UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811- 4777
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MFS SERIES TRUST I
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(Exact name of registrant as specified in charter)
500 Boylston Street, Boston, Massachusetts 02116
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(Address of principal executive offices) (Zip code)
James R. Bordewick, Jr.
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
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(Name and address of agents for service)
Registrant's telephone number, including area code: (617) 954-5000
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Date of fiscal year end: August 31
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Date of reporting period: August 31, 2004
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ITEM 1. REPORTS TO STOCKHOLDERS.
MFS(R) Mutual Funds
ANNUAL REPORT 8/31/04
MFS(R) CORE GROWTH FUND
A path for pursuing opportunity
[graphic omitted]
[logo] M F S(R)
INVESTMENT MANAGEMENT
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MFS(R) PRIVACY POLICY: A COMMITMENT TO YOU
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Privacy is a concern for every investor today. At MFS Investment Management(R)
and the MFS funds, we take this concern very seriously. We want you to
understand our policies about every MFS investment product and service that we
offer and how we protect the nonpublic personal information of investors who
have a direct relationship with us and our wholly owned subsidiaries.
Throughout our business relationship, you provide us with personal information;
we maintain information and records about you, your investments, and the
services you use. Examples of the nonpublic personal information we maintain
include
o data from investment applications and other forms
o share balances and transactional history with us, our affiliates, or others
o facts from a consumer reporting agency
We do not disclose any nonpublic personal information about our customers or
former customers to anyone except as permitted by law. We may share information
with companies or financial institutions that perform marketing services on our
behalf or to other financial institutions with which we have joint marketing
arrangements.
Access to your nonpublic personal information is limited to appropriate
personnel who provide products, services, or information to you. We maintain
physical, electronic, and procedural safeguards that comply with applicable
federal regulations.
If you have any questions about MFS' privacy policy, please call 1-800-225-2606
any business day between 8 a.m. and 8 p.m. Eastern time.
Note: If you own MFS products or receive MFS services in the name of a third
party such as a bank or broker-dealer, their privacy policy may apply to you
instead of ours.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK OR CREDIT UNION GUARANTEE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
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MFS(R) CORE GROWTH FUND
The fund seeks to provide capital appreciation.
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A PROSPECTUS FOR ANY MFS PRODUCT CAN BE OBTAINED FROM YOUR INVESTMENT
PROFESSIONAL. YOU SHOULD READ THE PROSPECTUS CAREFULLY BEFORE INVESTING AS IT
CONTAINS COMPLETE INFORMATION ON THE FUND'S INVESTMENT OBJECTIVE(s), THE RISKS
ASSOCIATED WITH AN INVESTMENT IN THE FUND, AND THE FEES, CHARGES, AND EXPENSES
INVOLVED. THESE ELEMENTS, AS WELL AS OTHER INFORMATION CONTAINED IN THE
PROSPECTUS, SHOULD BE CONSIDERED CAREFULLY BEFORE INVESTING.
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TABLE OF CONTENTS
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MFS PRIVACY POLICY
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LETTER FROM THE CEO 1
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MFS ORIGINAL RESEARCH(R) 5
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MANAGEMENT REVIEW 6
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PORTFOLIO COMPOSITION 10
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PERFORMANCE SUMMARY 11
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EXPENSE TABLE 14
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PORTFOLIO OF INVESTMENTS 16
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FINANCIAL STATEMENTS 22
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NOTES TO FINANCIAL STATEMENTS 37
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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 49
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TRUSTEES AND OFFICERS 50
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MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS 54
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FEDERAL TAX INFORMATION 55
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CONTACT INFORMATION BACK COVER
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LETTER FROM THE CEO
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Dear Shareholders,
[Photo of Robert J. Manning]
Our firm was built on the strength of MFS Original Research(R), our in-depth
analysis of every security we consider for our portfolios. We've been honing
this process since 1932, when we created one of the mutual fund industry's
first research departments. And we continue to fine-tune this process so that
we can provide strong and consistent long-term investment performance to help
you achieve your financial goals.
While we have achieved strong investment performance in many of our portfolios,
our goal is to achieve the same strong results across all asset classes. To
ensure that our portfolio teams are doing the best possible job for our firm's
clients and shareholders, I am focusing the vast majority of my time on the
three key elements that I believe truly differentiate MFS from its competitors:
people, process, and culture.
PEOPLE
Our people have always been our most valuable resource. Our philosophy is to
deliver consistent, repeatable investment results by hiring the most talented
investors in our industry. We recruit from the nation's top business schools and
hire experienced analysts, both domestically and around the globe.
Our analysts are the engine that powers our entire investment team because
their recommendations have a direct impact on the investment performance of our
portfolios. To demonstrate our ongoing commitment in this area, we increased
the number of equity analysts at MFS from less than 40 at the end of 2000 to
about 50 in June 2004. During that same period, we doubled the average
investment experience of our domestic equity analysts, in part by recruiting
more seasoned analysts to the firm. Moreover, our international network of
investment personnel now spans key regions of the world with offices in London,
Mexico City, Singapore, and Tokyo, as well as Boston.
One of the major advantages that MFS has over many of its competitors is that
the position of research analyst is a long-term career for many members of our
team, not simply a steppingstone toward becoming a portfolio manager. We have
worked to elevate the stature of the analyst position to be on par with that of
a portfolio manager. In fact, an exceptional research analyst has the
opportunity to earn more at MFS than some portfolio managers.
At the same time, we look within the firm to promote talented analysts who
choose a path toward becoming a portfolio manager. We rarely hire portfolio
managers from our competitors because we believe the best investors are those
steeped in the MFS process and culture. In the past few months, we have
identified three senior research analysts who will assume roles on the
management teams of several of our larger portfolios. MFS is fortunate to have
a deep bench of talented investment personnel, and we welcome the opportunity
to put their skills to work for our clients.
PROCESS
MFS was built on the strength of its bottom-up approach to researching
securities. We have enhanced the mentoring process for our research analysts by
calling on several of our most seasoned portfolio managers to supplement the
work of Director of Global Equity Research David A. Antonelli. These portfolio
managers are taking a special interest in developing the careers of our
research analysts and strengthening our investment process. Kenneth J. Enright
of our value equity group is working with a team of domestic analysts; David E.
Sette-Ducati of our small- and mid-cap equity team is working with analysts
concentrating on small- and mid-cap companies; and Barnaby Wiener of our
international equity team in London heads the European equity research team.
We have combined the bottom-up approach of our research process with a top-
down approach to risk controls on portfolio composition. We have a very strong
quantitative team under the leadership of industry veteran Deborah H. Miller,
who represents the equity management department on the Management Committee of
the firm. Quantitative analysis helps us generate investment ideas and, more
importantly, assess the appropriate level of risk for each portfolio. The risk
assessment is designed to assure that each portfolio operates within its
investment objectives.
Additionally, we have increased the peripheral vision of our investment
personnel across asset classes through the collaboration of our Equity, Fixed
Income, Quantitative Analysis, and Risk Management teams. We recently codified
this key aspect of our culture by forming an Investment Management Committee,
composed of key members of these teams. This committee will work to ensure that
all teams are sharing information, actively debating investment ideas, and
creating a unified investment team.
CULTURE
Teamwork is at the heart of our ability to deliver consistent and competitive
investment performance over time. At MFS, each member of our team is involved
in our success; we have no superstars. The collaborative nature of our process
works to assure a consistent investment approach across all of our products and
provides a high level of continuity in portfolio management because our
investment performance never depends on the contributions of just a single
individual. Our culture is based on an environment of teamwork that allows our
investment personnel to be successful. In turn, we demand superior investment
results from every member of our team.
We have created a meritocracy at our firm based on investment results. We hold
all of our portfolio managers accountable for the performance of their
portfolios and their contributions to the team. We also track the equity and
fixed-income ratings of our analysts so we can evaluate them based on the
performance of their recommendations. We align bonus compensation to investment
performance by weighting rewards to those who have created the greatest
long-term benefit for our shareholders and who contribute most successfully to
the Original Research(SM) process.
The strength of our culture has resulted in a tremendous amount of stability.
Although we have dismissed members of our team whose performance did not meet
MFS' high standards, only one portfolio manager has voluntarily left the firm
over the past six months, based on a decision to retire from the industry.
In short, we can help you achieve your financial goals by hiring talented
people, following a disciplined process, and maintaining our firm's unique
culture. The enhancements described in this letter reflect the collaborative
spirit and the depth of resources in our investment teams.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R)
September 20, 2004
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed.
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MFS ORIGINAL RESEARCH(R)
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THE MFS(R) DIFFERENCE
For 80 years MFS has been offering investors clear paths to pursuing specific
investment objectives. Today, millions of individuals and thousands of
institutions all over the world look to MFS to manage their assets with insight
and care.
Our success, we believe, has to do with the fact that we see investors as
people with plans, not just dollars to invest.
When you invest with MFS, you invest with a company dedicated to helping you
realize your long-term financial goals.
INVESTORS CHOOSE MFS FOR OUR
o global asset management expertise across all asset classes
o time-tested money management process for pursuing consistent results
o full spectrum of investment products backed by MFS Original Research(R)
o resources and services that match real-life needs
TURNING INFORMATION INTO OPPORTUNITY
Sound investments begin with sound information. MFS has been doing its own
research and analyzing findings in-house for decades. The process we use to
uncover opportunity is called MFS Original Research(R).
MFS ORIGINAL RESEARCH INVOLVES
o meeting with the management of 3,000 companies each year to assess their
business plans and the managers' ability to execute those plans
o making onsite visits to more than 2,000 companies annually to gain first-hand
knowledge of their operations and products
o analyzing financial statements and balance sheets
o talking extensively with companies' customers and competitors
o developing our own proprietary estimates of companies' earnings
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MANAGEMENT REVIEW
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MARKET ENVIRONMENT
The recovery in global stock markets that began in the spring of 2003 continued
into the first quarter of 2004. Business capital expenditures, which had been
weak for several years, began to trend upward in the latter half of 2003,
adding support to a recovery that had been fueled largely by consumer spending.
In the spring and summer of 2004, many measures of global economic growth,
including employment, corporate spending, and earnings growth, continued to
improve. But stock prices made only modest gains as investors, in our view,
became increasingly concerned about higher interest rates, rising oil prices, a
slowdown in corporate earnings growth, and continuing unrest in Iraq. The U.S.
Federal Reserve Board raised interest rates in June and again in August, and
set expectations for an ongoing series of modest rate hikes. A pullback in
equity markets near the end of the period was triggered, we believe, by
indications from a number of bellwether companies that earnings growth was
starting to slow.
DETRACTORS FROM PERFORMANCE
In the financial services, leisure, and transportation sectors, stock selection
and, to a lesser extent, an overweighting in each sector held back relative
returns. The chief detractors in financial services were an underweighted
position in home loan firm Federal National Mortgage Association (Fannie Mae)
and an overweighted position in student loan company SLM Corp (Sallie Mae). We
sold our Fannie Mae position and thus missed some strong performance by the
stock late in the period. Within a month after the period ended, however,
Fannie's stock plunged on news that federal regulators had uncovered accounting
problems and lax internal controls at the firm.
Several media holdings in the leisure sector, including Viacom and Clear Channel
Communications, fell short of our growth expectations as they failed to enjoy
the strong increases in advertising revenues we had anticipated in an improving
economy. By period-end we had sold our Viacom and Clear Channel stock.
Positions in several low-cost air carriers, including Ireland-headquartered
Ryanair, were key detractors in the transportation area. We sold our Ryanair
position during the period. The stock was not a position in the portfolio's
benchmark, the Russell 1000 Growth Index.
While the fund's technology positioning as a whole was positive for results,
several technology stocks held back relative performance. Among these were
storage management software firm VERITAS Software, online travel vendor IAC/
InterActiveCorp, and chip manufacturer Taiwan Semiconductor, which was not a
holding in the fund's benchmark. VERITAS stock tumbled as the firm lowered its
earnings projections and moved to restate prior-year results. IAC/
InterActiveCorp lost traction, we feel, on concerns that online booking agents
would be shut out of more desirable flights and rooms as travel demand
recovered. Taiwan Semiconductor shares retreated as investors, we believe,
questioned the sustainability of the semiconductor business, cycle and by
period-end we had sold our position.
Elsewhere in technology, underweighting cellular communications products firm
QUALCOMM and missing much of the stock's strong rise over the period also
subtracted from relative returns.
Our investment in discount retailer Kohl's hurt relative returns as well.
Kohl's stock price declined as the firm, in our view, struggled to recover from
an excess inventory situation.
CONTRIBUTORS TO PERFORMANCE
On a sector basis, stock selection in the health care, technology, and
industrial goods and services sectors contributed to relative performance.
Within health care, the fund benefited from its positions in medical products
company C.R. Bard and biopharmaceutical firm Genzyme. C.R. Bard's stock rose as
the company introduced several new products in the first half of 2004. Genzyme
stock advanced after the company announced second-quarter 2004 results that
topped consensus expectations. Genzyme, in our view, also surprised investors
by maintaining previous 2004 earnings projections that many analysts had
anticipated would be diluted by the firm's acquisition of Ilex Oncology.
The fund benefited as well from overweighting Cardinal Health early in the
period and selling our position before the stock fell sharply. Shares in the
drug and medical supply distributor plummeted following an earnings
disappointment and the announcement of additional investigations into the
firm's accounting practices.
In the technology sector, the portfolio benefited from holdings in security
software firm Symantec and online auctioneer eBay. In our view, successful
expansion into international markets was a key driver of eBay's strong
performance. Underweighting semiconductor giant Intel, a large position in our
benchmark, aided relative performance as well. We believe the stock declined
because of investor concerns about the semiconductor industry's near-term
prospects.
Manufacturing conglomerate Tyco International was the largest relative
contributor in the industrial goods and services sector and in the fund as a
whole. We believe Tyco's stock gained ground as a result of both the economic
rebound and progress in restructuring by the firm's new management team. Tyco
was not a position in the fund's benchmark.
Stocks in other sectors that helped relative results included retail giant
Wal-Mart, cruise operator Carnival, and oil field services firm BJ Services.
Carnival, which was not a holding in the portfolio's benchmark, benefited from
stronger bookings over the period. We sold our Wal-Mart position during the
period.
Respectfully,
/s/ Margaret W. Adams /s/ Stephen Pesek
Margaret W. Adams Stephen Pesek
Portfolio Manager Portfolio Manager
Note to shareholders: Effective July 1, 2004, Margaret W. Adams became a manager
of the portfolio.
The views expressed in this report are those of the portfolio managers only
through the end of the period of the report as stated on the cover and do not
necessarily reflect the views of MFS or any other person in the MFS
organization. These views are subject to change at any time based on market and
other conditions, and MFS disclaims any responsibility to update such views.
These views may not be relied upon as investment advice or as an indication of
trading intent on behalf of any MFS fund. References to specific securities are
not recommendations of such securities and may not be representative of any MFS
fund's current or future investments.
The fund will charge a 2% redemption fee on proceeds from shares redeemed or
exchanged within 5 business days of acquiring (either by purchasing or
exchanging) fund shares. See the prospectus for complete details.
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Visit mfs.com for our latest economic and investment outlook.
o Under Updates & Announcements, click Week in Review for a summary of recent
investment-related news.
o From Week in Review, link to MFS Global Perspective for our current view of
the world.
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PORTFOLIO COMPOSITION
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PORTFOLIO STRUCTURE
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Stocks 97.7%
Cash and Other Net Assets 2.3%
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TOP 5 SECTOR WEIGHTINGS
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Health Care 28.6%
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Technology 22.6%
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Retailing 10.0%
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Financial Services 6.8%
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Leisure 6.5%
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TOP 10 STOCK HOLDINGS
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JOHNSON & JOHNSON 3.6%
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MICROSOFT CORP. 3.0%
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PFIZER INC. 2.9%
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GENZYME CORP. 2.6%
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PROCTER & GAMBLE CO. 2.6%
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CISCO SYSTEMS INC. 2.6%
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TYCO INTERNATIONAL LTD. 2.4%
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DELL INC. 2.3%
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ABBOTT LABORATORIES 2.2%
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AMGEN INC. 2.2%
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Percentages are based on total net assets as of 8/31/04.
The portfolio is actively managed, and current holdings may be different.
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PERFORMANCE SUMMARY THROUGH 8/31/04
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The following chart illustrates the historical performance of the fund's
original share class in comparison to its benchmark. Performance results
include the deduction of the maximum applicable sales charge and reflect the
percentage change in net asset value, including reinvestment of dividends and
capital gains distributions. Benchmark comparisons are unmanaged and do not
reflect any fees or expenses. The performance of other share classes will be
greater than or less than the line shown. (See Notes to Performance Summary.)
VISIT MFS.COM FOR THE MOST RECENT MONTH-END PERFORMANCE RESULTS. MARKET
VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND CURRENT
PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE
OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. ANY
HIGH SHORT-TERM RETURNS MAY BE AND LIKELY WERE ATTRIBUTABLE TO RECENT FAVORABLE
MARKET CONDITIONS, WHICH MAY NOT BE REPEATED. THE PERFORMANCE SHOWN DOES NOT
REFLECT THE DEDUCTION OF TAXES, IF ANY, THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from the commencement of the fund's investment operations,
January 2, 1996, through August 31, 2004. Index information is from January 2,
1996.)
MFS Core Growth Russell 1000
Fund -- Class A Growth Index
1/96 $ 9,425 $10,000
8/98 18,353 16,329
8/00 42,876 32,325
8/02 21,288 13,756
8/04 23,688 16,532
TOTAL RETURNS
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Average annual
without sales charge
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Class
Share class inception date 1-yr 3-yr 5-yr Life*
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A 1/2/96 2.08% -4.50% -3.51% 11.22%
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B 12/31/99 1.49% -5.08% -4.06% 10.86%
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C 12/31/99 1.42% -5.10% -4.06% 10.86%
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I 1/2/97 2.39% -4.15% -3.19% 11.46%
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R1 12/31/02 1.94% -4.55% -3.54% 11.21%
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R2 10/31/03 1.87% -4.57% -3.55% 11.20%
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Average annual
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Comparative benchmarks 1-yr 3-yr 5-yr Life*
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Average large-cap growth fund+ 2.90% -3.35% -6.08% 4.96%
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Russell 1000 Growth Index# 5.36% -2.20% -7.35% 5.97%
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Average annual
with sales charge
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Share class
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A -3.79% -6.37% -4.65% 10.47%
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B -2.51% -6.04% -4.41% 10.86%
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C 0.42% -5.10% -4.06% 10.86%
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I, R1, and R2 Class shares do not have a sales charge. Please see Notes to
Performance Summary for more details.
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Cumulataive
without sales charge
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A 2.08% -12.91% -16.37% 151.33%
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B 1.49% -14.47% -18.74% 144.20%
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C 1.42% -14.52% -18.71% 144.29%
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I 2.39% -11.93% -14.98% 155.92%
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R1 1.94% -13.03% -16.48% 150.98%
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R2 1.87% -13.08% -16.54% 150.81%
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* For the period from the commencement of the fund's investment operations,
January 2, 1996, through August 31, 2004. Index information is from
January 1, 1996.
+ Source: Lipper Inc., an independent firm that reports mutual fund performance.
# Source: Standard & Poor's Micropal, Inc.
INDEX DEFINITIONS
RUSSELL 1000 GROWTH INDEX - measures the performance of those companies in the
Russell 1000 index with higher price to book and forecasted growth values. The
Russell 1000 consists of the 1000 largest market cap companies in the Russell
3000 index.
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
The performance shown reflects a non-recurring accrual made to the fund on July
28, 2004, relating to MFS' revenue sharing settlement with the Securities and
Exchange Commission, without which the performance would have been lower.
Class A results, including sales charge, reflect the deduction of the maximum
5.75% sales charge. Class B results, including sales charge, reflect the
deduction of the applicable contingent deferred sales charge (CDSC), which
declines over six years from 4% to 0%. Class C results, including sales charge
(assuming redemption within one year from the end of the calendar month of
purchase), reflect the deduction of the 1% CDSC. Class I shares have no sales
charges and are available only to certain investors. Class R1 and R2 shares
have no sales charges and are available only to certain retirement plans.
Performance for share classes offered after Class A shares includes the
performance of the fund's Class A shares for periods prior to their offering.
This blended class performance has been adjusted to take into account
differences in sales loads, if any, applicable to these share classes, but has
not been adjusted to take into account differences in class specific operating
expenses (such as Rule 12b-1 fees). Compared to performance these share classes
would have experienced had they been offered for the entire period, the use of
blended performance generally results in higher performance for share classes
with higher operating expenses than the initial share class to which it is
blended, and lower performance for share classes with lower operating expenses
than the initial share class to which it is blended.
Performance results reflect any applicable expense subsidies and waivers in
effect during the periods shown. Without such subsidies and waivers the fund's
performance results would be less favorable. Please see the prospectus and
financial statements for complete details.
KEY RISK CONSIDERATIONS
The portfolio may invest in growth company securities which will fall to a
greater extent than the overall equity markets (e.g., as represented by the
Standard & Poor's Composite 500 Index) due to changing economic, political or
market conditions or disappointing growth company earnings results.
The portfolio may invest in foreign and/or emerging markets securities, which
are more susceptible to risks relating to interest rates, currency exchange
rates, economic, and political conditions.
The portfolio may invest in small-, mid-sized, or emerging companies, which are
susceptible to greater risk than is customarily associated with investing in
more established companies.
The portfolio's value will vary daily since its investments will fluctuate in
response to issuer, market, regulatory, economic, or political developments.
Because stocks tend to be more volatile than some other investments, such as
bonds, the more assets a fund dedicates to stocks, generally the more volatile
the portfolio's value will be. Historically, stocks have outperformed bonds
over time. The portfolio's investment risks should be considered prior to
investing.
Please see the prospectus for further information regarding these and other
risk considerations.
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EXPENSE TABLE
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FUND EXPENSES BORNE BY SHAREHOLDERS DURING THE PERIOD FROM MARCH 1, 2004,
THROUGH AUGUST 31, 2004.
As a shareholder of the fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on certain purchase or redemption
payments and redemption fees on certain exchanges and redemptions, and (2)
ongoing costs, including management fees; distribution and service (12b-1)
fees; and other fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of
the period and held for the entire period, March 1, 2004 through August 31,
2004.
ACTUAL EXPENSES
The first line for each share class in the table below provides information
about actual account values and actual expenses. You may use the information in
this line, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the first line under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during
this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line for each share class in the table below provides information
about hypothetical account values and hypothetical expenses based on the fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption fees. Therefore, the second line for each share
class in the table is useful in comparing ongoing costs only, and will not help
you determine the relative total costs of owning different funds. In addition,
if these transactional costs were included, your costs would have been higher.
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Share Class
- --------------
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Expenses
Paid During
Annualized Beginning Ending Period**
Expense Account Value Account Value* 3/01/04-
Ratio 3/01/04 8/31/04 8/31/04
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Actual 1.33% $1,000 $955 $6.55
A -------------------------------------------------------------------------
Hypothetical 1.33% $1,000 $1,018 $6.77
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Actual 1.97% $1,000 $953 $9.70
B -------------------------------------------------------------------------
Hypothetical 1.97% $1,000 $1,015 $10.01
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Actual 1.97% $1,000 $953 $9.70
C -------------------------------------------------------------------------
Hypothetical 1.97% $1,000 $1,015 $10.01
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Actual 0.98% $1,000 $957 $4.83
I -------------------------------------------------------------------------
Hypothetical 0.98% $1,000 $1,020 $4.99
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Actual 1.48% $1,000 $955 $7.29
R1 -------------------------------------------------------------------------
Hypothetical 1.48% $1,000 $1,018 $7.53
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Actual 1.90% $1,000 $954 $9.36
R2 -------------------------------------------------------------------------
Hypothetical 1.90% $1,000 $1,015 $9.65
- --------------------------------------------------------------------------------
* Ending account value reflects each class' ending account value assuming the
actual class return per year before expenses (Actual) and a hypothetical 5%
class return per year before expenses (Hypothetical).
** Expenses paid is equal to each class' annualized expense ratio for the most
recent six month period, as shown above, multiplied by the average account
value over the period, multiplied by the number of days in the period,
divided by the number of days in the year. Expenses paid do not include any
applicable sales charges (loads) or redemption fees. If these transaction
costs had been included, your costs would have been higher.
- ---------------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS - 8/31/04
- ---------------------------------------------------------------------------------------------------
The Portfolio of Investments is a complete list of all securities owned by your
fund. It is categorized by broad-based asset classes.
Stocks - 97.7%
- -------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
U.S. Stocks - 91.5%
- -------------------------------------------------------------------------------------------------
Aerospace - 0.6%
- -------------------------------------------------------------------------------------------------
Lockheed Martin Corp. 65,400 $3,517,212
- -------------------------------------------------------------------------------------------------
Airlines - 0.7%
- -------------------------------------------------------------------------------------------------
Southwest Airlines Co. 302,500 $4,483,050
- -------------------------------------------------------------------------------------------------
Apparel Manufacturers - 1.6%
- -------------------------------------------------------------------------------------------------
Nike, Inc., "B" 136,100 $10,249,691
- -------------------------------------------------------------------------------------------------
Automotive - 0.8%
- -------------------------------------------------------------------------------------------------
Harley-Davidson, Inc. 82,100 $5,009,742
- -------------------------------------------------------------------------------------------------
Banks & Credit Companies - 3.5%
- -------------------------------------------------------------------------------------------------
American Express Co. 64,600 $3,231,292
- -------------------------------------------------------------------------------------------------
Citigroup, Inc. 234,600 10,927,668
- -------------------------------------------------------------------------------------------------
Freddie Mac 68,200 4,577,584
- -------------------------------------------------------------------------------------------------
SLM Corp. 101,000 3,941,020
- -------------------------------------------------------------------------------------------------
$22,677,564
- -------------------------------------------------------------------------------------------------
Biotechnology - 7.9%
- -------------------------------------------------------------------------------------------------
Amgen, Inc.* 234,300 $13,891,647
- -------------------------------------------------------------------------------------------------
Celgene Corp.^* 41,100 2,332,425
- -------------------------------------------------------------------------------------------------
Genentech, Inc.* 189,700 9,253,566
- -------------------------------------------------------------------------------------------------
Genzyme Corp.* 307,100 16,583,400
- -------------------------------------------------------------------------------------------------
Gilead Sciences, Inc.* 123,600 8,544,468
- -------------------------------------------------------------------------------------------------
$50,605,506
- -------------------------------------------------------------------------------------------------
Broadcast & Cable TV - 2.2%
- -------------------------------------------------------------------------------------------------
Comcast Corp., "A"* 356,100 $10,031,337
- -------------------------------------------------------------------------------------------------
EchoStar Communications Corp., "A"* 127,800 3,917,070
- -------------------------------------------------------------------------------------------------
$13,948,407
- -------------------------------------------------------------------------------------------------
Chemicals - 1.4%
- -------------------------------------------------------------------------------------------------
Air Products & Chemicals, Inc. 61,500 $3,221,370
- -------------------------------------------------------------------------------------------------
Monsanto Co. 163,900 5,998,740
- -------------------------------------------------------------------------------------------------
$9,220,110
- -------------------------------------------------------------------------------------------------
Computer Software - 6.0%
- -------------------------------------------------------------------------------------------------
Mercury Interactive Corp.* 66,700 $2,301,817
- -------------------------------------------------------------------------------------------------
Microsoft Corp. 713,900 19,489,470
- -------------------------------------------------------------------------------------------------
Oracle Corp.* 313,100 3,121,607
- -------------------------------------------------------------------------------------------------
Red Hat, Inc.^* 248,300 3,044,158
- -------------------------------------------------------------------------------------------------
Symantec Corp.* 174,400 8,364,224
- -------------------------------------------------------------------------------------------------
VERITAS Software Corp.* 143,200 2,394,304
- -------------------------------------------------------------------------------------------------
$38,715,580
- -------------------------------------------------------------------------------------------------
Computer Software - Systems - 3.4%
- -------------------------------------------------------------------------------------------------
EMC Corp.* 995,900 $10,725,843
- -------------------------------------------------------------------------------------------------
International Business Machines Corp. 132,100 11,187,549
- -------------------------------------------------------------------------------------------------
$21,913,392
- -------------------------------------------------------------------------------------------------
Consumer Goods & Services - 5.7%
- -------------------------------------------------------------------------------------------------
Apollo Group, Inc., "A"* 61,800 $4,820,400
- -------------------------------------------------------------------------------------------------
Career Education Corp.* 75,000 2,313,000
- -------------------------------------------------------------------------------------------------
Colgate-Palmolive Co. 147,200 7,948,800
- -------------------------------------------------------------------------------------------------
Gillette Co. 118,400 5,032,000
- -------------------------------------------------------------------------------------------------
Procter & Gamble Co. 296,000 16,567,120
- -------------------------------------------------------------------------------------------------
$36,681,320
- -------------------------------------------------------------------------------------------------
Electrical Equipment - 4.7%
- -------------------------------------------------------------------------------------------------
Danaher Corp. 66,200 $3,404,004
- -------------------------------------------------------------------------------------------------
General Electric Co. 346,300 11,355,177
- -------------------------------------------------------------------------------------------------
Tyco International Ltd. 495,900 15,531,588
- -------------------------------------------------------------------------------------------------
$30,290,769
- -------------------------------------------------------------------------------------------------
Electronics - 1.9%
- -------------------------------------------------------------------------------------------------
Applied Materials, Inc.* 96,700 $1,536,563
- -------------------------------------------------------------------------------------------------
Intel Corp. 342,800 7,298,212
- -------------------------------------------------------------------------------------------------
Maxim Integrated Products, Inc. 35,000 1,520,050
- -------------------------------------------------------------------------------------------------
Texas Instruments, Inc. 80,600 1,574,924
- -------------------------------------------------------------------------------------------------
$11,929,749
- -------------------------------------------------------------------------------------------------
Food & Drug Stores - 1.7%
- -------------------------------------------------------------------------------------------------
CVS Corp. 264,600 $10,584,000
- -------------------------------------------------------------------------------------------------
Food & Non-Alcoholic Beverages - 1.8%
- -------------------------------------------------------------------------------------------------
PepsiCo, Inc. 193,700 $9,685,000
- -------------------------------------------------------------------------------------------------
SYSCO Corp. 64,600 2,076,244
- -------------------------------------------------------------------------------------------------
$11,761,244
- -------------------------------------------------------------------------------------------------
Gaming & Lodging - 2.2%
- -------------------------------------------------------------------------------------------------
Carnival Corp. 236,800 $10,843,072
- -------------------------------------------------------------------------------------------------
Starwood Hotels & Resorts Worldwide, Inc. 77,400 3,421,080
- -------------------------------------------------------------------------------------------------
$14,264,152
- -------------------------------------------------------------------------------------------------
General Merchandise - 3.4%
- -------------------------------------------------------------------------------------------------
Kohl's Corp.* 198,000 $9,797,040
- -------------------------------------------------------------------------------------------------
Target Corp. 274,100 12,219,378
- -------------------------------------------------------------------------------------------------
$22,016,418
- -------------------------------------------------------------------------------------------------
Health Maintenance Organizations - 1.1%
- -------------------------------------------------------------------------------------------------
UnitedHealth Group, Inc. 101,700 $6,725,421
- -------------------------------------------------------------------------------------------------
Insurance - 3.3%
- -------------------------------------------------------------------------------------------------
AFLAC, Inc. 203,300 $8,152,330
- -------------------------------------------------------------------------------------------------
American International Group, Inc. 179,900 12,816,076
- -------------------------------------------------------------------------------------------------
$20,968,406
- -------------------------------------------------------------------------------------------------
Internet - 3.5%
- -------------------------------------------------------------------------------------------------
eBay, Inc.* 148,800 $12,877,152
- -------------------------------------------------------------------------------------------------
IAC/InterActiveCorp^* 75,000 1,710,750
- -------------------------------------------------------------------------------------------------
Yahoo!, Inc.* 277,600 7,914,376
- -------------------------------------------------------------------------------------------------
$22,502,278
- -------------------------------------------------------------------------------------------------
Leisure & Toys - 0.6%
- -------------------------------------------------------------------------------------------------
Electronic Arts, Inc.^* 76,200 $3,793,236
- -------------------------------------------------------------------------------------------------
Machinery & Tools - 0.8%
- -------------------------------------------------------------------------------------------------
Illinois Tool Works, Inc. 58,500 $5,340,465
- -------------------------------------------------------------------------------------------------
Medical & Health Technology & Services - 1.9%
- -------------------------------------------------------------------------------------------------
Caremark Rx, Inc. 33,700 $967,190
- -------------------------------------------------------------------------------------------------
Fisher Scientific International, Inc.^* 150,000 8,545,500
- -------------------------------------------------------------------------------------------------
HCA, Inc. 67,700 2,627,437
- -------------------------------------------------------------------------------------------------
$12,140,127
- -------------------------------------------------------------------------------------------------
Medical Equipment - 4.0%
- -------------------------------------------------------------------------------------------------
Biomet, Inc.^ 100,500 $4,587,825
- -------------------------------------------------------------------------------------------------
C.R. Bard, Inc. 60,100 3,371,610
- -------------------------------------------------------------------------------------------------
Medtronic, Inc. 270,200 13,442,450
- -------------------------------------------------------------------------------------------------
Waters Corp.* 95,100 4,118,781
- -------------------------------------------------------------------------------------------------
$25,520,666
- -------------------------------------------------------------------------------------------------
Oil Services - 3.3%
- -------------------------------------------------------------------------------------------------
BJ Services Co.* 173,300 $8,327,065
- -------------------------------------------------------------------------------------------------
GlobalSantaFe Corp. 90,900 2,534,292
- -------------------------------------------------------------------------------------------------
Halliburton Co. 86,200 2,514,454
- -------------------------------------------------------------------------------------------------
Smith International, Inc.^* 134,500 7,663,810
- -------------------------------------------------------------------------------------------------
$21,039,621
- -------------------------------------------------------------------------------------------------
Personal Computers & Peripherals - 2.6%
- -------------------------------------------------------------------------------------------------
Apple Computer, Inc.* 33,700 $1,162,313
- -------------------------------------------------------------------------------------------------
Dell, Inc.* 427,600 14,897,584
- -------------------------------------------------------------------------------------------------
Network Appliance, Inc.* 32,200 646,254
- -------------------------------------------------------------------------------------------------
$16,706,151
- -------------------------------------------------------------------------------------------------
Pharmaceuticals - 12.2%
- -------------------------------------------------------------------------------------------------
Abbott Laboratories 343,700 $14,328,853
- -------------------------------------------------------------------------------------------------
Allergan, Inc. 54,400 4,060,960
- -------------------------------------------------------------------------------------------------
Eli Lilly & Co. 105,300 6,681,285
- -------------------------------------------------------------------------------------------------
Johnson & Johnson 401,000 23,298,100
- -------------------------------------------------------------------------------------------------
Pfizer, Inc. 562,200 18,367,074
- -------------------------------------------------------------------------------------------------
Wyeth 320,600 11,724,342
- -------------------------------------------------------------------------------------------------
$78,460,614
- -------------------------------------------------------------------------------------------------
Restaurants - 1.0%
- -------------------------------------------------------------------------------------------------
ARAMARK Corp., "B" 127,700 $3,232,087
- -------------------------------------------------------------------------------------------------
YUM! Brands, Inc. 85,900 3,411,089
- -------------------------------------------------------------------------------------------------
$6,643,176
- -------------------------------------------------------------------------------------------------
Specialty Chemicals - 0.3%
- -------------------------------------------------------------------------------------------------
Bunge Ltd.^ 41,200 $1,643,468
- -------------------------------------------------------------------------------------------------
Specialty Stores - 3.4%
- -------------------------------------------------------------------------------------------------
Best Buy Co., Inc. 140,400 $6,531,408
- -------------------------------------------------------------------------------------------------
Lowe's Cos., Inc. 223,600 11,112,920
- -------------------------------------------------------------------------------------------------
PETsMART, Inc. 116,400 3,266,184
- -------------------------------------------------------------------------------------------------
TJX Cos., Inc. 45,700 967,012
- -------------------------------------------------------------------------------------------------
$21,877,524
- -------------------------------------------------------------------------------------------------
Telecommunications - Wireline - 3.2%
- -------------------------------------------------------------------------------------------------
Cisco Systems, Inc.* 872,600 $16,369,976
- -------------------------------------------------------------------------------------------------
QUALCOMM, Inc. 110,600 4,208,330
- -------------------------------------------------------------------------------------------------
$20,578,306
- -------------------------------------------------------------------------------------------------
Trucking - 0.8%
- -------------------------------------------------------------------------------------------------
FedEx Corp. 40,700 $3,336,993
- -------------------------------------------------------------------------------------------------
United Parcel Service, Inc., "B" 24,500 1,789,725
- -------------------------------------------------------------------------------------------------
$5,126,718
- -------------------------------------------------------------------------------------------------
Total U.S. Stocks $586,934,083
- -------------------------------------------------------------------------------------------------
Foreign Stocks - 6.2%
- -------------------------------------------------------------------------------------------------
Bermuda - 1.7%
- -------------------------------------------------------------------------------------------------
Accenture Ltd., "A" (Business Services)* 172,100 $4,491,810
- -------------------------------------------------------------------------------------------------
Marvell Technology Group Ltd. (Electronics)^* 280,100 6,475,912
- -------------------------------------------------------------------------------------------------
$10,967,722
- -------------------------------------------------------------------------------------------------
Canada - 0.4%
- -------------------------------------------------------------------------------------------------
Research In Motion Ltd. (Telecommunications - Wireline)* 41,700 $2,511,174
- -------------------------------------------------------------------------------------------------
Mexico - 0.9%
- -------------------------------------------------------------------------------------------------
America Movil S.A. de C.V., ADR (Telecommunications -
Wireless) 56,800 $1,945,400
- -------------------------------------------------------------------------------------------------
Grupo Televisa S.A., ADR (Broadcast & Cable TV)^ 70,300 3,383,539
- -------------------------------------------------------------------------------------------------
$5,328,939
- -------------------------------------------------------------------------------------------------
Sweden - 0.3%
- -------------------------------------------------------------------------------------------------
Telefonaktiebolaget LM Ericsson, ADR (Telecommunications -
Wireline)^* 71,400 $1,930,656
- -------------------------------------------------------------------------------------------------
Switzerland - 1.2%
- -------------------------------------------------------------------------------------------------
Roche Holding AG (Pharmaceuticals) 80,800 $7,867,832
- -------------------------------------------------------------------------------------------------
United Kingdom - 1.7%
- -------------------------------------------------------------------------------------------------
Amdocs Ltd. (Computer Software)* 116,100 $2,333,610
- -------------------------------------------------------------------------------------------------
AstraZeneca PLC (Pharmaceuticals) 72,200 3,339,132
- -------------------------------------------------------------------------------------------------
Vodafone Group PLC (Telecommunications - Wireless) 2,340,000 5,337,100
- -------------------------------------------------------------------------------------------------
$11,009,842
- -------------------------------------------------------------------------------------------------
Total Foreign Stocks $39,616,165
- -------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $559,879,867) $626,550,248
- -------------------------------------------------------------------------------------------------
Short-Term Obligation - 0.7%
- -------------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
- -------------------------------------------------------------------------------------------------
General Electric Capital Corp., 1.57%, due 9/01/04,
at Amortized Cost $4,385,000 $4,385,000
- -------------------------------------------------------------------------------------------------
Collateral for Securities Loaned - 5.1%
- -------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio, at Cost and
Net Asset Value 32,961,616 $32,961,616
- -------------------------------------------------------------------------------------------------
Repurchase Agreement - 2.7%
- -------------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
- -------------------------------------------------------------------------------------------------
Morgan Stanley, 1.57%, dated 8/31/04, due 9/01/04, total
to be received $17,104,746 (secured by various U.S. Treasury
and Federal Agency obligations in a jointly traded account),
at Cost $17,104,000 $17,104,000
- -------------------------------------------------------------------------------------------------
Total Investments(+) (Identified Cost, $614,330,483) $681,000,864
- -------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - (6.2)% (39,530,996)
- -------------------------------------------------------------------------------------------------
Net Assets - 100.0% $641,469,868
- -------------------------------------------------------------------------------------------------
* Non-income producing security.
^ All or a portion of this security is on loan.
(+) As of August 31, 2004, three securities representing $16,544,064 and 2.6% of net assets were fair
valued in accordance with the policies adopted by the Board of Trustees.
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------------------------------
This statement represents your fund's balance sheet, which details the assets
and liabilities composing the total value of your fund.
AT 8/31/04
ASSETS
Investments, at value, including $32,152,802 of
securities on loan (identified cost, $614,330,483) $681,000,864
- -----------------------------------------------------------------------------------------------------
Cash 751
- -----------------------------------------------------------------------------------------------------
Foreign currency, at value (identified cost, $1) 1
- -----------------------------------------------------------------------------------------------------
Receivable for investments sold 7,686,304
- -----------------------------------------------------------------------------------------------------
Receivable for fund shares sold 532,543
- -----------------------------------------------------------------------------------------------------
Interest and dividends receivable 606,960
- -----------------------------------------------------------------------------------------------------
Receivable from administrative proceeding settlement 589,873
- -----------------------------------------------------------------------------------------------------
Total assets $690,417,296
- -----------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased $10,297,272
- -----------------------------------------------------------------------------------------------------
Payable for fund shares reacquired 5,067,231
- -----------------------------------------------------------------------------------------------------
Collateral for securities loaned, at value 32,961,616
- -----------------------------------------------------------------------------------------------------
Payable to affiliates
- -----------------------------------------------------------------------------------------------------
Management fee 13,145
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 423,873
- -----------------------------------------------------------------------------------------------------
Distribution and service fee 10,183
- -----------------------------------------------------------------------------------------------------
Administrative fee 102
- -----------------------------------------------------------------------------------------------------
Administrative service fee 1
- -----------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 174,005
- -----------------------------------------------------------------------------------------------------
Total liabilities $48,947,428
- -----------------------------------------------------------------------------------------------------
Net assets $641,469,868
- -----------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Paid-in capital $751,896,016
- -----------------------------------------------------------------------------------------------------
Unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies 66,670,418
- -----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (177,062,459)
- -----------------------------------------------------------------------------------------------------
Accumulated net investment loss (34,107)
- -----------------------------------------------------------------------------------------------------
Net assets $641,469,868
- -----------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 44,044,063
- -----------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued
Class A shares
Net assets $404,511,297
- -----------------------------------------------------------------------------------------------------
Shares outstanding 27,490,107
- -----------------------------------------------------------------------------------------------------
Net asset value per share $14.71
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/94.25X$14.71) $15.61
- -----------------------------------------------------------------------------------------------------
Class B shares
Net assets $138,226,253
- -----------------------------------------------------------------------------------------------------
Shares outstanding 9,668,084
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $14.30
- -----------------------------------------------------------------------------------------------------
Class C shares
Net assets $91,224,621
- -----------------------------------------------------------------------------------------------------
Shares outstanding 6,380,361
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $14.30
- -----------------------------------------------------------------------------------------------------
Class I shares
Net assets $4,136,346
- -----------------------------------------------------------------------------------------------------
Shares outstanding 276,063
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $14.98
- -----------------------------------------------------------------------------------------------------
Class R1 shares
Net assets $3,266,174
- -----------------------------------------------------------------------------------------------------
Shares outstanding 222,277
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $14.69
- -----------------------------------------------------------------------------------------------------
Class R2 shares
Net assets $105,177
- -----------------------------------------------------------------------------------------------------
Shares outstanding 7,171
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $14.67
- -----------------------------------------------------------------------------------------------------
On sales of $50,000 or more, the offering price of Class A shares is reduced. A contingent deferred sales
charge may be imposed on redemptions of Class A, Class B and Class C shares.
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
This statement describes how much your fund received in investment income and paid in expenses. It
also describes any gains and/or losses generated by fund operations.
FOR YEAR ENDED 8/31/04
NET INVESTMENT INCOME (LOSS)
Income
- -----------------------------------------------------------------------------------------------------
Dividends $5,833,036
- -----------------------------------------------------------------------------------------------------
Interest 185,674
- -----------------------------------------------------------------------------------------------------
Other# 589,873
- -----------------------------------------------------------------------------------------------------
Foreign taxes withheld (33,190)
- -----------------------------------------------------------------------------------------------------
Total investment income $6,575,393
- -----------------------------------------------------------------------------------------------------
Expenses
- -----------------------------------------------------------------------------------------------------
Management fee $5,560,558
- -----------------------------------------------------------------------------------------------------
Trustees' compensation 21,035
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 1,657,972
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class A) 1,640,486
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class B) 1,559,476
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class C) 1,093,027
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class R1) 15,900
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class R2) 96
- -----------------------------------------------------------------------------------------------------
Administrative service fee (Class R2) 48
- -----------------------------------------------------------------------------------------------------
Administrative fee 60,728
- -----------------------------------------------------------------------------------------------------
Custodian fee 212,338
- -----------------------------------------------------------------------------------------------------
Printing 87,168
- -----------------------------------------------------------------------------------------------------
Postage 70,176
- -----------------------------------------------------------------------------------------------------
Auditing fees 37,882
- -----------------------------------------------------------------------------------------------------
Legal fees 9,254
- -----------------------------------------------------------------------------------------------------
Miscellaneous 168,820
- -----------------------------------------------------------------------------------------------------
Total expenses $12,194,964
- -----------------------------------------------------------------------------------------------------
Fees paid indirectly (61,725)
- -----------------------------------------------------------------------------------------------------
Reduction of expenses by investment adviser (356,739)
- -----------------------------------------------------------------------------------------------------
Net expenses $11,776,500
- -----------------------------------------------------------------------------------------------------
Net investment loss $(5,201,107)
- -----------------------------------------------------------------------------------------------------
Statement of Operations - continued
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain (loss) (identified cost basis)
- -----------------------------------------------------------------------------------------------------
Investment transactions $69,914,977
- -----------------------------------------------------------------------------------------------------
Foreign currency transactions (16,368)
- -----------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign
currency transactions $69,898,609
- -----------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
- -----------------------------------------------------------------------------------------------------
Investments $(47,792,870)
- -----------------------------------------------------------------------------------------------------
Translation of assets and liabilities in foreign
currencies 360
- -----------------------------------------------------------------------------------------------------
Net unrealized loss on investments and foreign
currency translation $(47,792,510)
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency $22,106,099
- -----------------------------------------------------------------------------------------------------
Increase in net assets from operations $16,904,992
- -----------------------------------------------------------------------------------------------------
# A non-recurring accrual recorded as a result of an administrative proceeding regarding disclosure of
brokerage allocation practices in connection with fund sales, as described in the Legal Proceedings
and Transactions with Affiliates footnotes.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------------------------
This statement describes the increases and/or decreases in net assets
resulting from operations, any distributions, and any shareholder
transactions.
FOR YEARS ENDED 8/31 2004 2003
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment loss $(5,201,107) $(4,810,414)
- -------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions 69,898,609 (46,148,022)
- -------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation (47,792,510) 111,640,686
- ------------------------------------------------------- --------------- --------------
Increase in net assets from operations $16,904,992 $60,682,250
- ------------------------------------------------------- --------------- --------------
Net increase (decrease) in net assets from fund share
transactions $(144,281,991) $88,713,665
- ------------------------------------------------------- --------------- --------------
Redemption fees $1,504 $--
- ------------------------------------------------------- --------------- --------------
Total increase (decrease) in net assets $(127,375,495) $149,395,915
- ------------------------------------------------------- --------------- --------------
NET ASSETS
At beginning of period $768,845,363 $619,449,448
- -------------------------------------------------------------------------------------------------------
At end of period (including accumulated net investment
loss of $34,107 and $103,737, respectively) $641,469,868 $768,845,363
- -------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the fund's financial performance for the past 5 years (or, if
shorter, the period of the fund's operation). Certain information reflects financial results for a single fund share. The total
returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund (assuming
reinvestment of all distributions) held for the entire period. This information has been audited by the fund's independent
registered public accounting firm, whose report, together with the fund's financial statements, are included in this report.
YEARS ENDED 8/31
-----------------------------------------------------------------------------
CLASS A 2004 2003 2002 2001 2000
Net asset value, beginning of period $14.41 $13.22 $16.89 $27.51 $19.46
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.07) $(0.07) $(0.12) $(0.11) $(0.16)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 0.37 1.26 (3.55) (9.73) 9.75
- ------------------------------------------------ -------- ------ ------ ------ ------
Total from investment operations $0.30 $1.19 $(3.67) $(9.84) $9.59
- ------------------------------------------------ -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments and
foreign currency transactions $-- $-- $-- $(0.53) $(1.54)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- (0.25) --
- ------------------------------------------------ -------- ------ ------ ------ ------
Total distributions declared to shareholders $-- $-- $-- $(0.78) $(1.54)
- ------------------------------------------------ -------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- ------------------------------------------------ -------- ------ ------ ------ ------
Net asset value, end of period $14.71 $14.41 $13.22 $16.89 $27.51
- ------------------------------------------------ -------- ------ ------ ------ ------
Total return (%)(+) 2.08^ 9.00 (21.73) (36.57) 51.38
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
-----------------------------------------------------------------------------
CLASS A (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.36 1.42 1.47 1.52 1.25
- ------------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.47) (0.52) (0.76) (0.56) (0.69)
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 261 312 257 283 303
- ------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $404,511 $496,271 $417,986 $111,062 $10,833
- ------------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods indicated. For the year ended
August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of
Independent Chief Compliance Officer service fees paid to Tarantino LLC. The investment adviser voluntarily agreed under a
temporary expense reimbursement agreement to pay all of the fund's operating expenses, exclusive of management and
distribution and service fees from January 1, 2000 through July 30, 2002. In consideration, the fund paid the investment
adviser a reimbursement fee not greater than 0.40% of the average daily net assets. Prior to January 1, 2000, the
investment adviser and distributor voluntarily waived their fees. In consideration, the fund paid the investment adviser a
fee not greater than 1.50% of average daily net assets. If these fees had been incurred by the fund, the net investment
loss per share and the ratios would have been:
Net investment loss $(0.08) $-- $(0.11) $(0.12) $(0.39)
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.41 -- 1.43 1.57 2.20
- ------------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.52) -- (0.72) (0.61) (1.64)
- ------------------------------------------------------------------------------------------------------------------------------
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
(+) Total returns do not include the applicable sales charge. If the charge had been included, the results would have been
lower.
+++ Per share amount was less than $0.01.
^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual resulted in an
increase in the net asset value of $0.01 per share based on shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31 PERIOD
------------------------------------------------------------- ENDED
CLASS B 2004 2003 2002 2001 8/31/00*
Net asset value, beginning of period $14.09 $13.01 $16.72 $27.41 $23.88
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.16) $(0.15) $(0.22) $(0.23) $(0.28)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 0.37 1.23 (3.49) (9.70) 3.81
- ------------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $0.21 $1.08 $(3.71) $(9.93) $3.53
- ------------------------------------------------- -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments and
foreign currency transactions $-- $-- $-- $(0.52) $--
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments
and foreign currency transactions -- -- -- (0.24) --
- ------------------------------------------------- -------- ------ ------ ------ ------
Total distributions declared to shareholders $-- $-- $-- $(0.76) $--
- ------------------------------------------------- -------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- ------------------------------------------------- -------- ------ ------ ------ ------
Net asset value, end of period $14.30 $14.09 $13.01 $16.72 $27.41
- ------------------------------------------------- -------- ------ ------ ------ ------
Total return (%) 1.49^ 8.22 (22.13) (37.01) 14.74++
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31 PERIOD
------------------------------------------------------------- ENDED
CLASS B (CONTINUED) 2004 2003 2002 2001 8/31/00*
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.00 2.07 2.12 2.17 2.15+
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.11) (1.18) (1.41) (1.20) (1.51)+
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 261 312 257 283 303
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $138,226 $155,602 $114,619 $68,839 $8,795
- -----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods indicated. For the year ended
August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of
Independent Chief Compliance Officer service fees paid to Tarantino LLC. The investment adviser voluntarily agreed under a
temporary expense reimbursement agreement to pay all of the fund's operating expenses, exclusive of management and
distribution and service fees from January 1, 2000 through July 30, 2002. In consideration, the fund paid the investment
adviser a reimbursement fee not greater than 0.40% of the average daily net assets. If these fees had been incurred by the
fund, the net investment loss per share and the ratios would have been:
Net investment loss $(0.17) $-- $(0.21) $(0.24) $(0.40)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.05 -- 2.08 2.22 2.85+
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.16) -- (1.37) (1.25) (2.21)+
- -----------------------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class B shares, December 31, 1999, through August 31, 2000.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
^ The fund's net asset value and total return calculation include a non- recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual resulted in an
increase in the net asset value of $0.01 per share based on shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31 PERIOD
----------------------------------------------------------- ENDED
CLASS C 2004 2003 2002 2001 8/31/00*
Net asset value, beginning of period $14.10 $13.02 $16.73 $27.43 $23.88
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.16) $(0.15) $(0.22) $(0.23) $(0.27)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 0.36 1.23 (3.49) (9.70) 3.82
- --------------------------------------------------- ------- ------ ------ ------ ------
Total from investment operations $0.20 $1.08 $(3.71) $(9.93) $3.55
- --------------------------------------------------- ------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments and
foreign currency transactions $-- $-- $-- $(0.53) $--
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments
and foreign currency transactions -- -- -- (0.24) --
- --------------------------------------------------- ------- ------ ------ ------ ------
Total distributions declared to shareholders $-- $-- $-- $(0.77) $--
- --------------------------------------------------- ------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- --------------------------------------------------- ------- ------ ------ ------ ------
Net asset value, end of period $14.30 $14.10 $13.02 $16.73 $27.43
- --------------------------------------------------- ------- ------ ------ ------ ------
Total return (%) 1.42^ 8.29 (22.18) (36.99) 14.82++
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31 PERIOD
----------------------------------------------------------- ENDED
CLASS C (CONTINUED) 2004 2003 2002 2001 8/31/00*
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.00 2.07 2.12 2.17 2.15+
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.12) (1.18) (1.41) (1.20) (1.50)+
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 261 312 257 283 303
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $91,225 $110,786 $82,441 $45,879 $4,750
- -----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods indicated. For the year ended
August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of
Independent Chief Compliance Officer service fees paid to Tarantino LLC. The investment adviser voluntarily agreed under a
temporary expense reimbursement agreement to pay all of the fund's operating expenses, exclusive of management and
distribution and service fees from January 1, 2000 through July 30, 2002. In consideration, the fund paid the investment
adviser a reimbursement fee not greater than 0.40% of the average daily net assets. If these fees had been incurred by the
fund, the net investment loss per share and the ratios would have been:
Net investment loss $(0.17) $-- $(0.21) $(0.24) $(0.39)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.05 -- 2.08 2.22 2.85+
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.17) -- (1.37) (1.25) (2.22)+
- -----------------------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class C shares, December 31, 1999, through August 31, 2000.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual resulted in an
increase in the net asset value of $0.01 per share based on shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
-------------------------------------------------------------------------
CLASS I 2004 2003 2002 2001 2000
Net asset value, beginning of period $14.63 $13.37 $17.01 $27.63 $19.47
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.02) $(0.02) $(0.06) $(0.03) $(0.09)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 0.37 1.28 (3.58) (9.80) 9.79
- ----------------------------------------------------- ------ ------ ------ ------ ------
Total from investment operations $0.35 $1.26 $(3.64) $(9.83) $9.70
- ----------------------------------------------------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments and
foreign currency transactions $-- $-- $-- $(0.54) $(1.54)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments
and foreign currency transactions -- -- -- (0.25) --
- ----------------------------------------------------- ------ ------ ------ ------ ------
Total distributions declared to shareholders $-- $-- $-- $(0.79) $(1.54)
- ----------------------------------------------------- ------ ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- ----------------------------------------------------- ------ ------ ------ ------ ------
Net asset value, end of period $14.98 $14.63 $13.37 $17.01 $27.63
- ----------------------------------------------------- ------ ------ ------ ------ ------
Total return (%) 2.39^ 9.42 (21.40) (36.39) 51.77
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
-------------------------------------------------------------------------
CLASS I (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.01 1.07 1.12 1.15 0.94
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.11) (0.16) (0.39) (0.14) (0.37)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 261 312 257 283 303
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $4,136 $4,317 $4,403 $7,381 $11,483
- -----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods indicated. For the year ended
August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of
Independent Chief Compliance Officer service fees paid to Tarantino LLC. The investment adviser voluntarily agreed under a
temporary expense reimbursement agreement to pay all of the fund's operating expenses, exclusive of management and
distribution and service fees from January 1, 2000 through July 30, 2002. In consideration, the fund paid the investment
adviser a reimbursement fee not greater than 0.40% of the average daily net assets. If these fees had been incurred by the
fund, the net investment loss per share and the ratios would have been:
Net investment loss $(0.02) $-- $(0.06) $(0.04) $(0.39)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.06 -- 1.08 1.20 1.84
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.16) -- (0.35) (0.19) (1.27)
- -----------------------------------------------------------------------------------------------------------------------------
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
+++ Per share amount was less than $0.01.
^ The fund's net asset value and total return calculation include a non- recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual resulted in an
increase in the net asset value of $0.01 per share based on shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEAR ENDED PERIOD ENDED
CLASS R1** 8/31/04 8/31/03*
Net asset value, beginning of period $14.41 $12.35
- -------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.09) $(0.08)
- -------------------------------------------------------------------------
Net realized and unrealized gain on investments
and foreign currency 0.37 2.14###
- --------------------------------------------------- ------ ------
Total from investment operations $0.28 $2.06
- --------------------------------------------------- ------ ------
Redemption fees added to paid-in capital# $0.00+++ $--
- --------------------------------------------------- ------ ------
Net asset value, end of period $14.69 $14.41
- --------------------------------------------------- ------ ------
Total return (%) 1.94^ 16.68++
- -------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.51 1.65+
- -------------------------------------------------------------------------
Net investment loss (0.60) (0.82)+
- -------------------------------------------------------------------------
Portfolio turnover 261 312
- -------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $3,266 $1,869
- -------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain
of the periods indicated. For the year ended August 31, 2004, the investment
adviser has voluntarily agreed to reimburse the fund for its proportional
share of Independent Chief Compliance Officer service fees paid to Tarantino
LLC. If these fees had been incurred by the fund, the net investment loss
per share and the ratios would have been:
Net investment loss $(0.10) $--
- -------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.56 --
- -------------------------------------------------------------------------
Net investment loss (0.65) --
- -------------------------------------------------------------------------
* For the period from the inception of Class R1 shares, December 31,
2002, through August 31, 2003.
** Effective November 3, 2003, Class R shares have been named R1 shares.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01. # Per share data are based on
average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
### The per share amount is not in accordance with the net realized and
unrealized gain/loss for the period because of the timing of the
sales of fund shares and the amount of the per share realized and
unrealized gains and losses at such time.
The fund's net asset value and total return calculation include a
non-recurring accrual recorded as a result of an administrative
proceeding regarding disclosure of brokerage allocation practices
in connection with fund sales, as described in the Legal
Proceedings and Transactions with Affiliates footnotes. The
non-recurring accrual resulted in an increase in the net asset
value of $0.01 per share based on shares outstanding on the day the
proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
PERIOD ENDED
CLASS R2 8/31/04*
Net asset value, beginning of period $14.64
- --------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.06)
- --------------------------------------------------------------------
Net realized and unrealized gain on investments
and foreign currency 0.09###
- ------------------------------------------------------------ ------
Total from investment operations $0.03
- ------------------------------------------------------------ ------
Redemption fees added to paid-in capital# $0.00+++
- ------------------------------------------------------------ ------
Net asset value, end of period $14.67
- ------------------------------------------------------------ ------
Total return (%) 0.20++^
- --------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.90+
- --------------------------------------------------------------------
Net investment loss (0.48)+
- --------------------------------------------------------------------
Portfolio turnover 261
- --------------------------------------------------------------------
Net assets at end of period (000 Omitted) $105
- --------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain
of the periods indicated. For the year ended August 31, 2004, the investment
adviser has voluntarily agreed to reimburse the fund for its proportional
share of Independent Chief Compliance Officer service fees paid to Tarantino
LLC. If these fees had been incurred by the fund, the net investment loss
per share and the ratios would have been:
Net investment loss $(0.07)
- --------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.95+
- --------------------------------------------------------------------
Net investment loss (0.53)+
- --------------------------------------------------------------------
* For the period from the inception of Class R2 shares, October 31,
2003, through August 31, 2004.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01. # Per share data are based on
average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
### The per share amount is not in accordance with the net realized and
unrealized gain/loss for the period because of the timing of the
sales of fund shares and the amount of the per share realized and
unrealized gains and losses at such time.
^ The fund's net asset value and total return calculation include a
non-recurring accrual recorded as a result of an administrative
proceeding regarding disclosure of brokerage allocation practices
in connection with fund sales, as described in the Legal
Proceedings and Transactions with Affiliates footnotes. The
non-recurring accrual resulted in an increase in the net asset
value of $0.01 per share based on shares outstanding on the day the
proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(1) BUSINESS AND ORGANIZATION
MFS Core Growth Fund (the fund) is a diversified series of MFS Series Trust I
(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 U.S.
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. The fund
can invest in foreign securities. 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 in the fund's portfolio for which
market quotations are available are valued at the last sale or official closing
price as reported by an independent pricing service on the primary market or
exchange on which they are primarily traded, or at the last quoted bid price
for securities in which there were no sales during the day. Equity securities
traded over the counter are valued at the last sales price traded each day as
reported by an independent pricing service, or to the extent there are no sales
reported, such securities are valued on the basis of quotations obtained from
brokers and dealers. Short-term obligations with a remaining maturity in excess
of 60 days will be valued upon dealer-supplied valuations. All other short-term
obligations in the fund's portfolio are valued at amortized cost, which
constitutes market value as determined by the Board of Trustees. Money market
mutual funds are valued at net asset value. 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. When
pricing service information or market quotations are not readily available,
securities are priced at fair value as determined under the direction of the
Board of Trustees. For example, significant events (such as movement in the
U.S. securities market, or other regional and local developments) may occur
between the time that foreign markets close (where the security is principally
traded) and the time that the fund calculates its net asset value (generally,
the close of the NYSE) that may impact the value of securities traded in these
foreign markets. In these cases, the fund may utilize information from an
external vendor or other sources to adjust closing market quotations of foreign
equity securities to reflect what it believes to be the fair value of the
securities as of the fund's valuation time. Because the frequency of
significant events is not predictable, fair valuation of foreign equity
securities may occur on a frequent basis.
REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements with
institutions that the fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The fund requires
that the securities collateral in a repurchase transaction be transferred to
the custodian in a manner sufficient to enable the fund to obtain those
securities in the event of a default under the repurchase agreement. The fund
monitors, on a daily basis, the value of the collateral to ensure that its
value, including accrued interest, is greater than amounts owed to the fund
under each such repurchase agreement. The fund, along with other affiliated
entities of Massachusetts Financial Services Company (MFS), may utilize a joint
trading account for the purpose of entering into one or more repurchase
agreements.
FOREIGN CURRENCY TRANSLATION - 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 result from
fluctuations in foreign currency exchange rates is not separately disclosed.
SECURITY LOANS - State Street Bank and Trust Company ("State Street"), as
lending agent, may loan the securities of the fund to certain qualified
institutions (the "Borrowers") approved by the fund. The loans are
collateralized at all times by cash and/or U.S. Treasury securities in an
amount at least equal to the market value of the securities loaned. State
Street provides the fund with indemnification against Borrower default. The
fund bears the risk of loss with respect to the investment of cash collateral.
On loans collateralized by cash, the cash collateral is invested in a money
market fund or short-term securities. A portion of the income generated upon
investment of the collateral is remitted to the Borrowers, and the remainder is
allocated between the fund and the lending agent. On loans collateralized by
U.S. Treasury securities, a fee is received from the Borrower, and is allocated
between the fund and the lending agent. Income from securities lending is
included in interest income on the Statement of Operations. The dividend and
interest income earned on the securities loaned is accounted for in the same
manner as other dividend and interest income.
SHORT TERM FEES - For purchases made on or after July 1, 2004, the fund will
charge a 2% redemption fee (which is retained by the fund) on proceeds from
shares redeemed or exchanged within 5 business days following their acquisition
(either by purchase or exchange). The fund may change the redemption fee period
in the future, including changes in connection with pending Securities and
Exchange rules. See the fund's prospectus for details. These fees are accounted
for as an addition to paid-in capital.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and discount is amortized or accreted for financial statement purposes in
accordance with U.S. generally accepted accounting principles. All discount is
accreted for tax reporting purposes as required by federal income tax
regulations. Dividends received in cash are recorded on the ex-dividend date.
Dividend and interest payments received in additional securities are recorded
on the ex-dividend or ex-interest date in an amount equal to the value of the
security on such date.
FEES PAID INDIRECTLY - The fund's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by the
fund. During the year ended August 31, 2004, the fund's custodian fees were
reduced by $4,620 under this arrangement. The fund has entered into a
commission recapture agreement, under which certain brokers will credit the
fund a portion of the commissions generated, to offset certain expenses of the
fund. For the year ended August 31, 2004, the fund's miscellaneous expenses
were reduced by $57,105 under this agreement. These amounts are shown as a
reduction of total 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 net 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 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. Common
types of book and tax differences that could occur include differences in
accounting for currency transactions and wash sales.
The fund paid no distributions for the years ended August 31, 2004 and August
31, 2003.
During the year ended August 31, 2004, accumulated net investment loss
decreased by $5,270,737, accumulated net realized loss on investments and
foreign currency transactions decreased by $16,368, and paid-in capital
decreased by $5,287,105 due to differences between book and tax accounting for
currency transactions and net operating losses. This change had no effect on
the net assets or net asset value per share.
As of August 31, 2004, the components of accumulated losses on a tax basis were
as follows:
Capital loss carryforward $(142,703,648)
----------------------------------------------------------
Unrealized appreciation 32,311,607
----------------------------------------------------------
Other temporary differences (34,107)
----------------------------------------------------------
For federal income tax purposes, the capital loss carryforward may be applied
against any net taxable realized gains of each succeeding year until the
earlier of its utilization or expiration on:
EXPIRATION DATE
March 31, 2010 $(13,415,606)
----------------------------------------------------------
March 31, 2011 (129,288,042)
----------------------------------------------------------
Total $(142,703,648)
----------------------------------------------------------
MULTIPLE CLASSES OF SHARES OF BENEFICIAL INTEREST - The fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the fund based on daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class. Differences in per share dividend rates are
generally due to differences in separate class expenses. Class B shares will
convert to Class A shares approximately eight years after purchase.
(3) TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISER - The fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.75% of
the fund's average daily net assets.
As part of a settlement agreement with the New York Attorney General concerning
market timing and related matters (see Legal Proceedings footnote), MFS has
agreed to reduce the fund's management fee to 0.65% of average daily net assets
for the period March 1, 2004 through February 28, 2009. During this time
period, the Board of Trustees will continue to review the appropriateness of
all advisory fees in accordance with their oversight responsibilities. After
February 28, 2009 the management fee will be determined in accordance with then
existing review policies approved by the Board of Trustees overseeing the fund.
Management fees incurred for the year ended August 31, 2004 were an effective
rate of 0.70% of average daily net assets on an annualized basis.
The fund pays compensation to its Independent Trustees in the form of a
retainer, attendance fees, and additional compensation to Board and Committee
chairpersons, and 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). The fund has an
unfunded defined benefit plan for retired Independent Trustees and an unfunded
retirement benefit deferral plan for current Independent Trustees. Included in
Trustees' compensation is $1,014 as a result of the change in the fund's
unfunded retirement benefit deferral plan for certain current Independent
Trustees and a pension expense of $759 for retired Independent Trustees for the
year ended August 31, 2004.
The MFS funds, including this fund, have entered into a services agreement (the
"Agreement") which provides for payment of fees by the MFS funds to Tarantino
LLC in return for the provision of services of an Independent Chief Compliance
Officer (ICCO) for the MFS funds. The ICCO is an officer of the MFS funds and
the sole member of Tarantino LLC. MFS has agreed to reimburse each of the MFS
funds for a proportional share of substantially all of the payments made by the
MFS funds to Tarantino LLC and also to provide office space and other
administrative support and supplies to the ICCO. The MFS funds can terminate
the Agreement with Tarantino LLC at any time under the terms of the Agreement.
The fund's investment adviser, MFS, has been the subject of an administrative
proceeding regarding disclosure of brokerage allocation practices in connection
with fund sales, as described in the Legal Proceedings Footnote. Pursuant to
the SEC Order, MFS, on July 28, 2004, transferred $1.00 in disgorgement and $50
million in penalty to the SEC (the "Payments"). A plan for distribution of
these Payments has been submitted to the SEC. Contemporaneous with the
transfer, the fund accrued an estimate of the amount to be received upon final
approval of the plan of distribution. The non- recurring accrual in the amount
of $589,873 resulted in an increase in the net asset value of $0.01 per share
based on the shares outstanding on the day the proceeds were recorded.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment advisor. Under an administrative services
agreement between the funds and MFS, MFS is entitled to partial reimbursement
of the costs MFS incurs to provide these services, subject to review and
approval by the Board of Trustees. Each fund is allocated a portion of these
administrative costs based on its size and relative average net assets.
Prior to April 1, 2004, the fund paid MFS an administrative fee up to the
following annual percentage rates of the fund's average daily net assets:
First $2 billion 0.0175%
----------------------------------------------------------
Next $2.5 billion 0.0130%
----------------------------------------------------------
Next $2.5 billion 0.0005%
----------------------------------------------------------
In excess of $7 billion 0.0000%
----------------------------------------------------------
Effective April 1, 2004, the fund paid MFS an administrative fee up to the
following annual percentage rates of the fund's average daily net assets:
First $2 billion 0.01120%
----------------------------------------------------------
Next $2.5 billion 0.00832%
----------------------------------------------------------
Next $2.5 billion 0.00032%
----------------------------------------------------------
In excess of $7 billion 0.00000%
----------------------------------------------------------
For the year ended August 31, 2004, the fund paid MFS $60,728, equivalent to
0.0082% of average daily net assets, to partially reimburse MFS for the costs
of providing administrative services.
In addition to the administrative services provided by MFS to the fund as
described above, MFS is responsible for providing certain administrative
services with respect to Class R2 shares. These services include various
administrative, recordkeeping, and communication/educational services with
respect to the retirement plans which invest in Class R2 shares, and may be
provided directly by MFS or by a third party. The fund pays an annual 0.25%
administrative service fee solely from the assets of Class R2 shares to MFS for
the provision of these services.
DISTRIBUTOR - MFD, a wholly owned subsidiary of MFS, as distributor, received
$79,766 for the year ended August 31, 2004, as its portion of the sales charge
on sales of Class A shares of the fund.
The Trustees have adopted a distribution plan for Class A, Class B, Class C,
Class R1, and Class R2 shares pursuant to rule 12b-1 of the Investment Company
Act of 1940 as follows:
The fund's distribution plan provides that the fund will pay MFD an annual
percentage of its average daily net assets attributable to certain share
classes in order that MFD may pay expenses on behalf of the fund related to the
distribution and servicing of its shares. These expenses include a service fee
paid to each securities dealer that enters into a sales agreement with MFD
based on the average daily net assets of accounts attributable to such dealers.
The fees are calculated based on each class' average daily net assets. The
maximum distribution and service fees for each class of shares are as follows:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Distribution Fee 0.10% 0.75% 0.75% 0.25% 0.25%
- ---------------------------------------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25% 0.25% 0.25%
- ---------------------------------------------------------------------------------------------------------------
Total Distribution Plan 0.35% 1.00% 1.00% 0.50% 0.50%
- ---------------------------------------------------------------------------------------------------------------
MFD retains the service fee for accounts not attributable to a securities dealer, which for the year ended
August 31, 2004 amounted to:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Service Fee Retained by MFD $10,131 $455 $933 $8 $14
- ---------------------------------------------------------------------------------------------------------------
Fees incurred under the distribution plan during the year ended August 31, 2004 were as follows:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Effective Annual Percentage Rates 0.35% 1.00% 1.00% 0.50% 0.50%
- ---------------------------------------------------------------------------------------------------------------
Certain Class A and Class C shares are subject to a contingent deferred sales charge in the event of a shareholder
redemption within, for Class A shares, 12 months following the purchase, and, for Class C shares, the first year
from the end of the calendar month of purchase. A contingent deferred sales charge is imposed on shareholder
redemptions of Class B shares in the event of a shareholder redemption within six years from the end of the
calendar month of purchase. MFD receives all contingent deferred sales charges. Contingent deferred sales charges
imposed during the year ended August 31, 2004 were as follows:
CLASS A CLASS B CLASS C
Contingent Deferred Sales Charges Imposed $15,108 $378,469 $16,499
- --------------------------------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT - Included in shareholder servicing costs is a fee
paid to MFSC, a wholly owned subsidiary of MFS, for its services as shareholder
servicing agent. The fee, which is calculated as a percentage of the fund's
average daily net assets is set periodically under the supervision of the
fund's Trustees. Prior to April 1, 2004, the fee was set at 0.11% of the fund's
average daily net assets. For the period April 1, 2004 through June 30, 2004,
the fee was set at 0.10% of the fund's average daily net assets. Effective July
1, 2004, the fund is charged up to 0.0861% of its average daily net assets. For
the year ended August 31, 2004, the fund paid MFSC a fee of $767,348 for
shareholder services which equated to 0.1029% of the fund's average daily net
assets. Also included in shareholder servicing costs are out-of-pocket
expenses, paid to MFSC, which amounted to $332,721 for the year ended August
31, 2004, as well as other expenses paid to unaffiliated vendors.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$1,909,206,519 and $2,063,176,979, 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 $648,689,294
----------------------------------------------------------
Gross unrealized appreciation $73,150,791
----------------------------------------------------------
Gross unrealized depreciation (40,839,221)
----------------------------------------------------------
Net unrealized appreciation $32,311,570
----------------------------------------------------------
(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:
Year ended 8/31/04 Year ended 8/31/03
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares sold 10,626,969 $158,101,180 21,075,431 $274,422,174
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (17,569,674) (262,111,271) (18,249,215) (235,227,052)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) (6,942,705) $(104,010,091) 2,826,216 $39,195,122
- -----------------------------------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 2,054,497 $29,865,095 4,499,700 $57,190,193
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (3,426,834) (49,782,232) (2,266,015) (28,533,992)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) (1,372,337) $(19,917,137) 2,233,685 $28,656,201
- -----------------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 1,747,376 $25,401,296 3,430,072 $43,531,150
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (3,226,826) (46,906,587) (1,903,646) (23,968,254)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) (1,479,450) $(21,505,291) 1,526,426 $19,562,896
- -----------------------------------------------------------------------------------------------------------
CLASS I SHARES
Shares sold 39,694 $605,358 55,893 $731,199
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (58,806) (894,652) (89,981) (1,156,127)
- -----------------------------------------------------------------------------------------------------------
Net decrease (19,112) $(289,294) (34,088) $(424,928)
- -----------------------------------------------------------------------------------------------------------
Year ended 8/31/04 Period ended 8/31/03*
SHARES AMOUNT SHARES AMOUNT
CLASS R1 SHARES
Shares sold 320,957 $4,749,392 215,934 $2,925,853
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (228,340) (3,418,826) (86,274) (1,201,479)
- -----------------------------------------------------------------------------------------------------------
Net increase 92,617 $1,330,566 129,660 $1,724,374
- -----------------------------------------------------------------------------------------------------------
Period ended 8/31/04**
SHARES AMOUNT
CLASS R2 SHARES
Shares sold 13,975 $213,149
- -----------------------------------------------------------------------
Shares reacquired (6,804) (103,893)
- -----------------------------------------------------------------------
Net increase 7,171 $109,256
- -----------------------------------------------------------------------
* For the period from the inception of Class R1 shares, December 31, 2002, through August 31, 2003.
** For the period from the inception of Class R2 shares, October 31, 2003, through August 31, 2004.
(6) LINE OF CREDIT
The fund and other affiliated funds participate in an $800 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the Federal
Reserve fund's rate plus 0.50%. 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 calendar quarter. The commitment fee
allocated to the fund for the year ended August 31, 2004 was $6,024, and is
included in miscellaneous expense. The fund had no significant borrowings
during the year ended August 31, 2004.
(7) LEGAL PROCEEDINGS.
On March 31, 2004, MFS settled an administrative proceeding with the Securities
and Exchange Commission ("SEC") regarding disclosure of brokerage allocation
practices in connection with MFS fund sales (the term "MFS funds" means the
open-end registered management investment companies sponsored by MFS). Under
the terms of the settlement, in which MFS neither admitted nor denied any
wrongdoing, MFS agreed to pay (one dollar) $1.00 in disgorgement and $50
million in penalty to certain MFS funds, pursuant to a plan developed by an
independent distribution consultant. The brokerage allocation practices which
were the subject of this proceeding were discontinued by MFS in November 2003.
The agreement with the SEC is reflected in an order of the SEC. Pursuant to the
SEC order, on July 28, 2004, MFS transferred these settlement amounts to the
SEC, and those MFS funds entitled to these settlement amounts accrued an
estimate of their pro rata portion of these amounts. Once the final
distribution plan is approved by the SEC, these amounts will be distributed by
the SEC to the affected MFS funds. The SEC settlement order states that MFS
failed to adequately disclose to the Boards of Trustees and to shareholders of
the MFS funds the specifics of its preferred arrangements with certain
brokerage firms selling MFS fund shares. The SEC settlement order states that
MFS had in place policies designed to obtain best execution of all MFS fund
trades. As part of the settlement, MFS retained an independent compliance
consultant to review the completeness of its current policies and practices
regarding disclosure to MFS fund trustees and to MFS fund shareholders of
strategic alliances between MFS or its affiliates and broker-dealers and other
financial advisers who support the sale of MFS fund shares.
In addition, in February, 2004, MFS reached agreement with the SEC, the New
York Attorney General ("NYAG") and the Bureau of Securities Regulation of the
State of New Hampshire ("NH") to settle administrative proceedings alleging
false and misleading information in certain MFS retail fund prospectuses
regarding market timing and related matters (the "February Settlements"). These
regulators alleged that prospectus language for certain MFS retail funds was
false and misleading because, although the prospectuses for those funds in the
regulators' view indicated that the MFS funds prohibited market timing, MFS did
not limit trading activity in 11 domestic large cap stock, high grade bond and
money market funds. MFS' former Chief Executive Officer, John W. Ballen, and
former President, Kevin R. Parke, also reached agreement with the SEC in which
they agreed to, among other terms, monetary fines and temporary suspensions
from association with any investment adviser or registered investment company.
Messrs. Ballen and Parke have resigned their positions with, and will not be
returning to, MFS and the MFS funds. Under the terms of the February
Settlements, MFS and the executives neither admit nor deny wrongdoing.
Under the terms of the February Settlements, a $225 million pool has been
established for distribution to shareholders in certain MFS retail funds, which
has been funded by MFS and of which $50 million is characterized as a penalty.
This pool will be distributed in accordance with a methodology developed by an
independent distribution consultant in consultation with MFS and the Board of
Trustees of the MFS retail funds, and acceptable to the SEC. MFS has further
agreed with NYAG to reduce its management fees in the aggregate amount of
approximately $25 million annually over the next five years, and not to
increase certain management fees during this period. MFS has also paid an
administrative fine to NH in the amount of $1 million, which will be used for
investor education purposes (NH retained $250,000 and $750,000 was contributed
to the North American Securities Administrators Association's Investor
Protection Trust). In addition, under the terms of the February Settlements,
MFS is in the process of adopting certain governance changes and reviewing its
policies and procedures.
Since December 2003, MFS, Sun Life Financial Inc., various MFS funds, the
Trustees of these MFS funds, and certain officers of MFS have been named as
defendants in multiple lawsuits filed in federal and state courts. The lawsuits
variously have been commenced as class actions or individual actions on behalf
of investors who purchased, held or redeemed shares of the MFS funds during
specified periods, as class actions on behalf of participants in certain
retirement plan accounts, or as derivative actions on behalf of the MFS funds.
The lawsuits relating to market timing and related matters have been
transferred to, and consolidated before, the United States District Court for
the District of Maryland, as part of a multi-district litigation of market
timing and related claims involving several other fund complexes (In re Mutual
Funds Investment Litigation (Alger, Columbia, Janus, MFS, One Group, Putnam,
PIMCO), No. 1:04-md-15863 (transfer began March 19, 2004)). Four lawsuits
alleging improper brokerage allocation practices and excessive compensation are
pending in the United States District Court for the District of Massachusetts
(Forsythe v. Sun Life Financial Inc., et al., No. 04cv10584 (GAO) (March 25,
2004); Eddings v. Sun Life Financial Inc., et al., No. 04cv10764 (GAO) (April
15, 2004); Marcus Dumond, et al. v. Massachusetts Financial Servs. Co., et al.,
No. 04cv11458 (GAO) (May 4, 2004); and Koslow v. Sun Life Financial Inc., et
al., No. 04cv11019 (GAO) (May 20, 2004)). The lawsuits generally allege that
some or all of the defendants (i) permitted or acquiesced in market timing
and/or late trading in some of the MFS funds, inadequately disclosed MFS'
internal policies concerning market timing and such matters, and received
excessive compensation as fiduciaries to the MFS funds, or (ii) permitted or
acquiesced in the improper use of fund assets by MFS to support the
distribution of MFS fund shares and inadequately disclosed MFS' use of fund
assets in this manner. The actions assert that some or all of the defendants
violated the federal securities laws, including the Securities Act of 1933 and
the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the
Investment Advisers Act of 1940, the Employee Retirement Income Security Act of
1974, as well as fiduciary duties and other violations of common law. The
lawsuits seek unspecified damages. Insofar as any of the actions is
appropriately brought derivatively on behalf of any of the MFS funds, any
recovery will inure to the benefit of the MFS funds. The defendants are
reviewing the allegations of the multiple complaints and will respond
appropriately. Additional lawsuits based on similar allegations may be filed in
the future.
Any potential resolution of these matters may include, but not be limited to,
judgments or settlements for damages against MFS, the MFS funds, or any other
named defendant. As noted above, as part of the regulatory settlements, MFS has
established a restitution pool in the amount of $225 million to compensate
certain shareholders of the MFS retail funds for damages that they allegedly
sustained as a result of market timing or late trading in certain of the MFS
retail funds, and transferred $50 million for distribution to affected MFS
funds to compensate those funds based upon the amount of brokerage commissions
allocated in recognition of MFS fund sales. It is not clear whether these
amounts will be sufficient to compensate shareholders for all of the damage
they allegedly sustained, whether certain shareholders or putative class
members may have additional claims to compensation, or whether the damages that
may be awarded in any of the actions will exceed these amounts. In the event
the MFS funds incur any losses, costs or expenses in connection with such
lawsuits, the Boards of Trustees of the affected MFS funds may pursue claims on
behalf of such funds against any party that may have liability to the funds in
respect thereof.
Review of these matters by the independent Trustees of the MFS funds and their
counsel is continuing. There can be no assurance that these regulatory actions
and lawsuits, or the adverse publicity associated with these developments, will
not result in increased fund redemptions, reduced sales of fund shares, or
other adverse consequences to the MFS funds.
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------------------------------
To the Trustees of MFS Series Trust I and Shareholders of MFS Core Growth Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Core Growth Fund (the Fund) (one of the portfolios comprising MFS Series Trust
I), including the portfolio of investments, as of August 31, 2004, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the periods indicated therein. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 and financial
highlights. Our procedures included confirmation of securities owned at August
31, 2004, by correspondence with the custodian and brokers or by other
appropriate auditing procedures where replies from brokers were not received.
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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Core Growth Fund at August 31, 2004, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended, and its financial highlights for each of the periods
indicated therein, in conformity with U.S. generally accepted accounting
principles.
ERNST & YOUNG LLP
Boston, Massachusetts
October 8, 2004
- ------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
- ------------------------------------------------------------------------------------------------------
The Trustees and officers of the Trust, as of October 10, 2004, are listed below, together with their
principal occupations during the past five years. (Their titles may have varied during that period.)
The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
PRINCIPAL OCCUPATIONS & OTHER
POSITION(s) HELD TRUSTEE/OFFICER DIRECTORSHIPS(2) DURING
NAME, DATE OF BIRTH WITH FUND SINCE(1) THE PAST FIVE YEARS
- ------------------- ---------------- --------------- -----------------------------
INTERESTED TRUSTEES
Robert J. Manning(3) Trustee and February 2004 Massachusetts Financial
(born 10/20/63) President Services Company, Chief
Executive Officer, President,
Chief Investment Officer and
Director
Robert C. Pozen(3) Trustee February 2004 Massachusetts Financial
(born 08/08/46) Services Company, Chairman
(since February 2004); Harvard
Law School (education), John
Olin Visiting Professor (since
July 2002); Secretary of
Economic Affairs, The
Commonwealth of Massachusetts
(January 2002 to December
2002); Fidelity Investments,
Vice Chairman (June 2000 to
December 2001); Fidelity
Management & Research Company
(investment adviser),
President (March 1997 to July
2001); The Bank of New York
(financial services),
Director; Bell Canada
Enterprises
(telecommunications),
Director; Telesat (satellite
communications), Director
INDEPENDENT TRUSTEES
J. Atwood Ives Trustee and Chair of February 1992 Private investor; Eastern
(born 05/01/36) Trustees Enterprises (diversified
services company), Chairman,
Trustee and Chief Executive
Officer (until November 2000)
Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital,
(born 03/11/37) Chief of Cardiac Surgery;
Harvard Medical School,
Professor of Surgery
David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining
(born 05/30/42) products and service
provider), Vice Chairman/
Director (since April 2001);
Encinitos Ventures (private
investment company), Principal
(1997 to April 2001); Lincoln
Electric Holdings, Inc.
(welding equipment
manufacturer), Director;
Southwest Gas Corporation
(natural gas distribution
company), Director
William R. Gutow Trustee December 1993 Private investor and real
(born 09/27/41) estate consultant; Capitol
Entertainment Management
Company (video franchise),
Vice Chairman
Amy B. Lane Trustee January 2004 Retired; Merrill Lynch & Co.,
(born 02/08/53) Inc., Managing Director,
Investment Banking Group
(1997 to February 2001);
Borders Group, Inc. (book and
music retailer), Director;
Federal Realty Investment
Trust (real estate investment
trust), Trustee
Lawrence T. Perera Trustee July 1981 Hemenway & Barnes
(born 06/23/35) (attorneys), Partner
William J. Poorvu Trustee August 1982 Private investor; Harvard
(born 04/10/35) University Graduate School of
Business Administration,
Class of 1961 Adjunct
Professor in Entrepreneurship
Emeritus; CBL & Associates
Properties, Inc. (real estate
investment trust), Director
J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 09/23/38) (acquisition planning
specialists), President;
Wellfleet Investments
(investor in health care
companies), Managing General
Partner (since 1993);
Cambridge Nutraceuticals
(professional nutritional
products), Chief Executive
Officer (until May 2001)
Elaine R. Smith Trustee February 1992 Independent health care
(born 04/25/46) industry consultant
OFFICERS
Robert J. Manning(3) President and February 2004 Massachusetts Financial
(born 10/20/63) Trustee Services Company, Chief
Executive Officer, President,
Chief Investment Officer and
Director
James R. Bordewick, Jr.(3) Assistant Secretary September 1990 Massachusetts Financial
(born 03/06/59) and Assistant Clerk Services Company, Senior Vice
President and Associate
General Counsel
Jeffrey N. Carp(3) Secretary and Clerk September 2004 Massachusetts Financial
(born 12/01/56) Services Company, Senior Vice
President, General Counsel and
Secretary (since April 2004);
Hale and Dorr LLP (law firm)
(prior to April 2004)
James F. DesMarais(3) Assistant Secretary September 2004 Massachusetts Financial
(born 03/09/61) and Assistant Clerk Services Company, Assistant
General Counsel
Stephanie A. DeSisto(3) Assistant Treasurer May 2003 Massachusetts Financial
(born 10/01/53) Services Company, Vice
President (since April 2003);
Brown Brothers Harriman &
Co., Senior Vice President
(November 2002 to April
2003); ING Groep N.V./Aeltus
Investment Management, Senior
Vice President (prior to
November 2002)
Robert R. Flaherty(3) Assistant Treasurer August 2000 Massachusetts Financial
(born 09/18/63) Services Company, Vice
President (since August
2000); UAM Fund Services,
Senior Vice President (prior
to August 2000)
Richard M. Hisey(3) Treasurer August 2002 Massachusetts Financial
(born 08/29/58) Services Company, Senior Vice
President (since July 2002);
The Bank of New York, Senior
Vice President (September 2000
to July 2002); Lexington
Global Asset Managers, Inc.,
Executive Vice President and
Chief Financial Officer (prior
to September 2000); Lexington
Funds, Chief Financial Officer
(prior to September 2000)
Brian T. Hourihan(3) Assistant Secretary September 2004 Massachusetts Financial
(born 11/11/64) and Assistant Clerk Services Company, Vice
President, Senior Counsel and
Assistant Secretary (since
June 2004); Affiliated
Managers Group, Inc., Chief
Legal Officer/Centralized
Compliance Program (January
to April 2004); Fidelity
Research & Management
Company, Assistant General
Counsel (prior to January
2004)
Ellen Moynihan(3) Assistant Treasurer April 1997 Massachusetts Financial
(born 11/13/57) Services Company, Vice
President
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of
(born 03/07/44) Compliance Officer compliance services),
Principal (since June 2004);
CRA Business Strategies Group
(consulting services),
Executive Vice President
(April 2003 to June 2004);
David L. Babson & Co.
(investment adviser),
Managing Director, Chief
Administrative Officer and
Director (February 1997 to
March 2003)
James O. Yost(3) Assistant Treasurer September 1990 Massachusetts Financial
(born 06/12/60) Services Company, Senior Vice
President
- ----------------
(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served
continuously since appointment unless indicated otherwise.
(2) Directorships or trusteeships of companies required to report to the Securities and Exchange
Commission (i.e., "public companies").
(3) "Interested person" of MFS within the meaning of the Investment Company Act of 1940 (referred to
as the 1940 Act), which is the principle federal law governing investment companies like the fund.
The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
The Trust does not hold annual shareholder meetings for the purpose of electing Trustees, and Trustees
are not elected for fixed terms. The Trust will hold a shareholders' meeting in 2005 and at least once
every five years thereafter to elect Trustees. Each Trustee and officer holds office until his or her
successor is chosen and qualified or until his or her earlier death, resignation, retirement or
removal.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which
MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with
certain affiliates of MFS. Each Trustee serves as a board member of 109 funds within the MFS Family of
Funds.
The Statement of Additional Information contains further information about the Trustees and is
available without charge upon request by calling 1-800-225-2606.
- -----------------------------------------------------------------------------------------------------
INVESTMENT ADVISER CUSTODIAN
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 02116-3741 225 Franklin Street, Boston, MA 02110
INDEPENDENT REGISTERED PUBLIC
DISTRIBUTOR ACCOUNTING FIRM
MFS Fund Distributors, Inc. Ernst & Young LLP
500 Boylston Street, Boston, MA 200 Clarendon Street, Boston, MA 02116
02116-3741
PORTFOLIO MANAGERS
Margaret W. Adams
Stephen Pesek
QUARTERLY PORTFOLIO DISCLOSURE
Beginning with the fund's first and third fiscal quarters following this report, the fund will file a
complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission)
for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q may be reviewed
and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-0102
Information on the operation of the Public Reference Room may be obtained by calling the Commission at
1-800-SEC-0330. The fund's Form N-Q is available on the EDGAR database on the Commission's Internet
website at http://www.sec.gov, and copies of this information may be obtained, upon payment of a
duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by
writing the Public Reference Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at www.mfs.com.
- -------------------------------------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS
- -------------------------------------------------------------------------------
YOUR GOALS ARE IMPORTANT
MFS offers a complete range of investments and investment services to address
specific financial needs over time. When your investing goals change, you can
easily stay with MFS for the products you need, when you need them. Whether
you're investing for college or retirement expenses or for tax management or
estate planning, MFS will be there.
Ask your investment professional how MFS can help you move toward the goals
you've set.
MFS FAMILY OF FUNDS(R)
More than 50 portfolios offer domestic and international equity and
fixed-income investments across the full risk spectrum
VARIABLE ANNUITIES
A selection of annuity products with advantages for
building and preserving wealth
MFS 401(k) AND IRA SUITES
Retirement plans for businesses and individuals
MFS COLLEGE SAVINGS PLANS
Investment products to help meet education expenses
MFS PRIVATE PORTFOLIO SERVICES
Investment advisory services that provide custom products
for high-net-worth individuals
Variable annuities are offered through MFS/Sun Life Financial Distributors, Inc.
- ------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED)
In January 2005, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 2004.
The fund has the option to use equalization, which is a tax basis dividends paid
deduction from earnings and profits distributed to shareholders upon redemption
of shares.
- --------------------------------------------------------------------------------
CONTACT INFORMATION
INVESTOR INFORMATION
For information on MFS mutual funds, call your investment professional or, for
an information kit, call toll free: 1-800-225-2606 any business day from 8 a.m.
to 8 p.m. Eastern time.
A general description of the MFS funds' proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the About MFS section of mfs.com or by visiting the SEC's Web site at
http://www.sec. gov.
Information regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is
available without charge by visiting the Proxy Voting section of mfs.com or by
visiting the SEC's Web site at http://www.sec.gov.
INVESTOR SERVICE
Write to us at: MFS Service Center, Inc.
P.O. Box 55824
Boston, MA 02205-5824
Type of Information Phone number Hours, Eastern Time
- --------------------------------------------------------------------------------
General information 1-800-225-2606 8 a.m. to 8 p.m., any
business day
- --------------------------------------------------------------------------------
Speech- or hearing-impaired 1-800-637-6576 9 a.m. to 5 p.m., any
business day
- --------------------------------------------------------------------------------
Share prices, account 1-800-MFS-TALK
balances (1-800-637-8255)
exchanges or stock and touch-tone required 24 hours a day, 365 days a
bond outlooks year
- --------------------------------------------------------------------------------
WORLD WIDE WEB
Go to MFS.COM for a clear view of market events, investor education, account
access, and product and performance insights.
Go paperless with EDELIVERY: Join your fellow shareholders who are already
taking advantage of this great new benefit from MFS. With eDelivery, we send you
prospectuses, reports, and proxies electronically. You get timely information
without mailbox clutter (and help your fund save printing and postage costs).
SIGN-UP instructions: If your account is registered with us, go to mfs.com, log
in to your account via MFS Access, and select the eDelivery sign up options.
If you own your MFS fund shares through a financial institution or through a
retirement plan, MFS TALK, MFS Access, and eDelivery may not be available to
you.
[logo] M F S(R)
INVESTMENT MANAGEMENT
(C) 2004 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116.
CGF-ANN-10/04 65M
MFS(R) Mutual Funds
ANNUAL REPORT 8/31/04
MFS(R) CASH RESERVE FUND
A path for pursuing opportunity
[graphic omitted]
[logo] M F S(R)
INVESTMENT MANAGEMENT
- -------------------------------------------------------------------------------
MFS(R) PRIVACY POLICY: A COMMITMENT TO YOU
- -------------------------------------------------------------------------------
Privacy is a concern for every investor today. At MFS Investment Management(R)
and the MFS funds, we take this concern very seriously. We want you to
understand our policies about every MFS investment product and service that we
offer and how we protect the nonpublic personal information of investors who
have a direct relationship with us and our wholly owned subsidiaries.
Throughout our business relationship, you provide us with personal information;
we maintain information and records about you, your investments, and the
services you use. Examples of the nonpublic personal information we maintain
include
o data from investment applications and other forms
o share balances and transactional history with us, our affiliates, or others
o facts from a consumer reporting agency
We do not disclose any nonpublic personal information about our customers or
former customers to anyone except as permitted by law. We may share information
with companies or financial institutions that perform marketing services on our
behalf or to other financial institutions with which we have joint marketing
arrangements.
Access to your nonpublic personal information is limited to appropriate
personnel who provide products, services, or information to you. We maintain
physical, electronic, and procedural safeguards that comply with applicable
federal regulations.
If you have any questions about MFS' privacy policy, please call 1-800-225-2606
any business day between 8 a.m. and 8 p.m. Eastern time.
Note: If you own MFS products or receive MFS services in the name of a third
party such as a bank or broker-dealer, their privacy policy may apply to you
instead of ours.
- --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUIF
- --------------------------------------------------------------------------------
MFS(R) CASH RESERVE FUND
The fund seeks as high a level of current income as is considered
consistent with the preservation of capital and liquidity.
- -------------------------------------------------------------------------------
A PROSPECTUS FOR ANY MFS PRODUCT CAN BE OBTAINED FROM YOUR INVESTMENT
PROFESSIONAL. YOU SHOULD READ THE PROSPECTUS CAREFULLY BEFORE INVESTING AS IT
CONTAINS COMPLETE INFORMATION ON THE FUND'S INVESTMENT OBJECTIVE(s), THE RISKS
ASSOCIATED WITH AN INVESTMENT IN THE FUND, AND THE FEES, CHARGES, AND EXPENSES
INVOLVED. THESE ELEMENTS, AS WELL AS OTHER INFORMATION CONTAINED IN THE
PROSPECTUS, SHOULD BE CONSIDERED CAREFULLY BEFORE INVESTING.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- ----------------------------------------------------
MFS PRIVACY POLICY
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LETTER FROM THE CEO 1
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MFS ORIGINAL RESEARCH(R) 5
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MANAGEMENT REVIEW 6
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PORTFOLIO COMPOSITION 8
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PERFORMANCE SUMMARY 9
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EXPENSE TABLE 11
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PORTFOLIO OF INVESTMENTS 13
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FINANCIAL STATEMENTS 15
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NOTES TO FINANCIAL STATEMENTS 25
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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 35
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TRUSTEES AND OFFICERS 36
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MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS 40
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FEDERAL TAX INFORMATION 41
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ASSET ALLOCATION 42
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CONTACT INFORMATION BACK COVER
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LETTER FROM THE CEO
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Dear Shareholders,
[Photo of Robert J. Manning]
Our firm was built on the strength of MFS Original Research(R), our in-depth
analysis of every security we consider for our portfolios. We've been honing
this process since 1932, when we created one of the mutual fund industry's
first research departments. And we continue to fine-tune this process so that
we can provide strong and consistent long-term investment performance to help
you achieve your financial goals.
While we have achieved strong investment performance in many of our portfolios,
our goal is to achieve the same strong results across all asset classes. To
ensure that our portfolio teams are doing the best possible job for our firm's
clients and shareholders, I am focusing the vast majority of my time on the
three key elements that I believe truly differentiate MFS from its competitors:
people, process, and culture.
PEOPLE
Our people have always been our most valuable resource. Our philosophy is to
deliver consistent, repeatable investment results by hiring the most talented
investors in our industry. We recruit from the nation's top business schools
and hire experienced analysts, both domestically and around the globe.
Our analysts are the engine that powers our entire investment team because
their recommendations have a direct impact on the investment performance of our
portfolios. To demonstrate our ongoing commitment in this area, we increased
the number of equity analysts at MFS from less than 40 at the end of 2000 to
about 50 in June 2004. During that same period, we doubled the average
investment experience of our domestic equity analysts, in part by recruiting
more seasoned analysts to the firm. Moreover, our international network of
investment personnel now spans key regions of the world with offices in London,
Mexico City, Singapore, and Tokyo, as well as Boston.
One of the major advantages that MFS has over many of its competitors is that
the position of research analyst is a long-term career for many members of our
team, not simply a steppingstone toward becoming a portfolio manager. We have
worked to elevate the stature of the analyst position to be on par with that of
a portfolio manager. In fact, an exceptional research analyst has the
opportunity to earn more at MFS than some portfolio managers.
At the same time, we look within the firm to promote talented analysts who
choose a path toward becoming a portfolio manager. We rarely hire portfolio
managers from our competitors because we believe the best investors are those
steeped in the MFS process and culture. In the past few months, we have
identified three senior research analysts who will assume roles on the
management teams of several of our larger portfolios. MFS is fortunate to have
a deep bench of talented investment personnel, and we welcome the opportunity
to put their skills to work for our clients.
PROCESS
MFS was built on the strength of its bottom-up approach to researching
securities. We have enhanced the mentoring process for our research analysts by
calling on several of our most seasoned portfolio managers to supplement the
work of Director of Global Equity Research David A. Antonelli. These portfolio
managers are taking a special interest in developing the careers of our
research analysts and strengthening our investment process. Kenneth J. Enright
of our value equity group is working with a team of domestic analysts; David E.
Sette-Ducati of our small- and mid-cap equity team is working with analysts
concentrating on small- and mid-cap companies; and Barnaby Wiener of our
international equity team in London heads the European equity research team.
We have combined the bottom-up approach of our research process with a top-
down approach to risk controls on portfolio composition. We have a very strong
quantitative team under the leadership of industry veteran Deborah H. Miller,
who represents the equity management department on the Management Committee of
the firm. Quantitative analysis helps us generate investment ideas and, more
importantly, assess the appropriate level of risk for each portfolio. The risk
assessment is designed to assure that each portfolio operates within its
investment objectives.
Additionally, we have increased the peripheral vision of our investment
personnel across asset classes through the collaboration of our Equity, Fixed
Income, Quantitative Analysis, and Risk Management teams. We recently codified
this key aspect of our culture by forming an Investment Management Committee,
composed of key members of these teams. This committee will work to ensure that
all teams are sharing information, actively debating investment ideas, and
creating a unified investment team.
CULTURE
Teamwork is at the heart of our ability to deliver consistent and competitive
investment performance over time. At MFS, each member of our team is involved
in our success; we have no superstars. The collaborative nature of our process
works to assure a consistent investment approach across all of our products and
provides a high level of continuity in portfolio management because our
investment performance never depends on the contributions of just a single
individual. Our culture is based on an environment of teamwork that allows our
investment personnel to be successful. In turn, we demand superior investment
results from every member of our team.
We have created a meritocracy at our firm based on investment results. We hold
all of our portfolio managers accountable for the performance of their
portfolios and their contributions to the team. We also track the equity and
fixed-income ratings of our analysts so we can evaluate them based on the
performance of their recommendations. We align bonus compensation to investment
performance by weighting rewards to those who have created the greatest
long-term benefit for our shareholders and who contribute most successfully to
the Original Research(SM) process.
The strength of our culture has resulted in a tremendous amount of stability.
Although we have dismissed members of our team whose performance did not meet
MFS' high standards, only one portfolio manager has voluntarily left the firm
over the past six months, based on a decision to retire from the industry.
In short, we can help you achieve your financial goals by hiring talented
people, following a disciplined process, and maintaining our firm's unique
culture. The enhancements described in this letter reflect the collaborative
spirit and the depth of resources in our investment teams.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R)
September 20, 2004
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
The opinions expressed in this letter are those of MFS, and no forecasts can be
guaranteed.
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MFS ORIGINAL RESEARCH(R)
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THE MFS(R) DIFFERENCE
For 80 years MFS has been offering investors clear paths to pursuing specific
investment objectives. Today, millions of individuals and thousands of
institutions all over the world look to MFS to manage their assets with insight
and care.
Our success, we believe, has to do with the fact that we see investors as
people with plans, not just dollars to invest.
When you invest with MFS, you invest with a company dedicated to helping you
realize your long-term financial goals.
INVESTORS CHOOSE MFS FOR OUR
o global asset management expertise across all asset classes
o time-tested money management process for pursuing consistent results
o full spectrum of investment products backed by MFS Original Research(R)
o resources and services that match real-life needs
TURNING INFORMATION INTO OPPORTUNITY
Sound investments begin with sound information. MFS has been doing its own
research and analyzing findings in-house for decades. The process we use to
uncover opportunity is called MFS Original Research(R).
MFS ORIGINAL RESEARCH INVOLVES
o meeting with the management of 3,000 companies each year to assess their
business plans and the managers' ability to execute those plans
o making onsite visits to more than 2,000 companies annually to gain first-hand
knowledge of their operations and products
o analyzing financial statements and balance sheets
o talking extensively with companies' customers and competitors
o developing our own proprietary estimates of companies' earnings
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MANAGEMENT REVIEW
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MARKET ENVIRONMENT
As the period began in September 2003, interest rates were at historical lows.
However, the bond market changed dramatically during the second half of the
period, after the U.S. Department of Labor began releasing a string of strong
monthly jobs reports. We think many investors viewed the jobs reports as an
indication that the U.S. economy was in a full recovery. Inflation, while still
quite low on a historical basis, began to pick up. We believe investors began
to anticipate the shift to a rising interest rate environment. That expectation
was fulfilled on June 30, 2004, when the U.S. Federal Reserve Board (the Fed)
raised interest rates for the first time in four years and, in our view, set
expectations for a continuing series of modest rate hikes. Indeed, the Fed
hiked rates by another 0.25% on August 10, resulting in a federal funds
benchmark rate of 1.50% at period-end.
FACTORS IMPACTING PERFORMANCE
With anticipation of rising interest rates so high during the period, we
shortened the weighted average maturity for the fund significantly, from 43
days at the start of the period to 29 days as the period ended. Essentially, we
looked to cut our interest-rate risk because we anticipated that rates would
begin to rise and continue to rise for the foreseeable future.
The portfolio was impacted by a continued short supply of commercial paper in
the market. Companies, according to our research, were locking in low current
interest rates by issuing longer-term debt in place of shorter-term commercial
paper. While evidence of U.S. and global economic improvement appeared to
strengthen during the period, we believe an additional cause of this short
supply may have been mixed economic signals that led to cautious corporate
spending.
FUND POSITIONING
As of period-end on August 31, 2004, approximately 97% of MFS(R) Cash Reserve
Fund was invested in high-quality commercial paper, certificates of deposit,
and euro time deposits. The balance of the portfolio was invested in a discount
agency note.
COMMITMENT TO QUALITY
Regardless of market or economic conditions, we intend to maintain a focus on
high quality as we concentrate on the fund's objectives of income, capital
preservation, and liquidity.
Respectfully,
/s/ Edward L. O'Dette /s/ Terri A. Vittozzi
Edward L. O'Dette Terri A. Vittozzi
Portfolio Manager Portfolio Manager
The views expressed in this report are those of the portfolio managers only
through the end of the period of the report as stated on the cover and do not
necessarily reflect the views of MFS or any other person in the MFS
organization. These views are subject to change at any time based on market and
other conditions, and MFS disclaims any responsibility to update such views.
These views may not be relied upon as investment advice or as an indication of
trading intent on behalf of any MFS fund. References to specific securities are
not recommendations of such securities and may not be representative of any MFS
fund's current or future investments.
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Visit mfs.com for our latest economic and investment outlook.
o Under Updates & Announcements, click Week in Review for a summary of recent
investment- related news.
o From Week in Review, link to MFS Global Perspective for our current view of
the world.
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PORTFOLIO COMPOSITION
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PORTFOLIO STRUCTURE*
Commercial Paper 88.6%
Certificates of Deposit 8.0%
Government & Agency 3.3%
Other 0.8%
Other Assets and Liabilites -0.4%
PORTFOLIO FACTS
Average Quality Short-Term Bonds A-1
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All holdings are rated "A-1"
MATURITY BREAKDOWN*
0 to 29 Days 63.6
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30 to 59 Days 30
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60 to 89 Days 6.8
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Other Assets Less Liabilities -0.4%
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Percentages are based on total net assets as of 8/31/04.
Short-term credit quality is based upon the average of the ratings from
Moody's Investors Service, Standard & Poor's, and Fitch, Inc. for each
security, if not rated by any of the three agencies, the security is
considered not rated.
* For purposes of this graphical presentation, the bond component includes both
the accrued interest on bonds and the equivalent exposure from any derivative
holdings, if applicable.
From time to time, "Other Assets Less Liabilities" may be negative due to
timing of cash receipts.
The portfolio is actively managed, and current holdings may be different.
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PERFORMANCE SUMMARY THROUGH 8/31/04
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Performance results reflect the change in net asset value, including
reinvestment of dividends and capital gains distributions. An investment in the
fund is not insured or guaranteed by the Federal Deposit Insurance Corporation
or any other government agency. Although the fund seeks to preserve the value
of your investment at $1.00 per share, it is possible to lose money by
investing in this fund. (See Notes to Performance Summary.)
VISIT MFS.COM FOR THE MOST RECENT MONTH-END PERFORMANCE RESULTS. MARKET
VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND CURRENT
PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE
OF FUTURE RESULTS. INVESTMENT RETURN WILL FLUCTUATE. THE PERFORMANCE SHOWN DOES
NOT REFLECT THE DEDUCTION OF TAXES, IF ANY, THAT A SHAREHOLDER WOULD PAY ON
FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
1 YEAR
TOTAL RETURN 1 YEAR CURRENT
(WITHOUT TOTAL RETURN 7-DAY YIELD
SALES (WITH SALES CURRENT WITHOUT
CLASS INCEPTION CHARGE) CHARGE) 7-DAY YIELD WAIVER
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A 9/7/93 0.58% 0.58% 1.12% 0.72%
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B 12/29/86 0.06% -3.94% 0.17% -0.28%
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C 4/1/96 0.06% -0.94% 0.16% -0.29%
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529A 7/31/02 0.33% 0.33% 0.87% 0.12%
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529B 7/31/02 0.06% -3.94% 0.17% -0.53%
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529C 7/31/02 0.06% -0.94% 0.18% -0.52%
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NOTES TO PERFORMANCE SUMMARY
Yields quoted are based on the latest seven days ended as of August 31, 2004,
with dividends annualized. The yield quotation more closely reflects the
current earnings of the fund than the total return quotation.
Class A and 529A shares have no sales charge. Class B and 529B results,
including sales charge, reflect the deduction of the applicable contingent
deferred sales charge (CDSC), which declines over six years from 4% to 0%.
Class C and 529C results, including sales charge (assuming redemption within
one year from the end of the calendar month of purchase), reflect the deduction
of the 1% CDSC. Class 529A, 529B, and 529C shares are only available in
conjunction with qualified tuition programs, such as the MFS 529 Savings Plan.
Performance results reflect any applicable expense subsidies and waivers in
effect during the periods shown. Subsidies and fee waivers may be imposed to
enhance a fund's yield during periods when the fund's operating expenses have a
significant impact on the fund's yield due to lower interest rates. Without
such subsidies and waivers, the fund's performance results would be less
favorable. Please see the prospectus and financial statements for complete
details. There also is an additional fee, which is detailed in the program
description, on qualified tuition programs. If this fee were reflected, the
performance for Class 529 shares would have been lower.
KEY RISK CONSIDERATIONS
The portfolio may invest in government guaranteed securities. These guarantees
apply to the underlying securities only and not to the prices and yields of the
portfolio.
The portfolio's investment risks should be considered prior to investing.
Please see the prospectus for further information regarding these and other
risk considerations.
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EXPENSE TABLE
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FUND EXPENSES BORNE BY SHAREHOLDERS DURING THE PERIOD FROM MARCH 1, 2004,
THROUGH AUGUST 31, 2004.
As a shareholder of the fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on certain purchase or redemption
payments and redemption fees on certain exchanges and redemptions, and (2)
ongoing costs, including management fees; distribution and service (12b-1)
fees; and other fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of
the period and held for the entire period, March 1, 2004, through August 31,
2004.
ACTUAL EXPENSES
The first line for each share class in the table on the following page provides
information about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested, to estimate
the expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the first line under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line for each share class in the table on the following page
provides information about hypothetical account values and hypothetical
expenses based on the fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing costs of investing in the fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption fees. Therefore, the second line for each share
class in the table is useful in comparing ongoing costs only, and will not help
you determine the relative total costs of owning different funds. In addition,
if these transactional costs were included, your costs would have been higher.
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Share Class
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Expenses
Paid During
Annualized Beginning Ending Period**
Expense Account Value Account Value* 3/01/04-
Ratio 3/01/04 8/31/04 8/31/04
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Actual 0.45% $1,000 $1,004 $2.27
A ------------------------------------------------------------------------
Hypothetical 0.45% $1,000 $1,023 $2.29
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Actual 1.11% $1,000 $1,000 $5.60
B -------------------------------------------------------------------------
Hypothetical 1.11% $1,000 $1,019 $5.65
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Actual 1.11% $1,000 $1,000 $5.60
C ------------------------------------------------------------------------
Hypothetical 1.11% $1,000 $1,019 $5.65
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Actual 0.70% $1,000 $1,002 $3.53
529A ------------------------------------------------------------------------
Hypothetical 0.70% $1,000 $1,021 $3.57
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Actual 1.11% $1,000 $1,000 $5.60
529B ------------------------------------------------------------------------
Hypothetical 1.11% $1,000 $1,019 $5.65
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Actual 1.10% $1,000 $1,000 $5.55
529C ------------------------------------------------------------------------
Hypothetical 1.10% $1,000 $1,019 $5.60
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* Ending account value reflects each class' ending account value assuming the
actual class return per year before expenses (Actual) and a hypothetical 5%
class return per year before expenses (Hypothetical).
** Expenses paid is equal to each class' annualized expense ratio for the most
recent six month period, as shown above, multiplied by the average account
value over the period, multiplied by the number of days in the period,
divided by the number of days in the year. Expenses paid do not include any
applicable sales charges (loads) or redemption fees. If these transaction
costs had been included, your costs would have been higher.
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PORTFOLIO OF INVESTMENTS - 8/31/04
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The Portfolio of Investments is a complete list of all securities owned by your fund. It is
categorized by broad-based asset classes.
Certificates of Deposit - 8.0%
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ISSUER PAR AMOUNT $ VALUE
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Deutsche Bank, 1.68%, due 11/23/04 $25,000,000 $25,000,574
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Society Generale North America, 1.09%, due 10/5/04 24,000,000 24,000,000
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Total Certificates of Deposit, at Amortized Cost and Value $49,000,574
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Commercial Paper - 88.6%
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Abbey National North America, due 10/01/04 $15,800,000 $15,785,912
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Alpine Securitization Corp., due 9/14/04 25,144,000 25,130,108
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American General Finance Corp., due 9/17/04 25,373,000 25,355,972
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Bank of America Corp., due 10/29/04 22,051,000 21,993,447
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Barton Capital Corp., due 9/13/04 - 9/24/04 25,315,000 25,298,448
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Blue Ridge Asset Funding, due 9/17/04 25,108,000 25,090,927
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Ciesco LP, due 9/22/04 - 9/27/04 24,923,000 24,898,697
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Citibank Credit Card Issuance Trust, due 9/27/04 - 10/22/04 23,553,000 23,521,014
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Citicorp, Inc., due 10/26/04 25,111,000 25,047,699
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Edison Asset Securitization LLC, due 9/03/04 - 9/17/04 25,115,000 25,111,148
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FCAR Owner Trust Series, due 9/20/04 14,620,000 14,608,349
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General Electric Capital Corp., due 9/03/04 - 9/27/04 25,455,000 25,451,892
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Goldman Sachs Group, Inc., due 10/25/04 13,145,000 13,120,353
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Govco, Inc., due 10/29/04 7,327,000 7,307,522
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HBOS Treasury Services PLC, due 9/21/04 1,500,000 1,499,108
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ING America Insurance Holdings, due 10/15/04 - 10/18/04 25,372,000 25,321,401
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Jupiter Securitization Corp., due 9/09/04 - 10/12/04 25,368,000 25,343,260
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Kittyhawk Funding Corp., due 9/01/04 9,700,000 9,700,000
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MetLife Funding, Inc., due 11/10/04 16,939,000 16,883,992
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New Center Asset Trust, due 10/28/04 25,216,000 25,151,321
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Old Line Funding Corp., due 9/07/04 - 10/15/04 25,175,000 25,150,980
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Park Avenue Receivable Corp., due 9/14/04 25,103,000 25,089,131
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Receivables Capital Corp., due 9/15/04 25,360,000 25,344,812
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SBC Communications, Inc., due 9/09/04 16,400,000 16,394,424
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Sheffield Receivables Corp., due 9/09/04 25,098,000 25,089,467
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Thunder Bay Funding, Inc., due 9/13/04 - 9/22/04 25,369,000 25,350,783
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Total Commercial Paper, at Amortized Cost and Value $544,040,167
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European Time Deposit - 0.5%
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ISSUER PAR AMOUNT $ VALUE
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Royal Bank of Canada, 1.57%, due 9/01/04, at Amortized Cost
and Value $2,944,000 $2,944,000
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U.S. Government Agency Obligation - 3.3%
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Fannie Mae, due 9/30/04, at Amortized Cost and Value $20,000,000 $19,975,672
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Total Investments, at Amortized Cost and Value $615,960,413
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Other Assets, Less Liabilities - (0.4)% (2,229,310)
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Net Assets - 100.0% $613,731,103
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SEE NOTES TO FINANCIAL STATEMENTS
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FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
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This statement represents your fund's balance sheet, which details the assets and liabilities
composing the total value of your fund.
AT 8/31/04
ASSETS
Investments, at amortized cost and value $615,960,413
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Receivable for fund shares sold 852,628
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Interest receivable 118,902
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Other assets 1,644
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Total assets $616,933,587
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LIABILITIES
Payable to custodian $514
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Distributions payable 7,424
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Payable for fund shares reacquired 2,725,913
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Payable to affiliates
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Management fee 2,506
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Shareholder servicing costs 117,848
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Distribution and service fee 14,031
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Administrative fee 78
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Program manager fee 14
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Accrued expenses and other liabilities 334,156
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Total liabilities $3,202,484
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Net assets $613,731,103
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NET ASSETS CONSIST OF
Net assets (represented by paid-in capital) $613,731,103
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Shares of beneficial interest outstanding 613,731,103
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Statement of Assets and Liabilities - continued
Class A shares
Net assets $101,286,973
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Shares outstanding 101,286,973
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Net asset value, offering price and
redemption price per share $1.00
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Class B shares
Net assets $429,843,645
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Shares outstanding 429,843,645
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Net asset value and offering price per share $1.00
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Class C shares
Net assets $80,481,515
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Shares outstanding 80,481,515
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Net asset value and offering price per share $1.00
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Class 529A shares
Net assets $1,139,784
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Shares outstanding 1,139,784
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Net asset value, offering price and
redemption price per share $1.00
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Class 529B shares
Net assets $338,921
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Shares outstanding 338,921
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Net asset value and offering price per share $1.00
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Class 529C shares
Net assets $640,265
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Shares outstanding 640,265
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Net asset value and offering price per share $1.00
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A contingent deferred sales charge may be imposed on redemptions of Class A, Class B, Class C,
Class 529B, and Class 529C shares.
SEE NOTES TO FINANCIAL STATEMENTS
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FINANCIAL STATEMENTS STATEMENT OF OPERATIONS
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This statement describes how much your fund received in investment income and paid in expenses.
It also describes any gains and/or losses generated by fund operations.
FOR YEAR ENDED 8/31/04
NET INVESTMENT INCOME
Interest income $7,874,590
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Expenses
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Management fee $3,814,102
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Trustees' compensation 26,907
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Shareholder servicing costs 1,257,732
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Distribution and service fee (Class B) 4,886,147
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Distribution and service fee (Class C) 962,430
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Distribution and service fee (Class 529A) 4,065
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Distribution and service fee (Class 529B) 2,778
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Distribution and service fee (Class 529C) 6,378
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Program manager fee (Class 529A) 2,882
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Program manager fee (Class 529B) 698
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Program manager fee (Class 529C) 1,602
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Administrative fee 51,961
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Custodian fee 176,857
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Printing 91,530
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Postage 114,496
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Auditing fees 25,000
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Legal fees 8,414
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Total expenses $11,433,979
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Fees paid indirectly (2,682)
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Reduction of expenses by investment adviser and distributor (4,525,402)
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Net expenses $6,905,895
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Net investment income $968,695
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SEE NOTES TO FINANCIAL STATEMENTS
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FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
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This statement describes the increases and/or decreases in net assets resulting from operations,
any distributions, and any shareholder transactions.
FOR YEARS ENDED 8/31 2004 2003
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income declared as distributions
to shareholders $968,695 $1,788,868
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DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income
- ----------------------------------------------------------------------------------------------------
Class A $(609,133) $(1,285,090)
- ----------------------------------------------------------------------------------------------------
Class B (295,011) (422,361)
- ----------------------------------------------------------------------------------------------------
Class C (60,049) (79,677)
- ----------------------------------------------------------------------------------------------------
Class 529A (3,925) (1,461)
- ----------------------------------------------------------------------------------------------------
Class 529B (190) (142)
- ----------------------------------------------------------------------------------------------------
Class 529C (387) (137)
- ---------------------------------------------------- --------------- ---------------
Total distributions declared to shareholders $(968,695) $(1,788,868)
- ---------------------------------------------------- --------------- ---------------
Net decrease in net assets from fund share
transactions $(409,455,407) $(119,976,920)
- ---------------------------------------------------- --------------- ---------------
NET ASSETS
At beginning of period $1,023,186,510 $1,143,163,430
- ----------------------------------------------------------------------------------------------------
At end of period $613,731,103 $1,023,186,510
- ----------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the fund's financial performance for the past 5 years (or,
if shorter, the period of the fund's operation). Certain information reflects financial results for a single fund share. The
total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund
(assuming reinvestment of all distributions) held for the entire period. This information has been audited by the fund's
independent registered public accounting firm, whose report, together with the fund's financial statements, are included in
this report.
YEARS ENDED 8/31
------------------------------------------------------------------------------
CLASS A 2004 2003 2002 2001 2000
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.01 $0.01 $0.01 $0.05 $0.05
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions declared to shareholders
from net investment income (0.01) (0.01) (0.01) (0.05) (0.05)
- --------------------------------------------- ------- ------ ------ ------ ------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
- --------------------------------------------- ------- ------ ------ ------ ------
Total return (%) 0.58 0.69 1.49 4.85 5.39
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 0.55 0.71 0.81 0.80 0.81
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.58 0.70 1.44 4.82 5.18
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $101,287 $214,275 $242,230 $107,346 $76,062
- -----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. For the year ended August
31, 2004, the investment adviser has voluntarily agreed to reimburse the Fund for its proportional share of Independent
Chief Compliance Officer service fees paid to Tarantino LLC. If these fees had been incurred by the fund, the net
investment income per share and the ratios would have been:
Net investment income $0.00+++ $0.01 $0.01 $0.05 $0.05
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 0.79 0.81 0.91 0.90 0.91
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.34 0.60 1.34 4.72 5.08
- -----------------------------------------------------------------------------------------------------------------------------
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
----------------------------------------------------------------------------------
CLASS B 2004 2003 2002 2001 2000
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.00+++ $0.00+++ $0.00+++ $0.04 $0.04
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions declared to
shareholders from net investment income (0.00)+++ (0.00)+++ (0.00)+++ (0.04) (0.04)
- ----------------------------------------- ------- ------ ------ ------ ------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
- ----------------------------------------- ------- ------ ------ ------ ------
Total return (%) 0.06 0.06 0.49 3.81 4.35
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.07 1.35 1.81 1.80 1.81
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.06 0.06 0.50 3.65 4.18
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $429,844 $647,269 $741,638 $514,324 $313,782
- -----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. The distributor voluntarily
waived a portion of its fee for certain of the periods indicated. For the year ended August 31, 2004, the investment
adviser has voluntarily agreed to reimburse the Fund for its proportional share of Independent Chief Compliance Officer
service fees paid to Tarantino LLC. If these fees had been incurred by the fund, the net investment income (loss) per
share and the ratios would have been:
Net investment income (loss) $(0.01) $0.00+++ $0.00+++ $0.04 $0.04
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.80 1.81 1.91 1.90 1.91
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.67) (0.40) 0.40 3.55 4.08
- -----------------------------------------------------------------------------------------------------------------------------
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
--------------------------------------------------------------------------------
CLASS C 2004 2003 2002 2001 2000
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.00+++ $0.00+++ $0.00+++ $0.04 $0.04
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions declared to
shareholders from net investment income (0.00)+++ (0.00)+++ (0.00)+++ (0.04) (0.04)
- ------------------------------------------- ------- ------ ------ ------ ------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
- ------------------------------------------- ------- ------ ------ ------ ------
Total return (%) 0.06 0.06 0.49 3.80 4.32
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.07 1.36 1.81 1.80 1.81
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.06 0.06 0.50 3.77 4.15
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $80,482 $159,715 $159,254 $125,200 $52,426
- -----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. The distributor voluntarily
waived a portion of its fee for certain of the periods indicated. For the year ended August 31, 2004, the investment
adviser has voluntarily agreed to reimburse the Fund for its proportional share of Independent Chief Compliance Officer
service fees paid to Tarantino LLC. If these fees had been incurred by the fund, the net investment income (loss) per
share and the ratios would have been:
Net investment income (loss) $(0.01) $0.00+++ $0.01 $0.04 $0.04
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.79 1.81 1.91 1.90 1.91
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.66) (0.39) 0.40 3.67 4.05
- -----------------------------------------------------------------------------------------------------------------------------
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31 PERIOD
------------------------------ ENDED
CLASS 529A 2004 2003 8/31/02*
Net asset value, beginning of period $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.00+++ $0.00+++ $0.00+++
- --------------------------------------------------------------------------------------------------------------
Less distributions declared to shareholders from net
investment income (0.00)+++ (0.00)+++ (0.00)+++
- ------------------------------------------------------------ ------ ------ ------
Net asset value, end of period $1.00 $1.00 $1.00
- ------------------------------------------------------------ ------ ------ ------
Total return (%) 0.33 0.45 0.08++
- --------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 0.80 0.96 1.16+
- --------------------------------------------------------------------------------------------------------------
Net investment income 0.34 0.33 1.04+
- --------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $1,140 $1,164 $30
- --------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. The
distributor voluntarily waived a portion of its fee for certain of the periods indicated. For the year
ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the Fund for its
proportional share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If these
fees had been incurred by the fund, the net investment income (loss) per share and the ratios would have
been:
Net investment income (loss) $(0.00)+++ $(0.00)+++ $0.00+++
- --------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.39 1.41 1.26+
- --------------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.25) (0.12) 0.94+
- --------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529A shares, July 31, 2002,
through August 31, 2002.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31 PERIOD
------------------------------ ENDED
CLASS 529B 2004 2003 8/31/02*
Net asset value, beginning of period $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.00+++ $0.00+++ $0.00+++
- --------------------------------------------------------------------------------------------------------------
Less distributions declared to shareholders from net
investment income (0.00)+++ (0.00)+++ (0.00)+++
- ------------------------------------------------------------ ------ ------ ------
Net asset value, end of period $1.00 $1.00 $1.00
- ------------------------------------------------------------ ------ ------ ------
Total return (%) 0.06 0.07 0.02++
- --------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.08 1.25 2.06+
- --------------------------------------------------------------------------------------------------------------
Net investment income 0.07 0.06 0.23+
- --------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $339 $253 $5
- --------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. The
distributor voluntarily waived a portion of its fee for certain of the periods indicated. For the year
ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the Fund for its
proportional share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If these
fees had been incurred by the fund, the net investment income (loss) per share and the ratios would have
been:
Net investment income (loss) $(0.01) $(0.01) $0.00+++
- --------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.03 2.06 2.16+
- --------------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.88) (0.75) 0.13+
- --------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529B shares, July 31, 2002, through August 31, 2002.
+ Annualized.
++ Not annualized. Previous return has been restated from 0.01% to 0.02%. Actual return was 0.015%.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31 PERIOD
------------------------------ ENDED
CLASS 529C 2004 2003 8/31/02*
Net asset value, beginning of period $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.00+++ $0.00+++ $0.00+++
- --------------------------------------------------------------------------------------------------------------
Less distributions declared to shareholders from net
investment income (0.00)+++ (0.00)+++ (0.00)+++
- ------------------------------------------------------------ ------ ------ ------
Net asset value, end of period $1.00 $1.00 $1.00
- ------------------------------------------------------------ ------ ------ ------
Total return (%) 0.06 0.07 0.02++
- --------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.08 1.22 2.06+
- --------------------------------------------------------------------------------------------------------------
Net investment income 0.06 0.05 0.23+
- --------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $640 $512 $5
- --------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. The
distributor voluntarily waived a portion of its fee for certain of the periods indicated. For the year
ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the Fund for its
proportional share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If these
fees had been incurred by the fund, the net investment income (loss) per share and the ratios would have
been:
Net investment income (loss) $(0.01) $(0.01) $0.00+++
- --------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.03 2.06 2.16+
- --------------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.89) (0.79) 0.13+
- --------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529C shares, July 31, 2002, through August 31, 2002.
+ Annualized.
++ Not annualized. Previous return has been restated from 0.01% to 0.02%. Actual return was 0.015%.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(1) BUSINESS AND ORGANIZATION
MFS Cash Reserve Fund (the fund) is a diversified series of MFS Series Trust I
(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 U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
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.
INVESTMENT VALUATIONS - Money market instruments are valued at amortized cost,
which the Trustees have determined in good faith approximates market value. The
fund's use of amortized cost is subject to the fund's compliance with certain
conditions as specified under Rule 2a-7 of the Investment Company Act of 1940.
REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements with
institutions that the fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The fund requires
that the securities collateral in a repurchase transaction be transferred to
the custodian in a manner sufficient to enable the fund to obtain those
securities in the event of a default under the repurchase agreement. The fund
monitors, on a daily basis, the value of the collateral to ensure that its
value, including accrued interest, is greater than amounts owed to the fund
under each such repurchase agreement. The fund, along with other affiliated
entities of Massachusetts Financial Services Company (MFS), may utilize a joint
trading account for the purpose of entering into one or more repurchase
agreements.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and discount is amortized and accreted for financial statement purposes and tax
reporting purposes in accordance with U.S. generally accepted accounting
principles and federal tax regulations, respectively.
FEES PAID INDIRECTLY - The fund's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by the
fund. This amount, for the year ended August 31, 2004, is shown as a reduction
of total 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 net 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 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.
The tax character of distributions declared for the years ended August 31, 2004
and August 31, 2003 were as follows:
8/31/04 8/31/03
Distributions declared from ordinary income $968,695 $1,788,868
- ------------------------------------------------------------------------------
As of August 31, 2004, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed ordinary income $56,551
----------------------------------------------------------
Capital loss carryforward (441)
----------------------------------------------------------
Post-October capital loss deferral (4)
----------------------------------------------------------
Other temporary differences (55,351)
----------------------------------------------------------
Post-October capital loss deferrals represent losses during the current fiscal
year, but are recognized for tax purposes in the next fiscal year.
For federal income tax purposes, the capital loss carryforward may be applied
against any net taxable realized gains of each succeeding year until the
earlier of its utilization or expiration on August 31, 2012 ($411).
MULTIPLE CLASSES OF SHARES OF BENEFICIAL INTEREST - The fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the fund based on the value
of settled shares outstanding of each class, without distinction between share
classes. Dividends are declared separately for each class. Differences in per
share dividend rates are generally due to differences in separate class
expenses. Class B and Class 529B shares will convert to Class A and Class 529A
shares, respectively, approximately eight years after purchase.
(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
0.55% of the fund's average daily net assets. The investment adviser has
contractually agreed to waive a portion of its fee, which is shown as a
reduction of total expenses in the Statement of Operations.
As part of a settlement agreement with the New York Attorney General concerning
market timing and related matters (see Legal Proceedings footnote), MFS has
agreed to reduce the fund's management fee to 0.15% of average daily net assets
for the period March 1, 2004 through February 28, 2009. During this time
period, the Board of Trustees will continue to review the appropriateness of
all advisory fees in accordance with their oversight responsibilities. After
February 28, 2009 the management fee will be determined in accordance with then
existing review policies approved by the Board of Trustees overseeing the fund.
Management fees incurred for the year ended August 31, 2004 were an effective
rate of 0.31% of average daily net assets on an annualized basis.
The fund pays compensation to its Independent Trustees in the form of a
retainer, attendance fees, and additional compensation to Board and Committee
chairpersons, and 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). The fund has an
unfunded defined benefit plan for retired Independent Trustees. Included in
Trustees' compensation is a pension expense of $4,241 for retired Independent
Trustees for the year ended August 31, 2004.
The MFS funds, including this fund, have entered into a services agreement (the
"Agreement") which provides for payment of fees by the MFS funds to Tarantino
LLC in return for the provision of services of an Independent Chief Compliance
Officer (ICCO) for the MFS funds. The ICCO is an officer of the MFS funds and
the sole member of Tarantino LLC. MFS has agreed to reimburse each of the MFS
funds for a proportional share of substantially all of the payments made by the
MFS funds to Tarantino LLC and also to provide office space and other
administrative support and supplies to the ICCO. The MFS funds can terminate
the Agreement with Tarantino LLC at any time under the terms of the Agreement.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment adviser. Under an administrative services
agreement between the funds and MFS, MFS is entitled to partial reimbursement
of the costs MFS incurs to provide these services, subject to review and
approval by the Board of Trustees. Each fund is allocated a portion of these
administrative costs based on its size and relative average net assets. Prior
to April 1, 2004, the fund paid MFS an administrative fee up to the following
annual percentage rates of the fund's average daily net assets:
First $2 billion 0.0175%
----------------------------------------------------------
Next $2.5 billion 0.0130%
----------------------------------------------------------
Next $2.5 billion 0.0005%
----------------------------------------------------------
In excess of $7 billion 0.0000%
----------------------------------------------------------
Effective April 1, 2004, the fund paid MFS an administrative fee up to the
following annual percentage rates of the fund's average daily net assets:
First $2 billion 0.01120%
----------------------------------------------------------
Next $2.5 billion 0.00832%
----------------------------------------------------------
Next $2.5 billion 0.00032%
----------------------------------------------------------
In excess of $7 billion 0.00000%
----------------------------------------------------------
For the year ended August 31, 2004, the fund paid MFS $51,961, equivalent to
0.0075% of average daily net assets, to partially reimburse MFS for the costs
of providing administrative services.
DISTRIBUTOR - The Trustees have adopted a distribution plan for Class A, Class
B, Class C, Class 529A, Class 529B, and Class 529C shares pursuant to rule
12b-1 of the Investment Company Act of 1940 as follows:
The fund's distribution plan provides that the fund will pay MFD an annual
percentage of its average daily net assets attributable to certain share
classes in order that MFD may pay expenses on behalf of the fund related to the
distribution and servicing of its shares. These expenses include a service fee
paid to each securities dealer that enters into a sales agreement with MFD
based on the average daily net assets of accounts attributable to such dealers.
The fees are calculated based on each class' average daily net assets. The
maximum distribution and service fees for each class of shares are as follows:
CLASS A CLASS B CLASS C
Distribution Fee 0.10% 0.75% 0.75%
- ------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25%
- ------------------------------------------------------------------------------
Total Distribution Plan 0.35% 1.00% 1.00%
- ------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Distribution Fee 0.25% 0.75% 0.75%
- ------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25%
- ------------------------------------------------------------------------------
Total Distribution Plan 0.50% 1.00% 1.00%
- ------------------------------------------------------------------------------
MFD retains the service fee for accounts not attributable to a securities
dealer, which for the year ended August 31, 2004 amounted to:
CLASS A CLASS B CLASS C
Service Fee Retained by MFD $-- $9,264 $9,354
- ------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Service Fee Retained by MFD $-- $-- $--
- ------------------------------------------------------------------------------
Payment of the 0.10% per annum Class A distribution fee and payment of the
0.25% per annum service fee will commence on such date as the Trustees of the
fund may determine. The 0.25% per annum Class 529A service fee and 0.10% of the
Class 529A distribution are currently being waived. The remaining 0.15% per
annum distribution fee will be implemented on such date as the Trustees of the
Trust may determine. During the period, MFD voluntarily waived receipt of a
portion of the fund's distribution and service fees on Class B, Class C, Class
529B and Class 529C, as shown in the Statement of Operations.
Fees incurred under the distribution plan during the year ended August 31,
2004, were as follows:
CLASS A CLASS B CLASS C
Total Distribution Plan 0.00% 0.51% 0.52%
- ------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Total Distribution Plan 0.00% 0.29% 0.29%
- ------------------------------------------------------------------------------
Certain Class A shares acquired through an exchange may be subject to a CDSC
upon redemption depending upon when the shares exchanged were originally
purchased. A contingent deferred sales charge is imposed on shareholder
redemptions of Class B and Class 529B shares (including shares acquired through
an exchange depending on when the shares exchanged were originally purchased)
in the event of a shareholder redemption within six years from the end of the
calendar month of purchase. Class C and Class 529C shares (including shares
acquired through an exchange depending on when the shares exchanged were
originally purchased) are subject to a contingent deferred sales charge in the
event of a shareholder redemption within the first year from the end of the
calendar month of purchase. Contingent deferred sales charges imposed during
the year ended August 31, 2004 were as follows:
CLASS A CLASS B CLASS C
Contingent Deferred Sales Charges
Imposed $188,697 $2,656,944 $101,275
- ------------------------------------------------------------------------------
CLASS 529B CLASS 529C
Contingent Deferred Sales Charges
Imposed $5,548 $--
- ------------------------------------------------------------------------------
The fund has and may from time to time enter into contracts with program
managers and other parties that administer the tuition programs through which
an investment in the fund's 529 share classes is made. The fund has entered
into an agreement with MFD pursuant to which MFD receives an annual fee of up
to 0.35% from the fund based solely upon the value of the fund's 529 share
classes attributable to tuition programs to which MFD, or a third party which
contracts with MFD, provides administrative services. The current fee has been
established at 0.25% annually of average net assets of the fund's 529 share
classes attributable to such programs. The fee may only be increased with the
approval of the Board of Trustees that oversees the fund. The services
provided by MFD, or a third party with which MFD contracts, include
recordkeeping and tax reporting and account services, as well as services
designed to maintain the program's compliance with the Internal Revenue Code
and other regulatory requirements.
SHAREHOLDER SERVICING AGENT - Included in shareholder servicing costs is a fee
paid to MFSC, a wholly owned subsidiary of MFS, for its services as shareholder
servicing agent. The fee, which is calculated as a percentage of the fund's
average daily net assets is set periodically under the supervision of the
fund's Trustees. Prior to April 1, 2004, the fee was set at 0.11% of the fund's
average daily net assets. For the period April 1, 2004 through June 30, 2004,
the fee was set at 0.10% of the fund's average daily net assets. Effective July
1, 2004, the fund will be charged up to 0.0861% of its average daily net
assets. For the year ended August 31, 2004, the fund paid MFSC a fee of
$717,668 for shareholder services which equated to 0.1030% of the fund's
average daily net assets. Also included in shareholder servicing costs are
out-of-pocket expenses, paid to MFSC, which amounted to $198,032 for the year
ended August 31, 2004, as well as other expenses paid to unaffiliated vendors.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$9,665,232,047 and $10,078,477,535, respectively.
(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:
Year ended 8/31/04 Year ended 8/31/03
------------------ ------------------
Shares and dollars Shares and dollars
CLASS A SHARES
Shares sold 209,078,235 3,685,903,013
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 534,126 1,006,107
- --------------------------------------------------------------------------------
Shares reacquired (322,599,964) (3,714,864,724)
- --------------------------------------------------------------------------------
Net decrease (112,987,603) (27,955,604)
- --------------------------------------------------------------------------------
Year ended 8/31/04 Year ended 8/31/03
------------------- -------------------
Shares and dollars Shares and dollars
CLASS B SHARES
Shares sold 341,459,510 678,419,939
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 289,935 389,411
- --------------------------------------------------------------------------------
Shares reacquired (559,174,351) (773,179,025)
- --------------------------------------------------------------------------------
Net decrease (217,424,906) (94,369,675)
- --------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 186,509,632 397,526,433
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 54,855 70,913
- --------------------------------------------------------------------------------
Shares reacquired (265,797,616) (397,137,070)
- --------------------------------------------------------------------------------
Net increase (decrease) (79,233,129) 460,276
- --------------------------------------------------------------------------------
CLASS 529A SHARES
Shares sold 647,988 1,303,649
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 3,867 1,459
- --------------------------------------------------------------------------------
Shares reacquired (675,589) (171,703)
- --------------------------------------------------------------------------------
Net increase (decrease) (23,734) 1,133,405
- --------------------------------------------------------------------------------
CLASS 529B SHARES
Shares sold 353,059 668,022
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 181 139
- --------------------------------------------------------------------------------
Shares reacquired (267,144) (420,678)
- --------------------------------------------------------------------------------
Net increase 86,096 247,483
- --------------------------------------------------------------------------------
CLASS 529C SHARES
Shares sold 517,206 576,424
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 376 133
- --------------------------------------------------------------------------------
Shares reacquired (389,713) (69,362)
- --------------------------------------------------------------------------------
Net increase 127,869 507,195
- --------------------------------------------------------------------------------
(6) LINE OF CREDIT
The fund and other affiliated funds participate in an $800 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the bank's
base rate plus 0.50%. 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 calendar quarter. The commitment fee
allocated to the fund for the year ended August 31, 2004 was $4,988. The fund
had no significant borrowings during the year ended August 31, 2004.
(7) LEGAL PROCEEDINGS.
On March 31, 2004, MFS settled an administrative proceeding with the Securities
and Exchange Commission ("SEC") regarding disclosure of brokerage allocation
practices in connection with MFS fund sales (the term "MFS funds" means the
open-end registered management investment companies sponsored by MFS). Under
the terms of the settlement, in which MFS neither admitted nor denied any
wrongdoing, MFS agreed to pay (one dollar) $1.00 in disgorgement and $50
million in penalty to certain MFS funds, pursuant to a plan developed by an
independent distribution consultant. The brokerage allocation practices which
were the subject of this proceeding were discontinued by MFS in November 2003.
The agreement with the SEC is reflected in an order of the SEC. Pursuant to the
SEC order, on July 28, 2004, MFS transferred these settlement amounts to the
SEC, and those MFS funds entitled to these settlement amounts accrued an
estimate of their pro rata portion of these amounts. Once the final
distribution plan is approved by the SEC, these amounts will be distributed by
the SEC to the affected MFS funds. The SEC settlement order states that MFS
failed to adequately disclose to the Boards of Trustees and to shareholders of
the MFS funds the specifics of its preferred arrangements with certain
brokerage firms selling MFS fund shares. The SEC settlement order states that
MFS had in place policies designed to obtain best execution of all MFS fund
trades. As part of the settlement, MFS retained an independent compliance
consultant to review the completeness of its current policies and practices
regarding disclosure to MFS fund trustees and to MFS fund shareholders of
strategic alliances between MFS or its affiliates and broker-dealers and other
financial advisers who support the sale of MFS fund shares.
In addition, in February, 2004, MFS reached agreement with the SEC, the New
York Attorney General ("NYAG") and the Bureau of Securities Regulation of the
State of New Hampshire ("NH") to settle administrative proceedings alleging
false and misleading information in certain MFS retail fund prospectuses
regarding market timing and related matters (the "February Settlements"). These
regulators alleged that prospectus language for certain MFS retail funds was
false and misleading because, although the prospectuses for those funds in the
regulators' view indicated that the MFS funds prohibited market timing, MFS did
not limit trading activity in 11 domestic large cap stock, high grade bond and
money market funds. MFS' former Chief Executive Officer, John W. Ballen, and
former President, Kevin R. Parke, also reached agreement with the SEC in which
they agreed to, among other terms, monetary fines and temporary suspensions
from association with any investment adviser or registered investment company.
Messrs. Ballen and Parke have resigned their positions with, and will not be
returning to, MFS and the MFS funds. Under the terms of the February
Settlements, MFS and the executives neither admit nor deny wrongdoing.
Under the terms of the February Settlements, a $225 million pool has been
established for distribution to shareholders in certain MFS retail funds, which
has been funded by MFS and of which $50 million is characterized as a penalty.
This pool will be distributed in accordance with a methodology developed by an
independent distribution consultant in consultation with MFS and the Board of
Trustees of the MFS retail funds, and acceptable to the SEC. MFS has further
agreed with NYAG to reduce its management fees in the aggregate amount of
approximately $25 million annually over the next five years, and not to
increase certain management fees during this period. MFS has also paid an
administrative fine to NH in the amount of $1 million, which will be used for
investor education purposes (NH retained $250,000 and $750,000 was contributed
to the North American Securities Administrators Association's Investor
Protection Trust). In addition, under the terms of the February Settlements,
MFS is in the process of adopting certain governance changes and reviewing its
policies and procedures.
Since December 2003, MFS, Sun Life Financial Inc., various MFS funds, the
Trustees of these MFS funds, and certain officers of MFS have been named as
defendants in multiple lawsuits filed in federal and state courts. The lawsuits
variously have been commenced as class actions or individual actions on behalf
of investors who purchased, held or redeemed shares of the MFS funds during
specified periods, as class actions on behalf of participants in certain
retirement plan accounts, or as derivative actions on behalf of the MFS funds.
The lawsuits relating to market timing and related matters have been
transferred to, and consolidated before, the United States District Court for
the District of Maryland, as part of a multi-district litigation of market
timing and related claims involving several other fund complexes (In re Mutual
Funds Investment Litigation (Alger, Columbia, Janus, MFS, One Group, Putnam,
PIMCO), No. 1:04-md-15863 (transfer began March 19, 2004)). Four lawsuits
alleging improper brokerage allocation practices and excessive compensation are
pending in the United States District Court for the District of Massachusetts
(Forsythe v. Sun Life Financial Inc., et al., No. 04cv10584 (GAO) (March 25,
2004); Eddings v. Sun Life Financial Inc., et al., No. 04cv10764 (GAO) (April
15, 2004); Marcus Dumond, et al. v. Massachusetts Financial Servs. Co., et al.,
No. 04cv11458 (GAO) (May 4, 2004); and Koslow v. Sun Life Financial Inc., et
al., No. 04cv11019 (GAO) (May 20, 2004)). The lawsuits generally allege that
some or all of the defendants (i) permitted or acquiesced in market timing
and/or late trading in some of the MFS funds, inadequately disclosed MFS'
internal policies concerning market timing and such matters, and received
excessive compensation as fiduciaries to the MFS funds, or (ii) permitted or
acquiesced in the improper use of fund assets by MFS to support the
distribution of MFS fund shares and inadequately disclosed MFS' use of fund
assets in this manner. The actions assert that some or all of the defendants
violated the federal securities laws, including the Securities Act of 1933 and
the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the
Investment Advisers Act of 1940, the Employee Retirement Income Security Act of
1974, as well as fiduciary duties and other violations of common law. The
lawsuits seek unspecified damages. Insofar as any of the actions is
appropriately brought derivatively on behalf of any of the MFS funds, any
recovery will inure to the benefit of the MFS funds. The defendants are
reviewing the allegations of the multiple complaints and will respond
appropriately. Additional lawsuits based on similar allegations may be filed in
the future.
Any potential resolution of these matters may include, but not be limited to,
judgments or settlements for damages against MFS, the MFS funds, or any other
named defendant. As noted above, as part of the regulatory settlements, MFS has
established a restitution pool in the amount of $225 million to compensate
certain shareholders of the MFS retail funds for damages that they allegedly
sustained as a result of market timing or late trading in certain of the MFS
retail funds, and transferred $50 million for distribution to affected MFS
funds to compensate those funds based upon the amount of brokerage commissions
allocated in recognition of MFS fund sales. It is not clear whether these
amounts will be sufficient to compensate shareholders for all of the damage
they allegedly sustained, whether certain shareholders or putative class
members may have additional claims to compensation, or whether the damages that
may be awarded in any of the actions will exceed these amounts. In the event
the MFS funds incur any losses, costs or expenses in connection with such
lawsuits, the Boards of Trustees of the affected MFS funds may pursue claims on
behalf of such funds against any party that may have liability to the funds in
respect thereof.
Review of these matters by the independent Trustees of the MFS funds and their
counsel is continuing. There can be no assurance that these regulatory actions
and lawsuits, or the adverse publicity associated with these developments, will
not result in increased fund redemptions, reduced sales of fund shares, or
other adverse consequences to the MFS funds.
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------------------------------
To the Trustees of MFS Series Trust I and the Shareholders of
MFS Cash Reserve Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS Cash Reserve Fund (one of the
series comprising MFS Series Trust I) (the "Trust") as of August 31, 2004, and
the related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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 as of August 31, 2004, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of MFS Cash Reserve Fund as of August 31,
2004, the results of its operations for the year then ended, the changes in
their net assets for each of the two years in the period then ended, and their
financial highlights for each of the five years in the period then ended, in
conformity with accounting principles generally accepted in the United States
of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 25, 2004
- ------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
- ------------------------------------------------------------------------------------------------------
The Trustees and officers of the Trust, as of October 10, 2004, are listed below, together with
their principal occupations during the past five years. (Their titles may have varied during that
period.) The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts
02116.
PRINCIPAL OCCUPATIONS & OTHER
POSITION(s) HELD TRUSTEE/OFFICER DIRECTORSHIPS(2) DURING
NAME, DATE OF BIRTH WITH FUND SINCE(1) THE PAST FIVE YEARS
- ------------------- ---------------- --------------- -----------------------------
INTERESTED TRUSTEES
Robert J. Manning(3) Trustee and February 2004 Massachusetts Financial Services
(born 10/20/63) President Company, Chief Executive Officer,
President, Chief Investment
Officer and Director
Robert C. Pozen(3) Trustee February 2004 Massachusetts Financial Services
(born 08/08/46) Company, Chairman (since February
2004); Harvard Law School
(education), John Olin Visiting
Professor (since July 2002);
Secretary of Economic Affairs, The
Commonwealth of Massachusetts
(January 2002 to December 2002);
Fidelity Investments, Vice
Chairman (June 2000 to December
2001); Fidelity Management &
Research Company (investment
adviser), President (March 1997 to
July 2001); The Bank of New York
(financial services), Director;
Bell Canada Enterprises
(telecommunications), Director;
Telesat (satellite
communications), Director
INDEPENDENT TRUSTEES
J. Atwood Ives Trustee and Chair February 1992 Private investor; Eastern
(born 05/01/36) of Trustees Enterprises (diversified services
company), Chairman, Trustee and
Chief Executive Officer (until
November 2000)
Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital,
(born 03/11/37) Chief of Cardiac Surgery; Harvard
Medical School, Professor of
Surgery
David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining
(born 05/30/42) products and service provider),
Vice Chairman/Director (since
April 2001); Encinitos Ventures
(private investment company),
Principal (1997 to April 2001);
Lincoln Electric Holdings, Inc.
(welding equipment manufacturer),
Director; Southwest Gas
Corporation (natural gas
distribution company), Director
William R. Gutow Trustee December 1993 Private investor and real estate
(born 09/27/41) consultant; Capitol Entertainment
Management Company (video
franchise), Vice Chairman
Amy B. Lane Trustee January 2004 Retired; Merrill Lynch & Co.,
(born 02/08/53) Inc., Managing Director,
Investment Banking Group (1997 to
February 2001); Borders Group,
Inc. (book and music retailer),
Director; Federal Realty
Investment Trust (real estate
investment trust), Trustee
Lawrence T. Perera Trustee July 1981 Hemenway & Barnes (attorneys),
(born 06/23/35) Partner
William J. Poorvu Trustee August 1982 Private investor; Harvard
(born 04/10/35) University Graduate School of
Business Administration, Class of
1961 Adjunct Professor in
Entrepreneurship Emeritus; CBL &
Associates Properties, Inc. (real
estate investment trust), Director
J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 09/23/38) (acquisition planning
specialists), President; Wellfleet
Investments (investor in health
care companies), Managing General
Partner (since 1993); Cambridge
Nutraceuticals (professional
nutritional products), Chief
Executive Officer (until May 2001)
Elaine R. Smith Trustee February 1992 Independent health care industry
(born 04/25/46) consultant
OFFICERS
Robert J. Manning(3) President and February 2004 Massachusetts Financial Services
(born 10/20/63) Trustee Company, Chief Executive Officer,
President, Chief Investment
Officer and Director
James R. Bordewick, Jr.(3) Assistant September 1990 Massachusetts Financial Services
(born 03/06/59) Secretary and Company, Senior Vice President and
Assistant Clerk Associate General Counsel
Jeffrey N. Carp(3) Secretary and September 2004 Massachusetts Financial Services
(born 12/01/56) Clerk Company, Senior Vice President,
General Counsel and Secretary
(since April 2004); Hale and Dorr
LLP (law firm) (prior to April
2004)
James F. DesMarais(3) Assistant September 2004 Massachusetts Financial Services
(born 03/09/61) Secretary and Company, Assistant General Counsel
Assistant Clerk
Stephanie A. DeSisto(3) Assistant May 2003 Massachusetts Financial Services
(born 10/01/53) Treasurer Company, Vice President (since
April 2003); Brown Brothers
Harriman & Co., Senior Vice
President (November 2002 to April
2003); ING Groep N.V./Aeltus
Investment Management, Senior Vice
President (prior to November 2002)
Robert R. Flaherty(3) Assistant August 2000 Massachusetts Financial Services
(born 09/18/63) Treasurer Company, Vice President (since
August 2000); UAM Fund Services,
Senior Vice President (prior to
August 2000)
Richard M. Hisey(3) Treasurer August 2002 Massachusetts Financial Services
(born 08/29/58) Company, Senior Vice President
(since July 2002); The Bank of New
York, Senior Vice President
(September 2000 to July 2002);
Lexington Global Asset Managers,
Inc., Executive Vice President and
Chief Financial Officer (prior to
September 2000); Lexington Funds,
Chief Financial Officer (prior to
September 2000)
Brian T. Hourihan(3) Assistant September 2004 Massachusetts Financial Services
(born 11/11/64) Secretary and Company, Vice President, Senior
Assistant Clerk Counsel and Assistant Secretary
(since June 2004); Affiliated
Managers Group, Inc., Chief Legal
Officer/Centralized Compliance
Program (January to April 2004);
Fidelity Research & Management
Company, Assistant General Counsel
(prior to January 2004)
Ellen Moynihan(3) Assistant April 1997 Massachusetts Financial Services
(born 11/13/57) Treasurer Company, Vice President
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of
(born 03/07/44) Compliance compliance services), Principal
Officer (since June 2004); CRA Business
Strategies Group (consulting
services), Executive Vice
President (April 2003 to June
2004); David L. Babson & Co.
(investment adviser), Managing
Director, Chief Administrative
Officer and Director (February
1997 to March 2003)
James O. Yost(3) Assistant September 1990 Massachusetts Financial Services
(born 06/12/60) Treasurer Company, Senior Vice President
- ----------------
(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served
continuously since appointment unless indicated otherwise.
(2) Directorships or trusteeships of companies required to report to the Securities and Exchange
Commission (i.e., "public companies").
(3) "Interested person" of MFS within the meaning of the Investment Company Act of 1940 (referred to
as the 1940 Act), which is the principle federal law governing investment companies like the
fund. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
The Trust does not hold annual shareholder meetings for the purpose of electing Trustees, and
Trustees are not elected for fixed terms. The Trust will hold a shareholders' meeting in 2005 and at
least once every five years thereafter to elect Trustees. Each Trustee and officer holds office
until his or her successor is chosen and qualified or until his or her earlier death, resignation,
retirement or removal.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of
which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the
officers, with certain affiliates of MFS. Each Trustee serves as a board member of 109 funds within
the MFS Family of Funds.
The Statement of Additional Information contains further information about the Trustees and is
available without charge upon request by calling 1-800-225-2606.
- ------------------------------------------------------------------------------------------------------
INVESTMENT ADVISER CUSTODIAN
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 225 Franklin Street, Boston, MA 02110
02116-3741
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
DISTRIBUTOR Deloitte & Touche LLP
MFS Fund Distributors, Inc. 200 Berkeley Street, Boston, MA 02116
500 Boylston Street, Boston, MA
02116-3741
PORTFOLIO MANAGERS
Edward L. O'Dette
Terri A. Vittozzi
QUARTERLY PORTFOLIO DISCLOSURE
Beginning with the fund's first and third fiscal quarters following this report, the fund will file
a complete schedule of portfolio holdings with the Securities and Exchange Commission (the
Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q
may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-0102
Information on the operation of the Public Reference Room may be obtained by calling the Commission
at 1-800-SEC-0330. The fund's Form N-Q is available on the EDGAR database on the Commission's
Internet website at http://www.sec.gov, and copies of this information may be obtained, upon payment
of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or
by writing the Public Reference Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at www.mfs.com.
- ------------------------------------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS
- ------------------------------------------------------------------------------
YOUR GOALS ARE IMPORTANT
MFS offers a complete range of investments and investment services to address
specific financial needs over time. When your investing goals change, you can
easily stay with MFS for the products you need, when you need them. Whether
you're investing for college or retirement expenses or for tax management or
estate planning, MFS will be there.
Ask your investment professional how MFS can help you move toward the goals
you've set.
MFS FAMILY OF FUNDS(R)
More than 50 portfolios offer domestic and international
equity and fixed-income investments across the full risk
spectrum
VARIABLE ANNUITIES
A selection of annuity products with advantages for
building and preserving wealth
MFS 401(k) AND IRA SUITES
Retirement plans for businesses and individuals
MFS COLLEGE SAVINGS PLANS
Investment products to help meet education expenses
MFS PRIVATE PORTFOLIO SERVICES
Investment advisory services that provide custom products
for high-net-worth individuals
Variable annuities are offered through MFS/Sun Life Financial Distributors,
Inc.
- -------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED)
In January 2005, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 2004.
- -------------------------------------------------------------------------------
CONTACT INFORMATION
INVESTOR INFORMATION
For information on MFS mutual funds, call your investment professional or, for
an information kit, call toll free: 1-800-225-2606 any business day from 8
a.m. to
8 p.m. Eastern time.
A general description of the MFS funds' proxy voting policies and procedures
is available without charge, upon request, by calling 1-800-225-2606, by
visiting
the About MFS section of mfs.com or by visiting the SEC's Web site at
http://www.sec. gov.
Information regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is
available without charge by visiting the Proxy Voting section of mfs.com or by
visiting the SEC's Web site at http://www.sec.gov.
INVESTOR SERVICE
Write to us at: MFS Service Center, Inc.
P.O. Box 55824
Boston, MA 02205-5824
Type of Information Phone number Hours, Eastern Time
- --------------------------------------------------------------------------------
General information 1-800-225-2606 8 a.m. to 8 p.m., any
business day
- --------------------------------------------------------------------------------
Speech- or hearing-impaired 1-800-637-6576 9 a.m. to 5 p.m., any
business day
- --------------------------------------------------------------------------------
Shares prices, account 1-800-MFS-TALK
balances exchanges (1-800-637-8255) 24 hours a day, 365 days a
or stock and bond outlooks touch-tone required year
- --------------------------------------------------------------------------------
WORLD WIDE WEB
Go to MFS.COM for a clear view of market events, investor education, account
access, and product and performance insights.
Go paperless with EDELIVERY: Join your fellow shareholders who are already
taking advantage of this great new benefit from MFS. With eDelivery, we send
you prospectuses, reports, and proxies electronically. You get timely
information without mailbox clutter (and help your fund save printing and
postage costs).
SIGN-UP instructions: If your account is registered with us, go to mfs.com,
log in to your account via MFS Access, and select the eDelivery sign up
options.
If you own your MFS fund shares through a financial institution or through a
retirement plan, MFS TALK, MFS Access, and eDelivery may not be available to
you.
[logo] M F S(R)
INVESTMENT MANAGEMENT
(C) 2004 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116.
LMM-ANN-10/04 61M
MFS(R) Mutual Funds
ANNUAL REPORT 8/31/04
MFS(R) STRATEGIC GROWTH FUND
A path for pursuing opportunity
[graphic omitted]
[logo] M F S(R)
INVESTMENT MANAGEMENT
- --------------------------------------------------------------------------------
MFS(R) PRIVACY POLICY: A COMMITMENT TO YOU
- --------------------------------------------------------------------------------
Privacy is a concern for every investor today. At MFS Investment Management(R)
and the MFS funds, we take this concern very seriously. We want you to
understand our policies about every MFS investment product and service that we
offer and how we protect the nonpublic personal information of investors who
have a direct relationship with us and our wholly owned subsidiaries.
Throughout our business relationship, you provide us with personal information;
we maintain information and records about you, your investments, and the
services you use. Examples of the nonpublic personal information we maintain
include
o data from investment applications and other forms
o share balances and transactional history with us, our affiliates, or others
o facts from a consumer reporting agency
We do not disclose any nonpublic personal information about our customers or
former customers to anyone except as permitted by law. We may share information
with companies or financial institutions that perform marketing services on our
behalf or to other financial institutions with which we have joint marketing
arrangements.
Access to your nonpublic personal information is limited to appropriate
personnel who provide products, services, or information to you. We maintain
physical, electronic, and procedural safeguards that comply with applicable
federal regulations.
If you have any questions about MFS' privacy policy, please call 1-800-225-2606
any business day between 8 a.m. and 8 p.m. Eastern time.
Note: If you own MFS products or receive MFS services in the name of a third
party such as a bank or broker-dealer, their privacy policy may apply to you
instead of ours.
- --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK OR CREDIT UNION GUARANTEE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
- --------------------------------------------------------------------------------
MFS(R) STRATEGIC GROWTH FUND
The fund seeks capital appreciation.
- --------------------------------------------------------------------------------
A PROSPECTUS FOR ANY MFS PRODUCT CAN BE OBTAINED FROM YOUR INVESTMENT
PROFESSIONAL. YOU SHOULD READ THE PROSPECTUS CAREFULLY BEFORE INVESTING AS IT
CONTAINS COMPLETE INFORMATION ON THE FUND'S INVESTMENT OBJECTIVE(s), THE RISKS
ASSOCIATED WITH AN INVESTMENT IN THE FUND, AND THE FEES, CHARGES, AND EXPENSES
INVOLVED. THESE ELEMENTS, AS WELL AS OTHER INFORMATION CONTAINED IN THE
PROSPECTUS, SHOULD BE CONSIDERED CAREFULLY BEFORE INVESTING.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- ----------------------------------------------------
MFS PRIVACY POLICY
- ----------------------------------------------------
LETTER FROM THE CEO 1
- ----------------------------------------------------
MFS ORIGINAL RESEARCH(R) 5
- ----------------------------------------------------
MANAGEMENT REVIEW 6
- ----------------------------------------------------
PORTFOLIO COMPOSITION 9
- ----------------------------------------------------
PERFORMANCE SUMMARY 10
- ----------------------------------------------------
EXPENSE TABLE 14
- ----------------------------------------------------
PORTFOLIO OF INVESTMENTS 16
- ----------------------------------------------------
FINANCIAL STATEMENTS 22
- ----------------------------------------------------
NOTES TO FINANCIAL STATEMENTS 43
- ----------------------------------------------------
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 56
- ----------------------------------------------------
TRUSTEES AND OFFICERS 57
- ----------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS 61
- ----------------------------------------------------
FEDERAL TAX INFORMATION 62
- ----------------------------------------------------
ASSET ALLOCATION 63
- ----------------------------------------------------
CONTACT INFORMATION BACK COVER
- --------------------------------------------------------------------------------
LETTER FROM THE CEO
- --------------------------------------------------------------------------------
Dear Shareholders,
[Photo of Robert J. Manning]
Our firm was built on the strength of MFS Original Research(R), our in-depth
analysis of every security we consider for our portfolios. We've been honing
this process since 1932, when we created one of the mutual fund industry's
first research departments. And we continue to fine-tune this process so that
we can provide strong and consistent long-term investment performance to help
you achieve your financial goals.
While we have achieved strong investment performance in many of our portfolios,
our goal is to achieve the same strong results across all asset classes. To
ensure that our portfolio teams are doing the best possible job for our firm's
clients and shareholders, I am focusing the vast majority of my time on the
three key elements that I believe truly differentiate MFS from its competitors:
people, process, and culture.
PEOPLE
Our people have always been our most valuable resource. Our philosophy is to
deliver consistent, repeatable investment results by hiring the most talented
investors in our industry. We recruit from the nation's top business schools
and hire experienced analysts, both domestically and around the globe.
Our analysts are the engine that powers our entire investment team because
their recommendations have a direct impact on the investment performance of our
portfolios. To demonstrate our ongoing commitment in this area, we increased
the number of equity analysts at MFS from less than 40 at the end of 2000 to
about 50 in June 2004. During that same period, we doubled the average
investment experience of our domestic equity analysts, in part by recruiting
more seasoned analysts to the firm. Moreover, our international network of
investment personnel now spans key regions of the world with offices in London,
Mexico City, Singapore, and Tokyo, as well as Boston.
One of the major advantages that MFS has over many of its competitors is that
the position of research analyst is a long-term career for many members of our
team, not simply a steppingstone toward becoming a portfolio manager. We have
worked to elevate the stature of the analyst position to be on par with that of
a portfolio manager. In fact, an exceptional research analyst has the
opportunity to earn more at MFS than some portfolio managers.
At the same time, we look within the firm to promote talented analysts who
choose a path toward becoming a portfolio manager. We rarely hire portfolio
managers from our competitors because we believe the best investors are those
steeped in the MFS process and culture. In the past few months, we have
identified three senior research analysts who will assume roles on the
management teams of several of our larger portfolios. MFS is fortunate to have
a deep bench of talented investment personnel, and we welcome the opportunity
to put their skills to work for our clients.
PROCESS
MFS was built on the strength of its bottom-up approach to researching
securities. We have enhanced the mentoring process for our research analysts by
calling on several of our most seasoned portfolio managers to supplement the
work of Director of Global Equity Research David A. Antonelli. These portfolio
managers are taking a special interest in developing the careers of our
research analysts and strengthening our investment process. Kenneth J. Enright
of our value equity group is working with a team of domestic analysts; David E.
Sette-Ducati of our small- and mid-cap equity team is working with analysts
concentrating on small- and mid-cap companies; and Barnaby Wiener of our
international equity team in London heads the European equity research team.
We have combined the bottom-up approach of our research process with a top-
down approach to risk controls on portfolio composition. We have a very strong
quantitative team under the leadership of industry veteran Deborah H. Miller,
who represents the equity management department on the Management Committee of
the firm. Quantitative analysis helps us generate investment ideas and, more
importantly, assess the appropriate level of risk for each portfolio. The risk
assessment is designed to assure that each portfolio operates within its
investment objectives.
Additionally, we have increased the peripheral vision of our investment
personnel across asset classes through the collaboration of our Equity, Fixed
Income, Quantitative Analysis, and Risk Management teams. We recently codified
this key aspect of our culture by forming an Investment Management Committee,
composed of key members of these teams. This committee will work to ensure that
all teams are sharing information, actively debating investment ideas, and
creating a unified investment team.
CULTURE
Teamwork is at the heart of our ability to deliver consistent and competitive
investment performance over time. At MFS, each member of our team is involved
in our success; we have no superstars. The collaborative nature of our process
works to assure a consistent investment approach across all of our products and
provides a high level of continuity in portfolio management because our
investment performance never depends on the contributions of just a single
individual. Our culture is based on an environment of teamwork that allows our
investment personnel to be successful. In turn, we demand superior investment
results from every member of our team.
We have created a meritocracy at our firm based on investment results. We hold
all of our portfolio managers accountable for the performance of their
portfolios and their contributions to the team. We also track the equity and
fixed-income ratings of our analysts so we can evaluate them based on the
performance of their recommendations. We align bonus compensation to investment
performance by weighting rewards to those who have created the greatest
long-term benefit for our shareholders and who contribute most successfully to
the Original Research(SM) process.
The strength of our culture has resulted in a tremendous amount of stability.
Although we have dismissed members of our team whose performance did not meet
MFS' high standards, only one portfolio manager has voluntarily left the firm
over the past six months, based on a decision to retire from the industry.
In short, we can help you achieve your financial goals by hiring talented
people, following a disciplined process, and maintaining our firm's unique
culture. The enhancements described in this letter reflect the collaborative
spirit and the depth of resources in our investment teams.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R)
September 20, 2004
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
The opinions expressed in this letter are those of MFS, and no forecasts can be
guaranteed.
- --------------------------------------------------------------------------------
MFS ORIGINAL RESEARCH(R)
- --------------------------------------------------------------------------------
THE MFS(R) DIFFERENCE
For 80 years MFS has been offering investors clear paths to pursuing specific
investment objectives. Today, millions of individuals and thousands of
institutions all over the world look to MFS to manage their assets with insight
and care.
Our success, we believe, has to do with the fact that we see investors as
people with plans, not just dollars to invest.
When you invest with MFS, you invest with a company dedicated to helping you
realize your long-term financial goals.
INVESTORS CHOOSE MFS FOR OUR
o global asset management expertise across all asset classes
o time-tested money management process for pursuing consistent results
o full spectrum of investment products backed by MFS Original Research(R)
o resources and services that match real-life needs
TURNING INFORMATION INTO OPPORTUNITY
Sound investments begin with sound information. MFS has been doing its own
research and analyzing findings in-house for decades. The process we use to
uncover opportunity is called MFS Original Research(R).
MFS ORIGINAL RESEARCH INVOLVES
o meeting with the management of 3,000 companies each year to assess their
business plans and the managers' ability to execute those plans
o making onsite visits to more than 2,000 companies annually to gain first-hand
knowledge of their operations and products
o analyzing financial statements and balance sheets
o talking extensively with companies' customers and competitors
o developing our own proprietary estimates of companies' earnings
- --------------------------------------------------------------------------------
MANAGEMENT REVIEW
- --------------------------------------------------------------------------------
MARKET ENVIRONMENT
The recovery in global stock markets that began in the spring of 2003 continued
into the first quarter of 2004. Business capital expenditures, which had been
weak for several years, began to trend upward in the latter half of 2003,
adding support to a recovery that had been fueled largely by consumer spending.
In the spring and summer of 2004, many measures of global economic growth,
including employment, corporate spending, and earnings growth, continued to
improve. But stock prices made only modest gains as investors, in our view,
became increasingly concerned about higher interest rates, rising oil prices, a
slowdown in corporate earnings growth, and continuing unrest in Iraq. The U.S.
Federal Reserve Board raised interest rates in June and again in August, and
set expectations for an ongoing series of modest rate hikes. A pullback in
equity markets near the end of the period was triggered, we believe, by
indications from a number of bellwether companies that earnings growth was
starting to slow.
DETRACTORS FROM PERFORMANCE
Stock selection in technology, as well as an overweighting in the sector, hurt
relative returns. Among the most significant detractors in the sector were
storage management software firm VERITAS Software and online travel vendor
IAC/InterActiveCorp. VERITAS' stock price tumbled as the firm lowered its
earnings projections and moved to restate prior-year results.
IAC/InterActiveCorp lost traction, we feel, on concerns that online booking
agents would be shut out of more desirable flights and rooms as travel demand
recovered.
The fund's positions in semiconductor maker PMC-Sierra and Linux operating
system software firm Red Hat hurt relative performance as well. Despite raising
future revenue projections, PMC-Sierra suffered, in our view, from concerns
about the vulnerability of its high profit margins should the semiconductor
business cycle falter. Our Red Hat shares sank as the company announced it
would restate prior-year earnings.
Elsewhere in technology, underweighting cellular communications products firm
QUALCOMM and missing most of the stock's strong rise over the period also
subtracted from relative results. At period-end, QUALCOMM was not a holding in
the portfolio.
Investments in the leisure sector further detracted from relative returns, both
because of disappointing stock selection and our overweighting in the sector,
which lagged the fund's benchmark, the Russell 1000 Growth Index. Viacom,
Westwood One, and Clear Channel Communications hurt results as their earnings
fell short of our growth expectations. These firms, along with most other
traditional media companies, did not enjoy the strong increases in advertising
revenues that we had anticipated in an improving economy.
An underweighting in the consumer staples area hurt relative performance as the
sector delivered strong gains over the period. In particular, not owning
consumer products giant Procter & Gamble, which is tracked by the index,
detracted from relative results as the firm's stock soared.
Our investment in discount retailer Kohl's detracted from relative returns as
well. Kohl's stock underperformed as the firm, in our view, struggled to
recover from an excess inventory situation.
CONTRIBUTORS TO PERFORMANCE
On a sector basis, strong stock selection in the industrial goods and services
and the health care sectors contributed to relative performance. In the
industrial goods and services area, a relative underweighting helped results as
well.
Manufacturing conglomerate Tyco International delivered the largest relative
contribution in the industrial goods and services sector. Tyco stock rallied as
the economy rebounded and the company's new management team appeared to make
progress in restructuring the firm. Tyco was not a holding in the fund's
benchmark. Our position in industrial conglomerate General Electric added to
relative returns as well. We believe GE's stock rose over the period in part as
a result of improving fundamentals (business factors such as earnings and cash
flow growth).
Within health care, the fund benefited from its position in biopharmaceutical
company Gilead Sciences, whose stock advanced amid strong earnings and news
that the company was developing a single pill for HIV that combined two
different compounds.
Avoiding semiconductor giant Intel, a large position in our benchmark, aided
relative performance as well. In our view, the stock declined because of
concerns about the semiconductor industry's near-term prospects. Similarly,
underweighting retail giant Wal-Mart helped relative results as that stock
retreated during the period. In addition, direct-sales cosmetics firm Avon
Products was a strong contributor to relative performance, rallying as the
company reported solid revenue growth across all geographies. In the leisure
area, the fund's position in cruise operator Carnival benefited from stronger
bookings. Carnival was not a holding in the portfolio's benchmark.
While technology holdings as a group detracted from relative performance, a
number of positions in the sector contributed strongly to results. These
included telecom infrastructure firm Nortel Networks, which was not a holding
in the fund's benchmark, and e-business services provider Akamai Technologies.
We sold our Nortel position during the period.
Respectfully,
/s/ Margaret W. Adams /s/ S. Irfan Ali
Margaret W. Adams S. Irfan Ali
Portfolio Manager Portfolio Manager
Note to Shareholders: Effective July 1, 2004, Margaret W. Adams became a
manager of the fund.
The views expressed in this report are those of the portfolio managers only
through the end of the period of the report as stated on the cover and do not
necessarily reflect the views of MFS or any other person in the MFS
organization. These views are subject to change at any time based on market and
other conditions, and MFS disclaims any responsibility to update such views.
These views may not be relied upon as investment advice or as an indication of
trading intent on behalf of any MFS fund. References to specific securities are
not recommendations of such securities and may not be representative of any MFS
fund's current or future investments.
The fund will charge a 2% redemption fee on proceeds from shares redeemed or
exchanged within 5 business days of acquiring (either by purchasing or
exchanging) fund shares. See the prospectus for complete details.
- -------------------------------------------------------------------------------
Visit mfs.com for our latest economic and investment outlook.
o Under Updates & Announcements, click Week in Review for a summary of recent
investment-related news.
o From Week in Review, link to MFS Global Perspective for our current view of
the world.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
-------------------------------------------------------
PORTFOLIO STRUCTURE
-------------------------------------------------------
Stocks 97.6%
Cash and Other Net Assets 2.4%
-------------------------------------------------------
TOP 5 SECTOR HOLDINGS
-------------------------------------------------------
Technology 31.1%
-------------------------------------------------------
Health Care 22.9%
-------------------------------------------------------
Leisure 11.4%
-------------------------------------------------------
Financial Services 9.2%
-------------------------------------------------------
Retailing 8.5%
-------------------------------------------------------
-------------------------------------------------------
TOP 5 STOCK HOLDINGS
-------------------------------------------------------
JOHNSON & JOHNSON 4.0%
-------------------------------------------------------
MICROSOFT CORP. 3.7%
-------------------------------------------------------
CISCO SYSTEMS INC. 3.2%
-------------------------------------------------------
PFIZER INC. 2.7%
-------------------------------------------------------
AMERICAN INTERNATIONAL GROUP INC. 2.4%
-------------------------------------------------------
WYETH 2.1%
-------------------------------------------------------
MEDTRONIC INC. 2.0%
-------------------------------------------------------
DELL INC. 2.0%
-------------------------------------------------------
KOHL'S CORP. 1.9%
-------------------------------------------------------
CITIGROUP INC. 1.9%
-------------------------------------------------------
Percentages are based on total net assets as of 8/31/04.
The portfolio is actively managed, and current holdings may be different.
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY THROUGH 8/31/04
- --------------------------------------------------------------------------------
The following chart illustrates the historical performance of the fund's
original share class in comparison to its benchmark. Performance results
include the deduction of the maximum applicable sales charge and reflect the
percentage change in net asset value, including reinvestment of dividends and
capital gains distributions. Benchmark comparisons are unmanaged and do not
reflect any fees or expenses. The performance of other share classes will be
greater than or less than the line shown. (See Notes to Performance Summary.)
VISIT MFS.COM FOR THE MOST RECENT MONTH-END PERFORMANCE RESULTS. MARKET
VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND CURRENT
PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE
OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. ANY
HIGH SHORT-TERM RETURNS MAY BE AND LIKELY WERE ATTRIBUTABLE TO RECENT FAVORABLE
MARKET CONDITIONS, WHICH MAY NOT BE REPEATED. THE PERFORMANCE SHOWN DOES NOT
REFLECT THE DEDUCTION OF TAXES, IF ANY, THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from the commencement of the fund's investment operatons,
January 2, 1996, through August 31, 2004. Index information is from January 1,
1996.)
MFS Strategic
Growth Fund -- Russell 100
Class A Growth Index
1/96 $ 9,425 $10,000
8/96 11,555 10,823
8/98 20,845 16,329
8/00 47,367 32,325
8/02 19,815 13,756
8/04 23,473 16,532
TOTAL RETURNS
- --------------------
Average annual
without sales charge
- --------------------
Class
Share class inception date 1-yr 3-yr 5-yr Life*
- ------------------------------------------------------------------------------
A 1/02/96 0.30% -4.60% -6.12% 11.11%
- ------------------------------------------------------------------------------
B 4/11/97 -0.31% -5.20% -6.72% 10.48%
- ------------------------------------------------------------------------------
C 4/11/97 -0.31% -5.21% -6.71% 10.50%
- ------------------------------------------------------------------------------
I 1/02/97 0.65% -4.26% -5.78% 11.44%
- ------------------------------------------------------------------------------
J 2/10/00 -0.31% -5.19% -6.66% 10.74%
- ------------------------------------------------------------------------------
R1 12/31/02 0.18% -4.67% -6.16% 11.08%
- ------------------------------------------------------------------------------
R2 10/31/03 0.06% -4.67% -6.16% 11.08%
- ------------------------------------------------------------------------------
529A 7/31/02 0.18% -4.73% -6.20% 11.05%
- ------------------------------------------------------------------------------
529B 7/31/02 -0.56% -5.18% -6.46% 10.87%
- ------------------------------------------------------------------------------
529C 7/31/02 -0.56% -5.19% -6.47% 10.87%
- ------------------------------------------------------------------------------
- --------------------
Average annual
- --------------------
Comparative benchmarks
- ------------------------------------------------------------------------------
Average large-cap growth fund+ 2.90% -3.35% -6.08% 4.96%
- ------------------------------------------------------------------------------
Russell 1000 Growth Index# 5.36% -2.20% -7.35% 5.97%
- ------------------------------------------------------------------------------
- --------------------
Average annual
with sales charge
- --------------------
Share class
- ------------------------------------------------------------------------------
A -5.47% -6.46% -7.22% 10.35%
- ------------------------------------------------------------------------------
B -4.30% -6.15% -7.03% 10.48%
- ------------------------------------------------------------------------------
C -1.31% -5.21% -6.71% 10.50%
- ------------------------------------------------------------------------------
J -3.30% -6.15% -7.23% 10.35%
- ------------------------------------------------------------------------------
529A -5.58% -6.59% -7.30% 10.30%
- ------------------------------------------------------------------------------
529B -4.54% -6.11% -6.76% 10.87%
- ------------------------------------------------------------------------------
529C -1.56% -5.19% -6.47% 10.87%
- ------------------------------------------------------------------------------
I, R1, and R2 Class shares do not have a sales charge. Please see Notes to
Performance Summary for more details.
- --------------------
Cumulative
without sales charge
- --------------------
Share class
- ------------------------------------------------------------------------------
A 0.30% -13.17% -27.06% 149.05%
- ------------------------------------------------------------------------------
B -0.31% -14.79% -29.38% 137.11%
- ------------------------------------------------------------------------------
C -0.31% -14.82% -29.35% 137.58%
- ------------------------------------------------------------------------------
I 0.65% -12.25% -25.77% 155.48%
- ------------------------------------------------------------------------------
J -0.31% -14.77% -29.15% 141.95%
- ------------------------------------------------------------------------------
R1 0.18% -13.37% -27.24% 148.46%
- ------------------------------------------------------------------------------
R2 0.06% -13.38% -27.24% 148.44%
- ------------------------------------------------------------------------------
529A 0.18% -13.53% -27.37% 148.01%
- ------------------------------------------------------------------------------
529B -0.56% -14.76% -28.40% 144.48%
- ------------------------------------------------------------------------------
529C -0.56% -14.78% -28.42% 144.43%
- ------------------------------------------------------------------------------
* For the period from the commencement of the fund's investment operations,
January 2, 1996, through August 31, 2004. Index information is from January 1,
1996.
+ Source: Lipper Inc., an independent firm that reports mutual fund performance.
# Source: Standard & Poor's Micropal, Inc.
INDEX DEFINITION
RUSSELL 1000 GROWTH INDEX - measures the performance of those companies in the
Russell 1000 index with higher price to book and forecasted growth values. The
Russell 1000 consists of the 1000 largest market cap companies in the Russell
3000 index.
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
The performance shown reflects a non-recurring accrual made to the fund on July
28, 2004 relating to MFS' revenue sharing settlement with the Securities and
Exchange Commission without which the performance would have been lower.
Class A and 529A results, including sales charge, reflect the deduction of the
maximum 5.75% sales charge. Class B and 529B results, including sales charge,
reflect the deduction of the applicable contingent deferred sales charge
(CDSC), which declines over six years from 4% to 0%. Class C and 529C results,
including sales charge, (assuming redemption within one year from the end of
the calendar month of purchase) reflect the deduction of the 1% CDSC. Class I
shares have no sales charges and are available only to certain investors. Class
J results, including sales charge, reflect the deduction of the maximum 3%
sales charge and are available only to residents of Japan. Class R1 and R2
shares have no sales charges and are available only to certain retirement
plans. Class 529A, 529B, and 529C shares are only available in conjunction with
qualified tuition programs, such as the MFS 529 Savings Plan.
Performance for share classes offered after Class A shares includes the
performance of the fund's Class A shares for periods prior to their offering.
This blended class performance has been adjusted to take into account
differences in sales loads, if any, applicable to these share classes, but has
not been adjusted to take into account differences in class specific operating
expenses (such as Rule 12b-1 fees). Compared to performance these share classes
would have experienced had they been offered for the entire period, the use of
blended performance generally results in higher performance for share classes
with higher operating expenses than the initial share class to which it is
blended, and lower performance for share classes with lower operating expenses
than the initial share class to which it is blended.
Performance results reflect any applicable expense subsidies and waivers in
effect during the periods shown. Without such subsidies and waivers, the fund's
performance results would be less favorable. Please see the prospectus and
financial statements for complete details. There also is an additional annual
fee, which is detailed in the program description, on qualified tuition
programs. If this fee were reflected the performance for Class 529 shares would
have been lower.
KEY RISK CONSIDERATIONS
The portfolio may invest in growth company securities which will fall to a
greater extent than the overall equity markets (e.g. as represented by the
Standard & Poor's Composite 500 Index) due to changing economic, political or
market conditions or disappointing growth company earnings results.
The portfolio may invest in foreign and/or emerging markets securities, which
are more susceptible to risks relating to interest rates, currency exchange
rates, economic, and political conditions.
The portfolio's value will vary daily since its investments will fluctuate in
response to issuer, market, regulatory, economic, or political developments.
Because stocks tend to be more volatile than some other investments, such as
bonds, the more assets a fund dedicates to stocks, generally the more volatile
the portfolio's value will be. Historically, stocks have outperformed bonds
over time. The portfolio's investment risks should be considered prior to
investing. Please see the prospectus for further information regarding these
and other risk considerations.
- -------------------------------------------------------------------------------
EXPENSE TABLE
- -------------------------------------------------------------------------------
FUND EXPENSES BORNE BY SHAREHOLDERS DURING THE PERIOD FROM MARCH 1, 2004,
THROUGH AUGUST 31, 2004.
As a shareholder of the fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on certain purchase or redemption
payments and redemption fees on certain exchanges and redemptions, and (2)
ongoing costs, including management fees; distribution and service (12b-1)
fees; and other fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period, March 1, 2004, through August 31, 2004.
ACTUAL EXPENSES
The first line for each share class in the table below provides information
about actual account values and actual expenses. You may use the information in
this line, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the first line under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during
this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line for each share class in the table below provides information
about hypothetical account values and hypothetical expenses based on the fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption fees. Therefore, the second line for each share
class in the table is useful in comparing ongoing costs only, and will not help
you determine the relative total costs of owning different funds. In addition,
if these transactional costs were included, your costs would have been higher.
- --------------
Share Class
- --------------
- -------------------------------------------------------------------------------
Expenses
Paid During
Annualized Beginning Ending Period**
Expense Account Value Account Value* 3/01/04-
Ratio 3/01/04 8/31/04 8/31/04
- --------------------------------------------------------------------------------
Actual 1.25% $1,000 $907 $6.01
A -------------------------------------------------------------------------
Hypothetical 1.25% $1,000 $1,019 $6.36
- --------------------------------------------------------------------------------
Actual 1.89% $1,000 $904 $9.07
B -------------------------------------------------------------------------
Hypothetical 1.89% $1,000 $1,015 $9.60
- --------------------------------------------------------------------------------
Actual 1.89% $1,000 $904 $9.07
C -------------------------------------------------------------------------
Hypothetical 1.89% $1,000 $1,015 $9.60
- --------------------------------------------------------------------------------
Actual 0.90% $1,000 $908 $4.33
I -------------------------------------------------------------------------
Hypothetical 0.90% $1,000 $1,020 $4.58
- --------------------------------------------------------------------------------
Actual 1.89% $1,000 $904 $9.07
J -------------------------------------------------------------------------
Hypothetical 1.89% $1,000 $1,015 $9.60
- --------------------------------------------------------------------------------
Actual 1.40% $1,000 $906 $6.73
R1 -------------------------------------------------------------------------
Hypothetical 1.40% $1,000 $1,018 $7.12
- --------------------------------------------------------------------------------
Actual 1.65% $1,000 $905 $7.92
R2 -------------------------------------------------------------------------
Hypothetical 1.65% $1,000 $1,017 $8.39
- --------------------------------------------------------------------------------
Actual 1.50% $1,000 $905 $7.20
529A -------------------------------------------------------------------------
Hypothetical 1.50% $1,000 $1,017 $7.63
- --------------------------------------------------------------------------------
Actual 2.14% $1,000 $903 $10.26
529B -------------------------------------------------------------------------
Hypothetical 2.14% $1,000 $1,014 $10.86
- --------------------------------------------------------------------------------
Actual 2.14% $1,000 $903 $10.26
529C -------------------------------------------------------------------------
Hypothetical 2.14% $1,000 $1,014 $10.86
- --------------------------------------------------------------------------------
* Ending account value reflects each class' ending account value assuming the
actual class return per year before expenses (Actual) and a hypothetical 5%
class return per year before expenses (Hypothetical).
** Expenses paid is equal to each class' annualized expense ratio for the most
recent six month period, as shown above, multiplied by the average account
value over the period, multiplied by the number of days in the period,
divided by the number of days in the year. Expenses paid do not include any
applicable sales charges (loads) or redemption fees. If these transaction
costs had been included, your costs would have been higher.
- ---------------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS - 8/31/04
- ---------------------------------------------------------------------------------------------------
The Portfolio of Investments is a complete list of all securities owned by your
fund. It is categorized by broad-based asset classes.
Stocks - 97.6%
- -------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
U.S. Stocks - 90.2%
- -------------------------------------------------------------------------------------------------
Airlines - 0.2%
- -------------------------------------------------------------------------------------------------
Southwest Airlines Co.* 218,300 $3,235,206
- -------------------------------------------------------------------------------------------------
Apparel Manufacturers - 0.9%
- -------------------------------------------------------------------------------------------------
Reebok International Ltd. 415,900 $14,128,123
- -------------------------------------------------------------------------------------------------
Banks & Credit Companies - 5.5%
- -------------------------------------------------------------------------------------------------
American Express Co. 561,400 $28,081,228
- -------------------------------------------------------------------------------------------------
Citigroup, Inc. 611,557 28,486,325
- -------------------------------------------------------------------------------------------------
MBNA Corp. 549,200 13,257,688
- -------------------------------------------------------------------------------------------------
Mellon Financial Corp. 248,600 7,174,596
- -------------------------------------------------------------------------------------------------
Northern Trust Corp. 148,100 6,375,705
- -------------------------------------------------------------------------------------------------
$83,375,542
- -------------------------------------------------------------------------------------------------
Biotechnology - 7.1%
- -------------------------------------------------------------------------------------------------
Amgen, Inc.* 476,600 $28,257,614
- -------------------------------------------------------------------------------------------------
Genentech, Inc.* 374,600 18,272,988
- -------------------------------------------------------------------------------------------------
Genzyme Corp.* 525,000 28,350,000
- -------------------------------------------------------------------------------------------------
Gilead Sciences, Inc.* 317,200 21,928,036
- -------------------------------------------------------------------------------------------------
Medimmune, Inc.* 434,700 10,376,289
- -------------------------------------------------------------------------------------------------
$107,184,927
- -------------------------------------------------------------------------------------------------
Broadcast & Cable TV - 4.9%
- -------------------------------------------------------------------------------------------------
Comcast Corp., "Special A"* 994,400 $27,594,600
- -------------------------------------------------------------------------------------------------
Cox Communications, Inc., "A"* 185,900 6,108,674
- -------------------------------------------------------------------------------------------------
Cox Radio, Inc., "A"* 195,600 3,288,036
- -------------------------------------------------------------------------------------------------
EchoStar Communications Corp., "A"* 138,335 4,239,968
- -------------------------------------------------------------------------------------------------
Entercom Communications Corp., "A"* 104,000 3,920,800
- -------------------------------------------------------------------------------------------------
Time Warner, Inc.* 503,700 8,235,495
- -------------------------------------------------------------------------------------------------
Univision Communications, Inc., "A"* 335,800 11,081,400
- -------------------------------------------------------------------------------------------------
Westwood One, Inc.* 447,800 10,048,632
- -------------------------------------------------------------------------------------------------
$74,517,605
- -------------------------------------------------------------------------------------------------
Brokerage & Asset Managers - 0.7%
- -------------------------------------------------------------------------------------------------
Goldman Sachs Group, Inc. 51,300 $4,599,045
- -------------------------------------------------------------------------------------------------
Merrill Lynch & Co., Inc. 120,500 6,153,935
- -------------------------------------------------------------------------------------------------
$10,752,980
- -------------------------------------------------------------------------------------------------
Business Services - 1.4%
- -------------------------------------------------------------------------------------------------
Fiserv, Inc.^* 358,600 $12,472,108
- -------------------------------------------------------------------------------------------------
Getty Images, Inc.* 81,300 4,508,085
- -------------------------------------------------------------------------------------------------
Monster Worldwide, Inc.^* 228,000 4,612,440
- -------------------------------------------------------------------------------------------------
$21,592,633
- -------------------------------------------------------------------------------------------------
Computer Software - 10.2%
- -------------------------------------------------------------------------------------------------
Akamai Technologies, Inc.^* 215,400 $2,897,130
- -------------------------------------------------------------------------------------------------
Ascential Software Corp.* 291,700 3,780,432
- -------------------------------------------------------------------------------------------------
Computer Associates International, Inc. 575,600 13,941,032
- -------------------------------------------------------------------------------------------------
Mercury Interactive Corp.* 393,600 13,583,136
- -------------------------------------------------------------------------------------------------
Microsoft Corp. 2,070,600 56,527,380
- -------------------------------------------------------------------------------------------------
Oracle Corp.* 1,210,900 12,072,673
- -------------------------------------------------------------------------------------------------
Red Hat, Inc.* 763,900 9,365,414
- -------------------------------------------------------------------------------------------------
Symantec Corp.* 497,400 23,855,304
- -------------------------------------------------------------------------------------------------
VERITAS Software Corp.* 1,082,479 18,099,049
- -------------------------------------------------------------------------------------------------
$154,121,550
- -------------------------------------------------------------------------------------------------
Computer Software - Systems - 2.2%
- -------------------------------------------------------------------------------------------------
EMC Corp.* 732,400 $7,887,948
- -------------------------------------------------------------------------------------------------
International Business Machines Corp. 307,300 26,025,237
- -------------------------------------------------------------------------------------------------
$33,913,185
- -------------------------------------------------------------------------------------------------
Consumer Goods & Services - 0.9%
- -------------------------------------------------------------------------------------------------
Avon Products, Inc. 277,000 $12,237,860
- -------------------------------------------------------------------------------------------------
Career Education Corp.* 60,600 1,868,904
- -------------------------------------------------------------------------------------------------
$14,106,764
- -------------------------------------------------------------------------------------------------
Electrical Equipment - 4.4%
- -------------------------------------------------------------------------------------------------
Cooper Industries Ltd., "A" 175,700 $9,702,154
- -------------------------------------------------------------------------------------------------
Danaher Corp.^ 46,400 2,385,888
- -------------------------------------------------------------------------------------------------
Emerson Electric Co. 193,100 12,020,475
- -------------------------------------------------------------------------------------------------
General Electric Co. 607,300 19,913,367
- -------------------------------------------------------------------------------------------------
Tyco International Ltd. 737,804 23,108,021
- -------------------------------------------------------------------------------------------------
$67,129,905
- -------------------------------------------------------------------------------------------------
Electronics - 5.3%
- -------------------------------------------------------------------------------------------------
Amphenol Corp., "A"* 129,000 $3,877,740
- -------------------------------------------------------------------------------------------------
Analog Devices, Inc.^ 508,900 17,669,008
- -------------------------------------------------------------------------------------------------
Applied Materials, Inc.* 481,900 7,657,391
- -------------------------------------------------------------------------------------------------
Linear Technology Corp.^ 158,600 5,673,122
- -------------------------------------------------------------------------------------------------
Maxim Integrated Products, Inc. 140,800 6,114,944
- -------------------------------------------------------------------------------------------------
Novellus Systems, Inc.* 294,000 7,182,420
- -------------------------------------------------------------------------------------------------
PMC-Sierra, Inc.^* 1,091,200 10,191,808
- -------------------------------------------------------------------------------------------------
Texas Instruments, Inc. 509,600 9,957,584
- -------------------------------------------------------------------------------------------------
Xilinx, Inc.^ 434,100 11,907,363
- -------------------------------------------------------------------------------------------------
$80,231,380
- -------------------------------------------------------------------------------------------------
Entertainment - 3.0%
- -------------------------------------------------------------------------------------------------
Clear Channel Communications, Inc. 333,600 $11,178,936
- -------------------------------------------------------------------------------------------------
Viacom, Inc., "B" 830,213 27,654,395
- -------------------------------------------------------------------------------------------------
Walt Disney Co. 323,800 7,269,310
- -------------------------------------------------------------------------------------------------
$46,102,641
- -------------------------------------------------------------------------------------------------
Food & Drug Stores - 1.3%
- -------------------------------------------------------------------------------------------------
CVS Corp. 406,900 $16,276,000
- -------------------------------------------------------------------------------------------------
Rite Aid Corp.* 617,400 2,716,560
- -------------------------------------------------------------------------------------------------
$18,992,560
- -------------------------------------------------------------------------------------------------
Food & Non-Alcoholic Beverages - 1.8%
- -------------------------------------------------------------------------------------------------
PepsiCo, Inc. 531,800 $26,590,000
- -------------------------------------------------------------------------------------------------
Gaming & Lodging - 2.2%
- -------------------------------------------------------------------------------------------------
Carnival Corp.^ 508,700 $23,293,373
- -------------------------------------------------------------------------------------------------
Royal Caribbean Cruises Ltd.^ 244,100 10,081,330
- -------------------------------------------------------------------------------------------------
$33,374,703
- -------------------------------------------------------------------------------------------------
General Merchandise - 4.6%
- -------------------------------------------------------------------------------------------------
Kohl's Corp.* 589,600 $29,173,408
- -------------------------------------------------------------------------------------------------
Target Corp. 577,400 25,740,492
- -------------------------------------------------------------------------------------------------
Wal-Mart Stores, Inc. 278,776 14,683,132
- -------------------------------------------------------------------------------------------------
$69,597,032
- -------------------------------------------------------------------------------------------------
Insurance - 2.8%
- -------------------------------------------------------------------------------------------------
American International Group, Inc. 506,789 $36,103,648
- -------------------------------------------------------------------------------------------------
Hartford Financial Services Group, Inc. 101,760 6,223,642
- -------------------------------------------------------------------------------------------------
$42,327,290
- -------------------------------------------------------------------------------------------------
Internet - 2.9%
- -------------------------------------------------------------------------------------------------
eBay, Inc.* 148,200 $12,825,228
- -------------------------------------------------------------------------------------------------
IAC/InterActiveCorp^* 558,300 12,734,823
- -------------------------------------------------------------------------------------------------
Yahoo!, Inc.* 674,100 19,218,591
- -------------------------------------------------------------------------------------------------
$44,778,642
- -------------------------------------------------------------------------------------------------
Machinery & Tools - 1.0%
- -------------------------------------------------------------------------------------------------
Eaton Corp. 60,000 $3,621,000
- -------------------------------------------------------------------------------------------------
Illinois Tool Works, Inc.^ 67,200 6,134,688
- -------------------------------------------------------------------------------------------------
Parker Hannifin Corp. 104,700 5,692,539
- -------------------------------------------------------------------------------------------------
$15,448,227
- -------------------------------------------------------------------------------------------------
Medical & Health Technology & Services - 0.6%
- -------------------------------------------------------------------------------------------------
HCA, Inc. 242,100 $9,395,901
- -------------------------------------------------------------------------------------------------
Medical Equipment - 2.9%
- -------------------------------------------------------------------------------------------------
Medtronic, Inc. 618,800 $30,785,300
- -------------------------------------------------------------------------------------------------
Waters Corp.* 310,200 13,434,762
- -------------------------------------------------------------------------------------------------
$44,220,062
- -------------------------------------------------------------------------------------------------
Personal Computers & Peripherals - 2.7%
- -------------------------------------------------------------------------------------------------
Dell, Inc.* 880,300 $30,669,652
- -------------------------------------------------------------------------------------------------
Network Appliance, Inc.* 508,100 10,197,567
- -------------------------------------------------------------------------------------------------
$40,867,219
- -------------------------------------------------------------------------------------------------
Pharmaceuticals - 11.6%
- -------------------------------------------------------------------------------------------------
Abbott Laboratories 633,400 $26,406,446
- -------------------------------------------------------------------------------------------------
Eli Lilly & Co. 276,400 17,537,580
- -------------------------------------------------------------------------------------------------
Johnson & Johnson 1,040,700 60,464,670
- -------------------------------------------------------------------------------------------------
Pfizer, Inc. 1,232,160 40,254,667
- -------------------------------------------------------------------------------------------------
Wyeth 849,468 31,065,045
- -------------------------------------------------------------------------------------------------
$175,728,408
- -------------------------------------------------------------------------------------------------
Restaurants - 0.3%
- -------------------------------------------------------------------------------------------------
Cheesecake Factory, Inc.^* 94,600 $3,914,548
- -------------------------------------------------------------------------------------------------
Specialty Stores - 1.7%
- -------------------------------------------------------------------------------------------------
Best Buy Co., Inc. 228,600 $10,634,472
- -------------------------------------------------------------------------------------------------
Circuit City Stores, Inc. 232,100 3,010,337
- -------------------------------------------------------------------------------------------------
Hot Topic, Inc.^* 191,900 2,897,690
- -------------------------------------------------------------------------------------------------
Pacific Sunwear of California, Inc.^* 152,800 2,927,648
- -------------------------------------------------------------------------------------------------
Staples, Inc. 222,400 6,378,432
- -------------------------------------------------------------------------------------------------
$25,848,579
- -------------------------------------------------------------------------------------------------
Telecommunications - Wireless - 0.5%
- -------------------------------------------------------------------------------------------------
Andrew Corp.^* 735,610 $8,157,915
- -------------------------------------------------------------------------------------------------
Telecommunications - Wireline - 4.6%
- -------------------------------------------------------------------------------------------------
ADTRAN, Inc. 288,200 $7,717,996
- -------------------------------------------------------------------------------------------------
Cisco Systems, Inc.* 2,615,400 49,064,904
- -------------------------------------------------------------------------------------------------
Comverse Technology, Inc.* 357,300 6,256,323
- -------------------------------------------------------------------------------------------------
Foundry Networks, Inc.^* 442,500 4,035,600
- -------------------------------------------------------------------------------------------------
Lucent Technologies, Inc.^* 757,300 2,370,349
- -------------------------------------------------------------------------------------------------
$69,445,172
- -------------------------------------------------------------------------------------------------
Trucking - 2.0%
- -------------------------------------------------------------------------------------------------
FedEx Corp. 195,000 $15,988,050
- -------------------------------------------------------------------------------------------------
United Parcel Service, Inc., "B" 196,400 14,347,020
- -------------------------------------------------------------------------------------------------
$30,335,070
- -------------------------------------------------------------------------------------------------
Total U.S. Stocks $1,369,413,769
- -------------------------------------------------------------------------------------------------
Foreign Stocks - 7.4%
- -------------------------------------------------------------------------------------------------
Australia - 1.0%
- -------------------------------------------------------------------------------------------------
News Corp. Ltd., ADR (Broadcast & Cable TV) 522,900 $15,556,275
- -------------------------------------------------------------------------------------------------
Bermuda - 1.4%
- -------------------------------------------------------------------------------------------------
Accenture Ltd., "A" (Business Services)* 419,600 $10,951,560
- -------------------------------------------------------------------------------------------------
Ace Ltd. (Insurance) 62,800 2,420,940
- -------------------------------------------------------------------------------------------------
Marvell Technology Group Ltd. (Electronics)* 315,200 7,287,424
- -------------------------------------------------------------------------------------------------
$20,659,924
- -------------------------------------------------------------------------------------------------
Finland - 0.2%
- -------------------------------------------------------------------------------------------------
Nokia Corp., ADR (Telecommunications - Wireless) 292,200 $3,471,336
- -------------------------------------------------------------------------------------------------
Germany - 1.1%
- -------------------------------------------------------------------------------------------------
SAP AG, ADR (Computer Software) 457,100 $16,665,866
- -------------------------------------------------------------------------------------------------
Ireland - 0.7%
- -------------------------------------------------------------------------------------------------
Elan Corp. PLC, ADR* (Pharmaceuticals)^* 474,500 $10,737,935
- -------------------------------------------------------------------------------------------------
Mexico - 0.7%
- -------------------------------------------------------------------------------------------------
America Movil S.A. de C.V., ADR (Telecommunications -
Wireless) 334,500 $11,456,625
- -------------------------------------------------------------------------------------------------
Sweden - 1.1%
- -------------------------------------------------------------------------------------------------
Telefonaktiebolaget LM Ericsson, ADR (Telecommunications -
Wireline)* 605,900 $16,383,536
- -------------------------------------------------------------------------------------------------
United Kingdom - 1.2%
- -------------------------------------------------------------------------------------------------
Amdocs Ltd. (Computer Software)* 425,300 $8,548,530
- -------------------------------------------------------------------------------------------------
Vodafone Group PLC, ADR (Telecommunications - Wireless) 416,009 9,526,606
- -------------------------------------------------------------------------------------------------
$18,075,136
- -------------------------------------------------------------------------------------------------
Total Foreign Stocks $113,006,633
- -------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $1,600,301,282) $1,482,420,402
- -------------------------------------------------------------------------------------------------
Short-Term Obligation - 0.8%
- -------------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
- -------------------------------------------------------------------------------------------------
General Electric Capital Corp., 1.57%, due 9/01/04,
at Amortized Cost $12,440,000 $12,440,000
- -------------------------------------------------------------------------------------------------
Repurchase Agreement - 2.0%
- -------------------------------------------------------------------------------------------------
Morgan Stanley, 1.57%, dated 8/31/04, due 9/01/04, total to
be received $30,211,317 (secured by various U.S. Treasury
and Federal Agency obligations in a jointly traded account),
at Cost $30,210,000 $30,210,000
- -------------------------------------------------------------------------------------------------
Collateral for Securities Loaned - 4.4%
- -------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio, at Cost and
Net Asset Value 66,472,278 $66,472,278
- -------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,709,423,560) $1,591,542,680
- -------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - (4.8)% (72,975,058)
- -------------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,518,567,622
- -------------------------------------------------------------------------------------------------
* Non-income producing security.
^ All or a portion of this security is on loan.
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------------------------------
This statement represents your fund's balance sheet, which details the assets and liabilities
composing the total value of your fund.
AT 8/31/04
ASSETS
Investments, at value, including $64,619,475 of
securities on loan (identified cost, $1,709,423,560) $1,591,542,680
- -----------------------------------------------------------------------------------------------------
Cash 229
- -----------------------------------------------------------------------------------------------------
Receivable for investments sold 6,359,975
- -----------------------------------------------------------------------------------------------------
Receivable for fund shares sold 4,504,360
- -----------------------------------------------------------------------------------------------------
Interest and dividends receivable 1,623,756
- -----------------------------------------------------------------------------------------------------
Receivable from administrative proceeding settlement 827,507
- -----------------------------------------------------------------------------------------------------
Other assets 73,974
- -----------------------------------------------------------------------------------------------------
Total assets $1,604,932,481
- -----------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased $15,898,383
- -----------------------------------------------------------------------------------------------------
Payable for fund shares reacquired 2,897,282
- -----------------------------------------------------------------------------------------------------
Collateral for securities loaned, at value 66,472,278
- -----------------------------------------------------------------------------------------------------
Payable to affiliates
- -----------------------------------------------------------------------------------------------------
Management fee 26,985
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 418,946
- -----------------------------------------------------------------------------------------------------
Distribution and service fee 20,444
- -----------------------------------------------------------------------------------------------------
Administrative fee 202
- -----------------------------------------------------------------------------------------------------
Program manager fee 5
- -----------------------------------------------------------------------------------------------------
Administrative service fee 2
- -----------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 630,332
- -----------------------------------------------------------------------------------------------------
Total liabilities $86,364,859
- -----------------------------------------------------------------------------------------------------
Net assets $1,518,567,622
- -----------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Paid-in capital $2,811,887,041
- -----------------------------------------------------------------------------------------------------
Unrealized depreciation on investments and translation
of assets and liabilities in foreign currencies (117,878,613)
- -----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (1,173,384,657)
- -----------------------------------------------------------------------------------------------------
Accumulated net investment loss (2,056,149)
- -----------------------------------------------------------------------------------------------------
Net assets $1,518,567,622
- -----------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 92,229,817
- -----------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued
Class A shares
Net assets $563,761,493
- -----------------------------------------------------------------------------------------------------
Shares outstanding 33,919,193
- -----------------------------------------------------------------------------------------------------
Net asset value per share $16.62
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/94.25X$16.62) $17.63
- -----------------------------------------------------------------------------------------------------
Class B shares
Net assets $427,363,690
- -----------------------------------------------------------------------------------------------------
Shares outstanding 26,791,326
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $15.95
- -----------------------------------------------------------------------------------------------------
Class C shares
Net assets $114,022,920
- -----------------------------------------------------------------------------------------------------
Shares outstanding 7,134,711
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $15.98
- -----------------------------------------------------------------------------------------------------
Class I shares
Net assets $405,006,215
- -----------------------------------------------------------------------------------------------------
Shares outstanding 23,861,379
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $16.97
- -----------------------------------------------------------------------------------------------------
Class J shares
Net assets $5,363,064
- -----------------------------------------------------------------------------------------------------
Shares outstanding 338,226
- -----------------------------------------------------------------------------------------------------
Net asset value and redemption price per share $15.86
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/97.00X$15.86) $16.35
- -----------------------------------------------------------------------------------------------------
Class R1 shares
Net assets $1,982,412
- -----------------------------------------------------------------------------------------------------
Shares outstanding 119,549
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $16.58
- -----------------------------------------------------------------------------------------------------
Class R2 shares
Net assets $309,487
- -----------------------------------------------------------------------------------------------------
Shares outstanding 18,703
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $16.55
- -----------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued
Class 529A shares
Net assets $394,222
- -----------------------------------------------------------------------------------------------------
Shares outstanding 23,815
- -----------------------------------------------------------------------------------------------------
Net asset value and redemption price per share $16.55
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/94.25X$16.55) $17.56
- -----------------------------------------------------------------------------------------------------
Class 529B shares
Net assets $143,404
- -----------------------------------------------------------------------------------------------------
Shares outstanding 9,030
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $15.88
- -----------------------------------------------------------------------------------------------------
Class 529C shares
Net assets $220,715
- -----------------------------------------------------------------------------------------------------
Shares outstanding 13,885
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $15.90
- -----------------------------------------------------------------------------------------------------
On sales of $50,000 or more, the offering price of Class A and Class 529A shares are reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class B, Class C, Class
529B, and Class 529C shares.
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
This statement describes how much your fund received in investment income and paid in expenses. It
also describes any gains and/or losses generated by fund operations.
FOR YEAR ENDED 8/31/04
NET INVESTMENT INCOME (LOSS)
Income
- -----------------------------------------------------------------------------------------------------
Dividends $12,604,007
- -----------------------------------------------------------------------------------------------------
Interest 741,837
- -----------------------------------------------------------------------------------------------------
Other# 827,507
- -----------------------------------------------------------------------------------------------------
Foreign taxes withheld (49,907)
- -----------------------------------------------------------------------------------------------------
Total investment income $14,123,444
- -----------------------------------------------------------------------------------------------------
Expenses
- -----------------------------------------------------------------------------------------------------
Management fee $12,142,527
- -----------------------------------------------------------------------------------------------------
Trustees' compensation 38,611
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 3,171,714
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class A) 2,392,819
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class B) 4,931,012
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class C) 1,364,988
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class J) 56,049
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class R1) 5,854
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class R2) 440
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529A) 1,243
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529B) 1,146
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529C) 1,629
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529A) 887
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529B) 286
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529C) 407
- -----------------------------------------------------------------------------------------------------
Administrative service fee (Class R2) 220
- -----------------------------------------------------------------------------------------------------
Administrative fee 136,267
- -----------------------------------------------------------------------------------------------------
Custodian fee 360,023
- -----------------------------------------------------------------------------------------------------
Printing 190,657
- -----------------------------------------------------------------------------------------------------
Postage 172,180
- -----------------------------------------------------------------------------------------------------
Auditing fees 35,800
- -----------------------------------------------------------------------------------------------------
Legal fees 18,888
- -----------------------------------------------------------------------------------------------------
Miscellaneous 334,103
- -----------------------------------------------------------------------------------------------------
Total expenses $25,357,750
- -----------------------------------------------------------------------------------------------------
Fees paid indirectly (32,255)
- -----------------------------------------------------------------------------------------------------
Reduction of expenses by investment adviser (817,350)
- -----------------------------------------------------------------------------------------------------
Net expenses $24,508,145
- -----------------------------------------------------------------------------------------------------
Net investment loss $(10,384,701)
- -----------------------------------------------------------------------------------------------------
Statement of Operations - continued
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (identified cost basis)
- -----------------------------------------------------------------------------------------------------
Investment transactions $103,987,570
- -----------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
- -----------------------------------------------------------------------------------------------------
Investments $(92,872,347)
- -----------------------------------------------------------------------------------------------------
Translation of assets and liabilities in foreign
currencies 906
- -----------------------------------------------------------------------------------------------------
Net unrealized loss on investments and foreign
currency translation $(92,871,441)
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency $11,116,129
- -----------------------------------------------------------------------------------------------------
Increase in net assets from operations $731,428
- -----------------------------------------------------------------------------------------------------
# A non-recurring accrual recorded as a result of an administrative proceeding regarding disclosure
of brokerage allocation practices in connection with fund sales, as described in the Legal
Proceedings and Transactions with Affiliates footnotes.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------------------------
This statement describes the increases and/or decreases in net assets resulting from operations, any
distributions, and any shareholder transactions.
FOR YEARS ENDED 8/31 2004 2003
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment loss $(10,384,701) $(9,940,493)
- -------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions 103,987,570 (193,494,679)
- -------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation (92,871,441) 423,557,663
- ----------------------------------------------------------- -------------- -------------
Increase in net assets from operations $731,428 $220,122,491
- ----------------------------------------------------------- -------------- -------------
Net increase (decrease) in net assets from fund
share transactions $28,208,131 $(131,989,369)
- ----------------------------------------------------------- -------------- -------------
Redemption fees $2,033 $--
- ----------------------------------------------------------- -------------- -------------
Total increase in net assets $28,941,592 $88,133,122
- ----------------------------------------------------------- -------------- -------------
NET ASSETS
At beginning of period $1,489,626,030 $1,401,492,908
- -------------------------------------------------------------------------------------------------------
At end of period (including accumulated net investment
loss of $2,056,149 and $2,070,407, respectively) $1,518,567,622 $1,489,626,030
- -------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the fund's financial performance for the past 5 years (or,
if shorter, the period of the fund's operation). Certain information reflects financial results for a single fund share. The
total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund
(assuming reinvestment of all distributions) held for the entire period. This information has been audited by the fund's
independent registered public accounting firm, whose report, together with the fund's financial statements, are included in
this report.
YEARS ENDED 8/31
---------------------------------------------------------------------------------
CLASS A 2004 2003 2002 2001 2000
Net asset value, beginning of period $16.57 $14.03 $19.22 $39.19 $28.18
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.08) $(0.07) $(0.13) $(0.17) $(0.28)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and foreign
currency 0.13 2.61 (4.97) (15.53) 13.13
- ---------------------------------------------- ------ ------ ------ ------ ------
Total from investment operations $0.05 $2.54 $(5.10) $(15.70) $12.85
- ---------------------------------------------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments
and foreign currency transactions $-- $-- $-- $(4.08) $(1.84)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- (0.09) (0.19) --
- ---------------------------------------------- ------ ------ ------ ------ ------
Total distributions declared to
shareholders $-- $-- $(0.09) $(4.27) $(1.84)
- ---------------------------------------------- ------ ------ ------ ------ ------
Redemption fees added to paid-in
capital# $0.00+++ $-- $-- $-- $--
- ---------------------------------------------- ------ ------ ------ ------ ------
Net asset value, end of period $16.62 $16.57 $14.03 $19.22 $39.19
- ---------------------------------------------- ------ ------ ------ ------ ------
Total return (%) 0.30^^ 18.10^ (26.70) (42.93) 47.18
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
---------------------------------------------------------------------------------
CLASS A (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.32 1.41 1.45 1.37 1.32
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.46) (0.46) (0.74) (0.67) (0.78)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 80 72 116 104 104
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $563,761 $673,767 $731,283 $984,529 $1,356,313
- -----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods indicated. In addition, for
the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional
share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If these fees had been incurred by the
fund, the net investment loss per share and the ratios would have been:
Net investment loss $(0.09) $-- $-- $-- $--
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.37 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.51) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
^ The fund's net asset value and total return calculation include proceeds received on March 26, 2003 for the partial
payment of a non- recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of $0.01 per share based on shares outstanding
on the day the proceeds were received. Excluding the effect of this payment from the ending net asset value per share,
total return for the year ended August 31, 2003 would have been 0.08% lower.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual resulted in an
increase in the net asset value of $0.01 per share based on shares outstanding on the day the proceeds were recorded.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
---------------------------------------------------------------------------------
CLASS B 2004 2003 2002 2001 2000
Net asset value, beginning of period $16.00 $13.65 $18.80 $38.45 $27.75
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.19) $(0.16) $(0.24) $(0.33) $(0.49)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and foreign
currency 0.14 2.51 (4.82) (15.23) 12.92
- -------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $(0.05) $2.35 $(5.06) $(15.56) $12.43
- -------------------------------------------- -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments
and foreign currency transactions $-- $-- $-- $(3.91) $(1.73)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- (0.09) (0.18) --
- -------------------------------------------- -------- ------ ------ ------ ------
Total distributions declared to
shareholders $-- $-- $(0.09) $(4.09) $(1.73)
- -------------------------------------------- -------- ------ ------ ------ ------
Redemption fees added to paid-in
capital# $0.00+++ $-- $-- $-- $--
- -------------------------------------------- -------- ------ ------ ------ ------
Net asset value, end of period $15.95 $16.00 $13.65 $18.80 $38.45
- -------------------------------------------- -------- ------ ------ ------ ------
Total return (%) (0.31)^^ 17.22^ (27.08) (43.32) 46.23
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
---------------------------------------------------------------------------------
CLASS B (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.97 2.06 2.10 2.02 1.97
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.10) (1.12) (1.39) (1.32) (1.43)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 80 72 116 104 104
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $427,364 $505,090 $490,326 $820,848 $1,419,290
- -----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods indicated. In addition, for
the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional
share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If these fees had been incurred by the
fund, the net investment loss per share and the ratios would have been:
Net investment loss $(0.19) $-- $-- $-- $--
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.02 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.15) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
^ The fund's net asset value and total return calculation include proceeds received on March 26, 2003 for the partial
payment of a non- recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of $0.01 per share based on shares outstanding
on the day the proceeds were received. Excluding the effect of this payment from the ending net asset value per share,
total return for the year ended August 31, 2003 would have been 0.09% lower.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual resulted in an
increase in the net asset value of $0.01 per share based on shares outstanding on the day the proceeds were recorded.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
-------------------------------------------------------------------------------
CLASS C 2004 2003 2002 2001 2000
Net asset value, beginning of period $16.03 $13.67 $18.84 $38.54 $27.81
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.19) $(0.16) $(0.24) $(0.34) $(0.49)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency 0.14 2.52 (4.84) (15.25) 12.96
- ---------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $(0.05) $2.36 $(5.08) $(15.59) $12.47
- ---------------------------------------------- -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments
and foreign currency transactions $-- $-- $-- $(3.93) $(1.74)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- (0.09) (0.18) --
- ---------------------------------------------- -------- ------ ------ ------ ------
Total distributions declared to
shareholders $-- $-- $(0.09) $(4.11) $(1.74)
- ---------------------------------------------- -------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- ---------------------------------------------- -------- ------ ------ ------ ------
Net asset value, end of period $15.98 $16.03 $13.67 $18.84 $38.54
- ---------------------------------------------- -------- ------ ------ ------ ------
Total return (%) (0.31^^ 17.26^ (27.13) (43.29) 46.27
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
-------------------------------------------------------------------------------
CLASS C (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.97 2.06 2.10 2.02 1.97
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.10) (1.12) (1.39) (1.32) (1.43)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 80 72 116 104 104
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $114,023 $141,307 $148,930 $270,903 $450,352
- -----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods indicated. In addition, for
the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional
share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If these fees had been incurred by the
fund, the net investment loss per share and the ratios would have been:
Net investment loss $(0.19) $-- $-- $-- $--
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.02 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.15) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
^ The fund's net asset value and total return calculation include proceeds received on March 26, 2003 for the partial
payment of a non- recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of $0.01 per share based on shares outstanding
on the day the proceeds were received. Excluding the effect of this payment from the ending net asset value per share,
total return for the year ended August 31, 2003 would have been 0.08% lower.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual resulted in an
increase in the net asset value of $0.01 per share based on shares outstanding on the day the proceeds were recorded.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
----------------------------------------------------------------------------
CLASS I 2004 2003 2002 2001 2000
Net asset value, beginning of period $16.86 $14.24 $19.41 $39.53 $28.36
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.01) $(0.01) $(0.07) $(0.08) $(0.15)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 0.12 2.63 (5.01) (15.68) 13.22
- ---------------------------------------------- ----------- ------ ------ ------ ------
Total from investment operations $0.11 $2.62 $(5.08) $(15.76) $13.07
- ---------------------------------------------- ----------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments and
foreign currency transactions $-- $-- $-- $(4.17) $(1.90)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- (0.09) (0.19) --
- ---------------------------------------------- ----------- ------ ------ ------ ------
Total distributions declared to shareholders $-- $-- $(0.09) $(4.36) $(1.90)
- ---------------------------------------------- ----------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- ---------------------------------------------- ----------- ------ ------ ------ ------
Net asset value, end of period $16.97 $16.86 $14.24 $19.41 $39.53
- ---------------------------------------------- ----------- ------ ------ ------ ------
Total return (%) 0.65^^ 18.40^ (26.37) (42.73) 47.73
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
----------------------------------------------------------------------------
CLASS I (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 0.96 1.06 1.10 1.02 0.97
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.06) (0.10) (0.39) (0.32) (0.43)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 80 72 116 104 104
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $405,006 $163,758 $26,193 $28,455 $41,292
- -----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods indicated. In addition, for
the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional
share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If these fees had been incurred by the
fund, the net investment loss per share and the ratios would have been:
Net investment loss $(0.02) $-- $-- $-- $--
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.01 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.11) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
^ The fund's net asset value and total return calculation include proceeds received on March 26, 2003 for the partial
payment of a non- recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of $0.01 per share based on shares outstanding
on the day the proceeds were received. Excluding the effect of this payment from the ending net asset value per share,
total return for the year ended August 31, 2003 would have been 0.09% lower.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual resulted in an
increase in the net asset value of $0.01 per share based on shares outstanding on the day the proceeds were recorded.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31 PERIOD
----------------------------------------------------------- ENDED
CLASS J 2004 2003 2002 2001 8/31/00*
Net asset value, beginning of period $15.91 $13.56 $18.69 $38.46 $35.94
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.18) $(0.16) $(0.24) $(0.34) $(0.37)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 0.13 2.51 (4.80) (15.19) 2.89
- -------------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $(0.05) $2.35 $(5.04) $(15.53) $2.52
- -------------------------------------------------- -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments and
foreign currency transactions $-- $-- $-- $(4.06) $--
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments
and foreign currency transactions -- -- (0.09) (0.18) --
- -------------------------------------------------- -------- ------ ------ ------ ------
Total distributions declared to shareholders $-- $-- $(0.09) $(4.24) $--
- -------------------------------------------------- -------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- -------------------------------------------------- -------- ------ ------ ------ ------
Net asset value, end of period $15.86 $15.91 $13.56 $18.69 $38.46
- -------------------------------------------------- -------- ------ ------ ------ ------
Total return (%) (0.31)^^ 17.33^ (27.13) (43.31) 7.01++
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31 PERIOD
----------------------------------------------------------- ENDED
CLASS J (CONTINUED) 2004 2003 2002 2001 8/31/00*
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.97 2.06 2.10 2.02 1.97+
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.10) (1.12) (1.39) (1.32) (1.43)+
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 80 72 116 104 104
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $5,363 $5,119 $4,744 $6,003 $8,551
- -----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods indicated. In addition, for
the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional
share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If these fees had been incurred by the
fund, the net investment loss per share and the ratios would have been:
Net investment loss $(0.19) $-- $-- $-- $--
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.02 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.15) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class J shares, December 31, 1999, through August 31, 2000. For performance
calculation purposes, the Class J inception date was changed from December 31, 1999 to February 10, 2000 to reflect the
date of the initial sale of Class J shares. As a result, the total return and the beginning net asset value have been
restated.
^ The fund's net asset value and total return calculation include proceeds received on March 26, 2003 for the partial
payment of a non- recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of $0.01 per share based on shares outstanding
on the day the proceeds were received. Excluding the effect of this payment from the ending net asset value per share,
total return for the year ended August 31, 2003 would have been 0.09% lower.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual resulted in an
increase in the net asset value of $0.01 per share based on shares outstanding on the day the proceeds were recorded.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEAR ENDED PERIOD ENDED
CLASS R1 8/31/04 8/31/03*
Net asset value, beginning of period $16.55 $13.94
- -------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.09) $(0.06)
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency 0.12 2.67
- ----------------------------------------------------------------------- ------- ------
Total from investment operations $0.03 $2.61
- ----------------------------------------------------------------------- ------- ------
Redemption fees added to paid-in capital# $0.00+++ $--
- ----------------------------------------------------------------------- ------- ------
Net asset value, end of period $16.58 $16.55
- ----------------------------------------------------------------------- ------- ------
Total return (%) 0.18^^ 18.72++^
- -------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.44 1.60+
- -------------------------------------------------------------------------------------------------------
Net investment loss (0.52) (0.60)+
- -------------------------------------------------------------------------------------------------------
Portfolio turnover 80 72
- -------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $1,982 $221
- -------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods
indicated. In addition, for the year ended August 31, 2004, the investment adviser has voluntarily
agreed to reimburse the fund for its proportional share of Independent Chief Compliance Officer
service fees paid to Tarantino LLC. If these fees had been incurred by the fund, the net investment
loss per share and the ratios would have been:
Net investment loss $(0.10) $--
- -------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.49 --
- -------------------------------------------------------------------------------------------------------
Net investment loss (0.57) --
- -------------------------------------------------------------------------------------------------------
* For the period from the inception of Class R1 shares, December 31, 2002, through August 31, 2003.
^ The fund's net asset value and total return calculation include proceeds received on March 26, 2003
for the partial payment of a non-recurring litigation settlement from Cendant Corporation, recorded
as a realized gain on investment transactions. The proceeds resulted in an increase in the net asset
value of $0.01 per share based on shares outstanding on the day the proceeds were received.
Excluding the effect of this payment from the ending net asset value per share, total return for the
year ended August 31, 2003 would have been 0.08% lower.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as
a result of an administrative proceeding regarding disclosure of brokerage allocation practices in
connection with fund sales, as described in the Legal Proceedings and Transactions with Affiliates
footnotes. The non-recurring accrual resulted in an increase in the net asset value of $0.01 per
share based on shares outstanding on the day the proceeds were recorded.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
PERIOD ENDED
CLASS R2 8/31/04*
Net asset value, beginning of period $17.01
- -----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.10)
- -----------------------------------------------------------------------
Net realized and unrealized loss on investments and
foreign currency (0.36)
- ------------------------------------------------------------- --------
Total from investment operations $(0.46)
- ------------------------------------------------------------- --------
Redemption fees added to paid-in capital# $0.00+++
- ------------------------------------------------------------- --------
Net asset value, end of period $16.55
- ------------------------------------------------------------- --------
Total return (%) (2.70)++^^
- -----------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA(S):
Expenses## 1.66+
- -----------------------------------------------------------------------
Net investment loss (0.74)+
- -----------------------------------------------------------------------
Portfolio turnover 80
- -----------------------------------------------------------------------
Net assets at end of period (000 Omitted) $309
- -----------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain
of the periods indicated. In addition, for the year ended August 31, 2004,
the investment adviser has voluntarily agreed to reimburse the fund for its
proportional share of Independent Chief Compliance Officer service fees paid
to Tarantino LLC. If these fees had been incurred by the fund, the net
investment loss per share and the ratios would have been:
Net investment loss $(0.11)
- -----------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.71+
- -----------------------------------------------------------------------
Net investment loss (0.79)+
- -----------------------------------------------------------------------
* For the period from the inception of Class R2 shares, October 31, 2003,
through August 31, 2004.
^^ The fund's net asset value and total return calculation include a
non-recurring accrual recorded as a result of an administrative proceeding
regarding disclosure of brokerage allocation practices in connection with
fund sales, as described in the Legal Proceedings and Transactions with
Affiliates footnotes. The non-recurring accrual resulted in an increase in
the net asset value of $0.01 per share based on shares outstanding on the
day the proceeds were recorded.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average
shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31,
-------------------------------- PERIOD ENDED
CLASS 529A 2004 2003 8/31/02*
Net asset value, beginning of period $16.52 $14.03 $13.88
- -------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.12) $(0.10) $(0.01)
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency 0.15 2.59 0.16
- ------------------------------------------------------------- --------- ------ ------
Total from investment operations $0.03 $2.49 $0.15
- ------------------------------------------------------------- --------- ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $--
- ------------------------------------------------------------- --------- ------ ------
Net asset value, end of period $16.55 $16.52 $14.03
- ------------------------------------------------------------- --------- ------ ------
Total return (%) 0.18^^ 17.75^ 1.08++
- -------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.56 1.67 1.70+
- -------------------------------------------------------------------------------------------------------------------
Net investment loss (0.68) (0.69) (0.74)+
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover 80 72 116
- -------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $394 $225 $5
- -------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods indicated. In
addition, for the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the
fund for its proportional share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If
these fees had been incurred by the fund, the net investment loss per share and the ratios would have been:
Net investment loss $(0.13) $-- $--
- -------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.61 -- --
- -------------------------------------------------------------------------------------------------------------------
Net investment loss (0.73) -- --
- -------------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529A shares, July 31, 2002, through August 31, 2002.
^ The fund's net asset value and total return calculation include proceeds received on March 26, 2003 for the
partial payment of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain
on investment transactions. The proceeds resulted in an increase in the net asset value of $0.01 per share
based on shares outstanding on the day the proceeds were received. Excluding the effect of this payment from
the ending net asset value per share, total return for the year ended August 31, 2003 would have been 0.09%
lower.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result
of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund
sales, as described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring
accrual resulted in an increase in the net asset value of $0.01 per share based on shares outstanding on the
day the proceeds were recorded.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31,
-------------------------------- PERIOD ENDED
CLASS 529B 2004 2003 8/31/02*
Net asset value, beginning of period $15.97 $13.65 $13.51
- -------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.22) $(0.19) $(0.02)
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency 0.13 2.51 0.16
- ------------------------------------------------------------------------ ------ ------
Total from investment operations $(0.09) $2.32 $0.14
- ------------------------------------------------------------------------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $--
- ------------------------------------------------------------------------ ------ ------
Net asset value, end of period $15.88 $15.97 $13.65
- ------------------------------------------------------------------------ ------ ------
Total return (%) (0.56)^^ 17.00^ 1.04++
- -------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.20 2.33 2.35+
- -------------------------------------------------------------------------------------------------------------------
Net investment loss (1.31) (1.37) (1.39)+
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover 80 72 116
- -------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $143 $79 $5
- -------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods indicated. In
addition, for the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the
fund for its proportional share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If
these fees had been incurred by the fund, the net investment loss per share and the ratios would have been:
Net investment loss $(0.23) $-- $--
- -------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.25 -- --
- -------------------------------------------------------------------------------------------------------------------
Net investment loss (1.36) -- --
- -------------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529B shares, July 31, 2002, through August 31, 2002.
^ The fund's net asset value and total return calculation include proceeds received on March 26, 2003 for the
partial payment of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain
on investment transactions. The proceeds resulted in an increase in the net asset value of $0.01 per share
based on shares outstanding on the day the proceeds were received. Excluding the effect of this payment from
the ending net asset value per share, total return for the year ended August 31, 2003 would have been 0.09%
lower.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result
of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund
sales, as described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring
accrual resulted in an increase in the net asset value of $0.01 per share based on shares outstanding on the
day the proceeds were recorded.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31,
-------------------------------- PERIOD ENDED
CLASS 529C 2004 2003 8/31/02*
Net asset value, beginning of period $15.99 $13.67 $13.53
- -------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.22) $(0.19) $(0.02)
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency 0.13 2.51 0.16
- ------------------------------------------------------------- --------- ------ ------
Total from investment operations $(0.09) $2.32 $0.14
- ------------------------------------------------------------- --------- ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $--
- ------------------------------------------------------------- --------- ------ ------
Net asset value, end of period $15.90 $15.99 $13.67
- ------------------------------------------------------------- --------- ------ ------
Total return (%) (0.56)^^ 16.97^ 1.03++**
- -------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.20 2.30 2.35+
- -------------------------------------------------------------------------------------------------------------------
Net investment loss (1.29) (1.35) (1.38)+
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover 80 72 116
- -------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $221 $58 $5
- -------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods indicated. In
addition, for the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the
fund for its proportional share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If
these fees had been incurred by the fund, the net investment loss per share and the ratios would have been:
Net investment loss $(0.23) $-- $--
- -------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.25 -- --
- -------------------------------------------------------------------------------------------------------------------
Net investment loss (1.34) -- --
- -------------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529C shares, July 31, 2002, through August 31, 2002.
** The total return previously reported for the period ended August 31, 2002 has been revised from 1.04% to 1.03%.
^ The fund's net asset value and total return calculation include proceeds received on March 26, 2003 for the
partial payment of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain
on investment transactions. The proceeds resulted in an increase in the net asset value of $0.01 per share
based on shares outstanding on the day the proceeds were received. Excluding the effect of this payment from
the ending net asset value per share, total return for the year ended August 31, 2003 would have been 0.09%
lower.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result
of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund
sales, as described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring
accrual resulted in an increase in the net asset value of $0.01 per share based on shares outstanding on the
day the proceeds were recorded.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) BUSINESS AND ORGANIZATION
MFS Strategic Growth Fund (the fund) is a diversified series of MFS Series
Trust I (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 U.S.
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. The fund
can invest in foreign securities. 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 in the fund's portfolio for which
market quotations are available are valued at the last sale or official closing
price as reported by an independent pricing service on the primary market or
exchange on which they are primarily traded, or at the last quoted bid price
for securities in which there were no sales during the day. Equity securities
traded over the counter are valued at the last sales price traded each day as
reported by an independent pricing service, or to the extent there are no sales
reported, such securities are valued on the basis of quotations obtained from
brokers and dealers. Short-term obligations with a remaining maturity in excess
of 60 days will be valued upon dealer-supplied valuations. All other short-term
obligations in the fund's portfolio are valued at amortized cost, which
constitutes market value as determined by the Board of Trustees. Money market
mutual funds are valued at net asset value. 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. When
pricing service information or market quotations are not readily available,
securities are priced at fair value as determined under the direction of the
Board of Trustees. For example, significant events (such as movement in the
U.S. securities market, or other regional and local developments) may occur
between the time that foreign markets close (where the security is principally
traded) and the time that the fund calculates its net asset value (generally,
the close of the NYSE) that may impact the value of securities traded in these
foreign markets. In these cases, the fund may utilize information from an
external vendor or other sources to adjust closing market quotations of foreign
equity securities to reflect what it believes to be the fair value of the
securities as of the fund's valuation time. Because the frequency of
significant events is not predictable, fair valuation of foreign equity
securities may occur on a frequent basis.
REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements with
institutions that the fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The fund requires
that the securities collateral in a repurchase transaction be transferred to
the custodian in a manner sufficient to enable the fund to obtain those
securities in the event of a default under the repurchase agreement. The fund
monitors, on a daily basis, the value of the collateral to ensure that its
value, including accrued interest, is greater than amounts owed to the fund
under each such repurchase agreement. The fund, along with other affiliated
entities of Massachusetts Financial Services Company (MFS), may utilize a joint
trading account for the purpose of entering into one or more repurchase
agreements.
FOREIGN CURRENCY TRANSLATION - 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 TRUSTEE COMPENSATION - Under a Deferred Compensation Plan (the Plan)
independent Trustees may elect to defer receipt of all or a portion of their
annual compensation. Deferred amounts are treated as though equivalent dollar
amounts had been invested in shares of the fund or other MFS funds selected by
the Trustee. Deferred amounts represent an unsecured obligation of the fund
until distributed in accordance with the Plan. Included in other assets, and
accrued expenses and other liabilities, is $73,084 of Deferred Trustees'
Compensation.
SECURITY LOANS - State Street Bank and Trust Company ("State Street"), as
lending agent, may loan the securities of the fund to certain qualified
institutions (the "Borrowers") approved by the fund. The loans are
collateralized at all times by cash and/or U.S. Treasury securities in an
amount at least equal to the market value of the securities loaned. State
Street provides the fund with indemnification against Borrower default. The
fund bears the risk of loss with respect to the investment of cash collateral.
On loans collateralized by cash, the cash collateral is invested in a money
market fund or short-term securities. A portion of the income generated upon
investment of the collateral is remitted to the Borrowers, and the remainder is
allocated between the fund and the lending agent. On loans collateralized by
U.S. Treasury securities, a fee is received from the Borrower, and is allocated
between the fund and the lending agent. Income from securities lending is
included in interest income on the Statement of Operations. The dividend and
interest income earned on the securities loaned is accounted for in the same
manner as other dividend and interest income.
SHORT TERM FEES - For purchases made on or after July 1, 2004, the fund will
charge a 2% redemption fee (which is retained by the fund) on proceeds from
shares redeemed or exchanged within 5 business days following their acquisition
(either by purchase or exchange). The fund may change the redemption fee period
in the future, including changes in connection with pending Securities and
Exchange rules. See the fund's prospectus for details. These fees are accounted
for as an addition to paid-in capital.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and discount is amortized or accreted for financial statement purposes in
accordance with U.S. generally accepted accounting principles. All discount is
accreted for tax reporting purposes as required by federal income tax
regulations. Dividends received in cash are recorded on the ex-dividend date.
The fund was a participant in a class-action lawsuit against Cendant
Corporation. On March 26, 2003 the fund received a partial cash settlement in
the amount of $1,124,750, recorded as a realized gain on investment
transactions. The partial proceeds from the non-recurring litigation settlement
resulted in an increase in net asset value of $0.01 per share based on the
shares outstanding on the day the proceeds were received. Excluding the effect
of this payment from the fund's ending net asset value per share, total return
for the year ended August 31, 2003 would have been lower by 0.08% for Class A,
Class C and Class R1 and 0.09% for Class B, Class I, Class J, Class 529A, Class
529B and Class 529C shares, respectively.
FEES PAID INDIRECTLY - The fund's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by the
fund. During the year ended August 31, 2004, the fund's custodian fees were
reduced by $7,902 under this arrangement. The fund has entered into a
commission recapture agreement, under which certain brokers will credit the
fund a portion of the commissions generated, to offset certain expenses of the
fund. For the year ended August 31, 2004, the fund's miscellaneous expenses
were reduced by $24,353 under this agreement. These amounts are shown as a
reduction of total 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 net 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 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. Common
types of book and tax differences that could occur include differences in
accounting for currency transactions, wash sales, defaulted bonds and capital
losses.
The fund paid no distributions for the years ended August 31, 2004 and August
31, 2003.
During the year ended August 31, 2004, accumulated net investment loss
decreased by $10,398,959, and paid-in capital decreased by $10,398,959 due to
differences between book and tax accounting for net operating losses. This
change had no effect on the net assets or net asset value per share.
As of August 31, 2004, the components of accumulated losses on a tax basis were
as follows:
Capital loss carryforward $(1,157,631,028)
----------------------------------------------------------
Unrealized depreciation (133,632,242)
----------------------------------------------------------
Other temporary differences (2,056,149)
----------------------------------------------------------
For federal income tax purposes, the capital loss carryforward may be applied
against any net taxable realized gains of each succeeding year until the
earlier of its utilization or expiration on:
EXPIRATION DATE
August 31, 2010 $(827,855,260)
----------------------------------------------------------
August 31, 2011 (299,742,793)
----------------------------------------------------------
August 31, 2012 (30,032,975)
----------------------------------------------------------
Total $(1,157,631,028)
----------------------------------------------------------
MULTIPLE CLASSES OF SHARES OF BENEFICIAL INTEREST - The fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the fund based on daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class. Differences in per share dividend rates are
generally due to differences in separate class expenses. Class B and Class 529B
shares will convert to Class A and Class 529A shares, respectively,
approximately eight years after purchase.
(3) TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISER - The fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.75% of
the fund's average daily net assets.
As part of a settlement agreement with the New York Attorney General concerning
market timing and related matters (See Legal Proceedings footnote), MFS has
agreed to reduce the fund's management fee to 0.65% of average daily net assets
for the period March 1, 2004 through February 28, 2009. During this time
period, the Board of Trustees will continue to review the appropriateness of
all advisory fees in accordance with their oversight responsibilities. After
February 28, 2009 the management fee will be determined in accordance with then
existing review policies approved by the Board of Trustees overseeing the fund.
Management fees incurred for the year ended August 31, 2004 were at an
effective rate of 0.70% of average daily net assets on an annualized basis.
The fund pays compensation to its Independent Trustees in the form of a
retainer, attendance fees, and additional compensation to Board and Committee
chairpersons, and 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). The fund has an
unfunded defined benefit plan for retired Independent Trustees and an unfunded
retirement benefit deferral plan for current Independent Trustees. Included in
Trustees' compensation is a net decrease of $13,192 as a result of the change
in the fund's unfunded retirement benefit deferral plan for certain current
Independent Trustees and a pension expense of $2,239 for retired Independent
Trustees for the year ended August 31, 2004.
The MFS funds, including this fund, have entered into a services agreement (the
"Agreement") which provides for payment of fees by the MFS funds to Tarantino
LLC in return for the provision of services of an Independent Chief Compliance
Officer (ICCO) for the MFS funds. The ICCO is an officer of the MFS funds and
the sole member of Tarantino LLC. MFS has agreed to reimburse each of the MFS
funds for a proportional share of substantially all of the payments made by the
MFS funds to Tarantino LLC and also to provide office space and other
administrative support and supplies to the ICCO. The MFS funds can terminate
the Agreement with Tarantino LLC at any time under the terms of the Agreement.
The fund's investment adviser, MFS, has been the subject of an administrative
proceeding regarding disclosure of brokerage allocation practices in connection
with fund sales, as described in the Legal Proceedings Footnote. Pursuant to
the SEC Order, MFS, on July 28, 2004, transferred $1.00 in disgorgement and $50
million in penalty to the SEC (the "Payments"). A plan for distribution of
these Payments has been submitted to the SEC. Contemporaneous with the
transfer, the fund accrued an estimate of the amount to be received upon final
approval of the plan of distribution. The non- recurring accrual in the amount
of $827,507 resulted in an increase in the net asset value of $0.01 per share
based on the shares outstanding on the day the proceeds were recorded.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment advisor. Under an administrative services
agreement between the funds and MFS, MFS is entitled to partial reimbursement
of the costs MFS incurs to provide these services, subject to review and
approval by the Board of Trustees. Each fund is allocated a portion of these
administrative costs based on its size and relative average net assets. Prior
to April 1, 2004, the fund paid MFS an administrative fee up to the following
annual percentage rates of the fund's average daily net assets:
First $2 billion 0.0175%
----------------------------------------------------------
Next $2.5 billion 0.0130%
----------------------------------------------------------
Next $2.5 billion 0.0005%
----------------------------------------------------------
In excess of $7 billion 0.0000%
----------------------------------------------------------
Effective April 1, 2004, the fund paid MFS an administrative fee up to the
following annual percentage rates of the fund's average daily net assets:
First $2 billion 0.01120%
----------------------------------------------------------
Next $2.5 billion 0.00832%
----------------------------------------------------------
Next $2.5 billion 0.00032%
----------------------------------------------------------
In excess of $7 billion 0.00000%
----------------------------------------------------------
For the year ended August 31, 2004, the fund paid MFS $136,267, equivalent to
0.0084% of average daily net assets, to partially reimburse MFS for the costs
of providing administrative services.
In addition to the administrative services provided by MFS to the fund as
described above, MFS is responsible for providing certain administrative
services with respect to Class R2 shares. These services include various
administrative, recordkeeping, and communication/educational services with
respect to the retirement plans which invest in Class R2 shares, and may be
provided directly by MFS or by a third party. The fund pays an annual 0.25%
administrative service fee solely from the assets of Class R2 shares to MFS for
the provision of these services.
DISTRIBUTOR - MFD, a wholly owned subsidiary of MFS, as distributor, received
$90,094 and $1,127 for the year ended August 31, 2004, as its portion of the
sales charge on sales of Class A and Class 529A shares of the fund,
respectively.
The Trustees have adopted a distribution plan for Class A, Class B, Class C,
Class J, Class R1, Class R2, Class 529A, Class 529B, and Class 529C shares
pursuant to rule 12b-1 of the Investment Company Act of 1940 as follows:
The fund's distribution plan provides that the fund will pay MFD an annual
percentage of its average daily net assets attributable to certain share
classes in order that MFD may pay expenses on behalf of the fund related to the
distribution and servicing of its shares. These expenses include a service fee
paid to each securities dealer that enters into a sales agreement with MFD
based on the average daily net assets of accounts attributable to such dealers.
The fees are calculated based on each class' average daily net assets. The
maximum distribution and service fees for each class of shares are as follows:
CLASS A CLASS B CLASS C CLASS J CLASS R1 CLASS R2
Distribution Fee 0.10% 0.75% 0.75% 0.75% 0.25% 0.25%
- -----------------------------------------------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
- -----------------------------------------------------------------------------------------------------------------------
Total Distribution Plan 0.35% 1.00% 1.00% 1.00% 0.50% 0.50%
- -----------------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Distribution Fee 0.25% 0.75% 0.75%
- -----------------------------------------------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25%
- -----------------------------------------------------------------------------------------------------------------------
Total Distribution Plan 0.50% 1.00% 1.00%
- -----------------------------------------------------------------------------------------------------------------------
MFD retains the service fee for accounts not attributable to a securities dealer, which for the year ended August 31, 2004
amounted to:
CLASS A CLASS B CLASS C CLASS J CLASS R1 CLASS R2
Service Fee Retained
by MFD $159,946 $8,810 $6,642 $-- $8 $13
- -----------------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Service Fee Retained
by MFD $393 $14 $57
- -----------------------------------------------------------------------------------------------------------------------
Payment of the 0.15% per annum portion of the Class 529A distribution fee that is not currently being charged will be
implemented on such date as the Trustees of the Trust may determine.
Fees incurred under the distribution plan during the year ended August 31, 2004 were as follows:
CLASS A CLASS B CLASS C CLASS J CLASS R1 CLASS R2
Effective Annual Percentage
Rates 0.35% 1.00% 1.00% 1.00% 0.50% 0.50%
- -----------------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Effective Annual Percentage
Rates 0.35% 1.00% 1.00%
- -----------------------------------------------------------------------------------------------------------------------
Class J shares are available for distribution through Monex, Inc. ("Monex") and
Citicorp Securities (Japan) Ltd. ("Citicorp") and their network of financial
intermediaries. Monex also serves as the fund's Agent Securities Company in
Japan, and in that capacity represents the fund before Japanese regulatory
authorities. MFD will pay to Monex and Citicorp all of the service fee and a
portion of the distribution fee attributable to Class J shares. Out of the
distribution fee, MFD will pay to Monex and Citicorp 0.575% per annum of
average daily net assets attributable to Class J shares. A portion of the
distribution fee equal to 0.05% per annum of the fund's average daily net
assets attributable to Class J shares is paid to Monex to cover its service as
the fund's Agent Securities Company. MFD retains the remaining 0.125%.
Certain Class A, Class C and Class 529C shares are subject to a contingent
deferred sales charge in the event of a shareholder redemption within, for
Class A shares, 12 months following the purchase, and, for Class C and Class
529C shares, the first year from the end of the calendar month of purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B and Class 529B shares in the event of a shareholder redemption within six
years from the end of the calendar month of purchase. MFD receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the year ended August 31, 2004 were as follows:
CLASS A CLASS B CLASS C CLASS 529B CLASS 529C
Contingent Deferred Sales Charges
Imposed $18,069 $1,051,971 $6,322 $-- $--
- ------------------------------------------------------------------------------------------------------------------
The fund has and may from time to time enter into contracts with program
managers and other parties that administer the tuition programs through which
an investment in the fund's 529 share classes is made. The fund has entered
into an agreement with MFD pursuant to which MFD receives an annual fee of up
to 0.35% from the fund based solely upon the value of the fund's 529 share
classes attributable to tuition programs to which MFD, or a third party which
contracts with MFD, provides administrative services. The current fee has been
established at 0.25% annually of average net assets of the fund's 529 share
classes attributable to such programs. The fee may only be increased with the
approval of the board of trustees that oversees the fund. The services provided
by MFD, or a third party with which MFD contracts, include recordkeeping and
tax reporting and account services, as well as services designed to maintain
the program's compliance with the Internal Revenue Code and other regulatory
requirements.
SHAREHOLDER SERVICING AGENT - Included in shareholder servicing costs is a fee
paid to MFSC, a wholly owned subsidiary of MFS, for its services as shareholder
servicing agent. The fee, which is calculated as a percentage of the fund's
average daily net assets is set periodically under the supervision of the
fund's Trustees. Prior to April 1, 2004, the fee was set at 0.11% of the fund's
average daily net assets. For the period April 1, 2004 through June 30, 2004,
the fee was set at 0.10% of the fund's average daily net assets. Effective July
1, 2004, the fund is charged up to 0.0861% of its average daily net assets. For
the year ended August 31, 2004, the fund paid MFSC a fee of $1,669,867 for
shareholder services which equated to 0.1026% of the fund's average daily net
assets. Also included in shareholder servicing costs are out-of-pocket
expenses, paid to MFSC, which amounted to $657,312 for the year ended August
31, 2004, as well as other expenses paid to unaffiliated vendors.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$1,272,762,912 and $1,270,554,658, 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 $1,725,177,189
----------------------------------------------------------
Gross unrealized depreciation $(182,859,926)
----------------------------------------------------------
Gross unrealized appreciation 49,225,417
----------------------------------------------------------
Net unrealized depreciation $(133,634,509)
----------------------------------------------------------
(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:
Year ended 8/31/04 Year ended 8/31/03
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares sold 9,135,629 $159,921,433 42,067,436 $608,306,358
- -------------------------------------------------------------------------------------------------------------
Shares reacquired (15,888,205) (278,004,488) (53,503,806) (772,007,915)
- -----------------------------------------------------------------------------------------------------------
Net decrease (6,752,576) $(118,083,055) (11,436,370) $(163,701,557)
- -----------------------------------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 2,724,980 $45,750,851 4,961,087 $69,388,591
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (7,496,759) (125,557,730) (9,331,086) (128,196,184)
- -----------------------------------------------------------------------------------------------------------
Net decrease (4,771,779) $(79,806,879) (4,369,999) $(58,807,593)
- -----------------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 924,461 $15,527,263 1,052,437 $14,991,019
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (2,603,489) (43,764,517) (3,132,660) (43,273,762)
- -----------------------------------------------------------------------------------------------------------
Net decrease (1,679,028) $(28,237,254) (2,080,223) $(28,282,743)
- -----------------------------------------------------------------------------------------------------------
CLASS I SHARES
Shares sold 14,464,089 $257,055,055 8,744,706 $131,236,225
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (315,485) (5,591,834) (871,976) (12,561,146)
- -----------------------------------------------------------------------------------------------------------
Net increase 14,148,604 $251,463,221 7,872,730 $118,675,079
- -----------------------------------------------------------------------------------------------------------
CLASS J SHARES
Shares sold 134,418 $2,218,836 17,800 $257,229
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (118,008) (2,007,446) (45,778) (640,054)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) 16,410 $211,390 (27,978) $(382,825)
- -----------------------------------------------------------------------------------------------------------
Year ended 8/31/04 Period ended 8/31/03*
SHARES AMOUNT SHARES AMOUNT
CLASS R1 SHARES
Shares sold 122,633 $2,203,904 14,585 $224,566
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (16,451) (285,108) (1,218) (17,232)
- -----------------------------------------------------------------------------------------------------------
Net increase 106,182 $1,918,796 13,367 $207,334
- -----------------------------------------------------------------------------------------------------------
Period ended 8/31/04**
SHARES AMOUNT
CLASS R2 SHARES
Shares sold 18,703 $327,908
- -----------------------------------------------------------------------
Year ended 8/31/04 Year ended 8/31/03
SHARES AMOUNT SHARES AMOUNT
CLASS 529A SHARES
Shares sold 11,639 $202,658 13,890 $204,517
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (1,468) (25,484) (620) (10,129)
- -----------------------------------------------------------------------------------------------------------
Net increase 10,171 $177,174 13,270 $194,388
- -----------------------------------------------------------------------------------------------------------
CLASS 529B SHARES
Shares sold 4,118 $68,611 4,683 $64,857
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (38) (635) (122) (1,880)
- -----------------------------------------------------------------------------------------------------------
Net increase 4,080 $67,976 4,561 $62,977
- -----------------------------------------------------------------------------------------------------------
CLASS 529C SHARES
Shares sold 10,500 $173,280 3,281 $45,803
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (263) (4,426) (17) (232)
- -----------------------------------------------------------------------------------------------------------
Net increase 10,237 $168,854 3,264 $45,571
- -----------------------------------------------------------------------------------------------------------
* For the period from the inception of Class R1 shares, December 31, 2002, through August 31, 2003.
** For the period from the inception of Class R2 shares, October 31, 2003, through August 31, 2004.
(6) LINE OF CREDIT
The fund and other affiliated funds participate in an $800 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the Federal
Reserve funds rate plus 0.50%. 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 calendar quarter. The commitment fee
allocated to the fund for the year ended August 31, 2004 was $8,026, and is
included in miscellaneous expense. The fund had no significant borrowings
during the year ended August 31, 2004.
(7) LEGAL PROCEEDINGS.
On March 31, 2004, MFS settled an administrative proceeding with the Securities
and Exchange Commission ("SEC") regarding disclosure of brokerage allocation
practices in connection with MFS fund sales (the term "MFS funds" means the
open-end registered management investment companies sponsored by MFS). Under
the terms of the settlement, in which MFS neither admitted nor denied any
wrongdoing, MFS agreed to pay (one dollar) $1.00 in disgorgement and $50
million in penalty to certain MFS funds, pursuant to a plan developed by an
independent distribution consultant. The brokerage allocation practices which
were the subject of this proceeding were discontinued by MFS in November 2003.
The agreement with the SEC is reflected in an order of the SEC. Pursuant to the
SEC order, on July 28, 2004, MFS transferred these settlement amounts to the
SEC, and those MFS funds entitled to these settlement amounts accrued an
estimate of their pro rata portion of these amounts. Once the final
distribution plan is approved by the SEC, these amounts will be distributed by
the SEC to the affected MFS funds. The SEC settlement order states that MFS
failed to adequately disclose to the Boards of Trustees and to shareholders of
the MFS funds the specifics of its preferred arrangements with certain
brokerage firms selling MFS fund shares. The SEC settlement order states that
MFS had in place policies designed to obtain best execution of all MFS fund
trades. As part of the settlement, MFS retained an independent compliance
consultant to review the completeness of its current policies and practices
regarding disclosure to MFS fund trustees and to MFS fund shareholders of
strategic alliances between MFS or its affiliates and broker-dealers and other
financial advisers who support the sale of MFS fund shares.
In addition, in February, 2004, MFS reached agreement with the SEC, the New
York Attorney General ("NYAG") and the Bureau of Securities Regulation of the
State of New Hampshire ("NH") to settle administrative proceedings alleging
false and misleading information in certain MFS retail fund prospectuses
regarding market timing and related matters (the "February Settlements"). These
regulators alleged that prospectus language for certain MFS retail funds was
false and misleading because, although the prospectuses for those funds in the
regulators' view indicated that the MFS funds prohibited market timing, MFS did
not limit trading activity in 11 domestic large cap stock, high grade bond and
money market funds. MFS' former Chief Executive Officer, John W. Ballen, and
former President, Kevin R. Parke, also reached agreement with the SEC in which
they agreed to, among other terms, monetary fines and temporary suspensions
from association with any investment adviser or registered investment company.
Messrs. Ballen and Parke have resigned their positions with, and will not be
returning to, MFS and the MFS funds. Under the terms of the February
Settlements, MFS and the executives neither admit nor deny wrongdoing.
Under the terms of the February Settlements, a $225 million pool has been
established for distribution to shareholders in certain MFS retail funds, which
has been funded by MFS and of which $50 million is characterized as a penalty.
This pool will be distributed in accordance with a methodology developed by an
independent distribution consultant in consultation with MFS and the Board of
Trustees of the MFS retail funds, and acceptable to the SEC. MFS has further
agreed with NYAG to reduce its management fees in the aggregate amount of
approximately $25 million annually over the next five years, and not to
increase certain management fees during this period. MFS has also paid an
administrative fine to NH in the amount of $1 million, which will be used for
investor education purposes (NH retained $250,000 and $750,000 was contributed
to the North American Securities Administrators Association's Investor
Protection Trust). In addition, under the terms of the February Settlements,
MFS is in the process of adopting certain governance changes and reviewing its
policies and procedures.
Since December 2003, MFS, Sun Life Financial Inc., various MFS funds, the
Trustees of these MFS funds, and certain officers of MFS have been named as
defendants in multiple lawsuits filed in federal and state courts. The lawsuits
variously have been commenced as class actions or individual actions on behalf
of investors who purchased, held or redeemed shares of the MFS funds during
specified periods, as class actions on behalf of participants in certain
retirement plan accounts, or as derivative actions on behalf of the MFS funds.
The lawsuits relating to market timing and related matters have been
transferred to, and consolidated before, the United States District Court for
the District of Maryland, as part of a multi-district litigation of market
timing and related claims involving several other fund complexes (In re Mutual
Funds Investment Litigation (Alger, Columbia, Janus, MFS, One Group, Putnam,
PIMCO), No. 1:04-md-15863 (transfer began March 19, 2004)). Four lawsuits
alleging improper brokerage allocation practices and excessive compensation are
pending in the United States District Court for the District of Massachusetts
(Forsythe v. Sun Life Financial Inc., et al., No. 04cv10584 (GAO) (March 25,
2004); Eddings v. Sun Life Financial Inc., et al., No. 04cv10764 (GAO) (April
15, 2004); Marcus Dumond, et al. v. Massachusetts Financial Servs. Co., et al.,
No. 04cv11458 (GAO) (May 4, 2004); and Koslow v. Sun Life Financial Inc., et
al., No. 04cv11019 (GAO) (May 20, 2004)). The lawsuits generally allege that
some or all of the defendants (i) permitted or acquiesced in market timing
and/or late trading in some of the MFS funds, inadequately disclosed MFS'
internal policies concerning market timing and such matters, and received
excessive compensation as fiduciaries to the MFS funds, or (ii) permitted or
acquiesced in the improper use of fund assets by MFS to support the
distribution of MFS fund shares and inadequately disclosed MFS' use of fund
assets in this manner. The actions assert that some or all of the defendants
violated the federal securities laws, including the Securities Act of 1933 and
the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the
Investment Advisers Act of 1940, the Employee Retirement Income Security Act of
1974, as well as fiduciary duties and other violations of common law. The
lawsuits seek unspecified damages. Insofar as any of the actions is
appropriately brought derivatively on behalf of any of the MFS funds, any
recovery will inure to the benefit of the MFS funds. The defendants are
reviewing the allegations of the multiple complaints and will respond
appropriately. Additional lawsuits based on similar allegations may be filed in
the future.
Any potential resolution of these matters may include, but not be limited to,
judgments or settlements for damages against MFS, the MFS funds, or any other
named defendant. As noted above, as part of the regulatory settlements, MFS has
established a restitution pool in the amount of $225 million to compensate
certain shareholders of the MFS retail funds for damages that they allegedly
sustained as a result of market timing or late trading in certain of the MFS
retail funds, and transferred $50 million for distribution to affected MFS
funds to compensate those funds based upon the amount of brokerage commissions
allocated in recognition of MFS fund sales. It is not clear whether these
amounts will be sufficient to compensate shareholders for all of the damage
they allegedly sustained, whether certain shareholders or putative class
members may have additional claims to compensation, or whether the damages that
may be awarded in any of the actions will exceed these amounts. In the event
the MFS funds incur any losses, costs or expenses in connection with such
lawsuits, the Boards of Trustees of the affected MFS funds may pursue claims on
behalf of such funds against any party that may have liability to the funds in
respect thereof.
Review of these matters by the independent Trustees of the MFS funds and their
counsel is continuing. There can be no assurance that these regulatory actions
and lawsuits, or the adverse publicity associated with these developments, will
not result in increased fund redemptions, reduced sales of fund shares, or
other adverse consequences to the MFS funds.
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------------------------------
To the Trustees of MFS Series Trust I and Shareholders of MFS Strategic Growth
Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Strategic Growth Fund (the Fund) (one of the portfolios comprising MFS Series
Trust I), including the portfolio of investments, as of August 31, 2004, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the periods indicated therein. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 and financial
highlights. Our procedures included confirmation of securities owned at August
31, 2004, by correspondence with the custodian and brokers or by other
appropriate auditing procedures where replies from brokers were not received.
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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Strategic Growth Fund at August 31, 2004, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and its financial highlights for each of the periods
indicated therein, in conformity with U.S. generally accepted accounting
principles.
ERNST & YOUNG LLP
Boston, Massachusetts
October 8, 2004
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TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
- ------------------------------------------------------------------------------------------------------
The Trustees and officers of the Trust, as of October 10, 2004, are listed below, together with their
principal occupations during the past five years. (Their titles may have varied during that period.)
The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
PRINCIPAL OCCUPATIONS & OTHER
POSITION(s) HELD TRUSTEE/OFFICER DIRECTORSHIPS(2) DURING
NAME, DATE OF BIRTH WITH FUND SINCE(1) THE PAST FIVE YEARS
- ------------------- ---------------- --------------- -----------------------------
INTERESTED TRUSTEES
Robert J. Manning(3) Trustee and February 2004 Massachusetts Financial
(born 10/20/63) President Services Company, Chief
Executive Officer, President,
Chief Investment Officer and
Director
Robert C. Pozen(3) Trustee February 2004 Massachusetts Financial
(born 08/08/46) Services Company, Chairman
(since February 2004); Harvard
Law School (education), John
Olin Visiting Professor (since
July 2002); Secretary of
Economic Affairs, The
Commonwealth of Massachusetts
(January 2002 to December
2002); Fidelity Investments,
Vice Chairman (June 2000 to
December 2001); Fidelity
Management & Research Company
(investment adviser),
President (March 1997 to July
2001); The Bank of New York
(financial services),
Director; Bell Canada
Enterprises
(telecommunications),
Director; Telesat (satellite
communications), Director
INDEPENDENT TRUSTEES
J. Atwood Ives Trustee and Chair of February 1992 Private investor; Eastern
(born 05/01/36) Trustees Enterprises (diversified
services company), Chairman,
Trustee and Chief Executive
Officer (until November 2000)
Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital,
(born 03/11/37) Chief of Cardiac Surgery;
Harvard Medical School,
Professor of Surgery
David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining
(born 05/30/42) products and service
provider), Vice Chairman/
Director (since April 2001);
Encinitos Ventures (private
investment company), Principal
(1997 to April 2001); Lincoln
Electric Holdings, Inc.
(welding equipment
manufacturer), Director;
Southwest Gas Corporation
(natural gas distribution
company), Director
William R. Gutow Trustee December 1993 Private investor and real
(born 09/27/41) estate consultant; Capitol
Entertainment Management
Company (video franchise),
Vice Chairman
Amy B. Lane Trustee January 2004 Retired; Merrill Lynch & Co.,
(born 02/08/53) Inc., Managing Director,
Investment Banking Group
(1997 to February 2001);
Borders Group, Inc. (book and
music retailer), Director;
Federal Realty Investment
Trust (real estate investment
trust), Trustee
Lawrence T. Perera Trustee July 1981 Hemenway & Barnes
(born 06/23/35) (attorneys), Partner
William J. Poorvu Trustee August 1982 Private investor; Harvard
(born 04/10/35) University Graduate School of
Business Administration,
Class of 1961 Adjunct
Professor in Entrepreneurship
Emeritus; CBL & Associates
Properties, Inc. (real estate
investment trust), Director
J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 09/23/38) (acquisition planning
specialists), President;
Wellfleet Investments
(investor in health care
companies), Managing General
Partner (since 1993);
Cambridge Nutraceuticals
(professional nutritional
products), Chief Executive
Officer (until May 2001)
Elaine R. Smith Trustee February 1992 Independent health care
(born 04/25/46) industry consultant
OFFICERS
Robert J. Manning(3) President and February 2004 Massachusetts Financial
(born 10/20/63) Trustee Services Company, Chief
Executive Officer, President,
Chief Investment Officer and
Director
James R. Bordewick, Jr.(3) Assistant Secretary September 1990 Massachusetts Financial
(born 03/06/59) and Assistant Clerk Services Company, Senior Vice
President and Associate
General Counsel
Jeffrey N. Carp(3) Secretary and Clerk September 2004 Massachusetts Financial
(born 12/01/56) Services Company, Senior Vice
President, General Counsel and
Secretary (since April 2004);
Hale and Dorr LLP (law firm)
(prior to April 2004)
James F. DesMarais(3) Assistant Secretary September 2004 Massachusetts Financial
(born 03/09/61) and Assistant Clerk Services Company, Assistant
General Counsel
Stephanie A. DeSisto(3) Assistant Treasurer May 2003 Massachusetts Financial
(born 10/01/53) Services Company, Vice
President (since April 2003);
Brown Brothers Harriman &
Co., Senior Vice President
(November 2002 to April
2003); ING Groep N.V./Aeltus
Investment Management, Senior
Vice President (prior to
November 2002)
Robert R. Flaherty(3) Assistant Treasurer August 2000 Massachusetts Financial
(born 09/18/63) Services Company, Vice
President (since August
2000); UAM Fund Services,
Senior Vice President (prior
to August 2000)
Richard M. Hisey(3) Treasurer August 2002 Massachusetts Financial
(born 08/29/58) Services Company, Senior Vice
President (since July 2002);
The Bank of New York, Senior
Vice President (September 2000
to July 2002); Lexington
Global Asset Managers, Inc.,
Executive Vice President and
Chief Financial Officer (prior
to September 2000); Lexington
Funds, Chief Financial Officer
(prior to September 2000)
Brian T. Hourihan(3) Assistant Secretary September 2004 Massachusetts Financial
(born 11/11/64) and Assistant Clerk Services Company, Vice
President, Senior Counsel and
Assistant Secretary (since
June 2004); Affiliated
Managers Group, Inc., Chief
Legal Officer/Centralized
Compliance Program (January
to April 2004); Fidelity
Research & Management
Company, Assistant General
Counsel (prior to January
2004)
Ellen Moynihan(3) Assistant Treasurer April 1997 Massachusetts Financial
(born 11/13/57) Services Company, Vice
President
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of
(born 03/07/44) Compliance Officer compliance services),
Principal (since June 2004);
CRA Business Strategies Group
(consulting services),
Executive Vice President
(April 2003 to June 2004);
David L. Babson & Co.
(investment adviser),
Managing Director, Chief
Administrative Officer and
Director (February 1997 to
March 2003)
James O. Yost(3) Assistant Treasurer September 1990 Massachusetts Financial
(born 06/12/60) Services Company, Senior Vice
President
- ----------------
(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served
continuously since appointment unless indicated otherwise.
(2) Directorships or trusteeships of companies required to report to the Securities and Exchange
Commission (i.e., "public companies").
(3) "Interested person" of MFS within the meaning of the Investment Company Act of 1940 (referred to
as the 1940 Act), which is the principle federal law governing investment companies like the fund.
The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
The Trust does not hold annual shareholder meetings for the purpose of electing Trustees, and Trustees
are not elected for fixed terms. The Trust will hold a shareholders' meeting in 2005 and at least once
every five years thereafter to elect Trustees. Each Trustee and officer holds office until his or her
successor is chosen and qualified or until his or her earlier death, resignation, retirement or
removal.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which
MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with
certain affiliates of MFS. Each Trustee serves as a board member of 109 funds within the MFS Family of
Funds.
The Statement of Additional Information contains further information about the Trustees and is
available without charge upon request by calling 1-800-225-2606.
- -----------------------------------------------------------------------------------------------------
INVESTMENT ADVISER CUSTODIANS
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 02116-3741 225 Franklin Street, Boston, MA 02110
JP Morgan Chase Bank
DISTRIBUTOR One Chase Manhattan Plaza
MFS Fund Distributors, Inc. New York, NY 10081
500 Boylston Street, Boston, MA 02116-3741
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PORTFOLIO MANAGERS Ernst & Young LLP
Margaret W. Adams 200 Clarendon Street, Boston, MA 02116
S. Irfan Ali
QUARTERLY PORTFOLIO DISCLOSURE
Beginning with the fund's first and third fiscal quarters following this report, the fund will file a
complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission)
for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q may be reviewed
and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-0102
Information on the operation of the Public Reference Room may be obtained by calling the Commission at
1-800-SEC-0330. The fund's Form N-Q is available on the EDGAR database on the Commission's Internet
website at http://www.sec.gov, and copies of this information may be obtained, upon payment of a
duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by
writing the Public Reference Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at www.mfs.com.
- -------------------------------------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS
- -------------------------------------------------------------------------------
YOUR GOALS ARE IMPORTANT
MFS offers a complete range of investments and investment services to address
specific financial needs over time. When your investing goals change, you can
easily stay with MFS for the products you need, when you need them. Whether
you're investing for college or retirement expenses or for tax management or
estate planning, MFS will be there.
Ask your investment professional how MFS can help you move toward the goals
you've set.
MFS FAMILY OF FUNDS(R)
More than 50 portfolios offer domestic and international equity and
fixed-income investments across the full risk spectrum
VARIABLE ANNUITIES
A selection of annuity products with advantages for
building and preserving wealth
MFS 401(k) AND IRA SUITES
Retirement plans for businesses and individuals
MFS COLLEGE SAVINGS PLANS
Investment products to help meet education expenses
MFS PRIVATE PORTFOLIO SERVICES
Investment advisory services that provide custom products
for high-net-worth individuals
Variable annuities are offered through MFS/Sun Life Financial Distributors, Inc.
- ------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED)
In January 2005, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 2004.
The fund has the option to use equalization, which is a tax basis dividends
paid deduction from earnings and profits distributed to shareholders upon
redemption of shares.
- --------------------------------------------------------------------------------
CONTACT INFORMATION
INVESTOR INFORMATION
For information on MFS mutual funds, call your investment professional or, for
an information kit, call toll free: 1-800-225-2606 any business day from 8 a.m.
to 8 p.m. Eastern time.
A general description of the MFS funds' proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the About MFS section of mfs.com or by visiting the SEC's Web site at
http://www.sec. gov.
Information regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is
available without charge by visiting the Proxy Voting section of mfs.com or by
visiting the SEC's Web site at http://www.sec.gov.
INVESTOR SERVICE
Write to us at: MFS Service Center, Inc.
P.O. Box 55824
Boston, MA 02205-5824
Type of Information Phone number Hours, Eastern Time
- --------------------------------------------------------------------------------
General information 1-800-225-2606 8 a.m. to 8 p.m., any
business day
- --------------------------------------------------------------------------------
Speech- or hearing-impaired 1-800-637-6576 9 a.m. to 5 p.m., any
business day
- --------------------------------------------------------------------------------
Shares prices, account 1-800-MFS-TALK
balances exchanges (1-800-637-8255) 24 hours a day, 365 days a
or stock and bond outlooks touch-tone required year
- --------------------------------------------------------------------------------
WORLD WIDE WEB
Go to MFS.COM for a clear view of market events, investor education, account
access, and product and performance insights.
Go paperless with EDELIVERY: Join your fellow shareholders who are already
taking advantage of this great new benefit from MFS. With eDelivery, we send
you prospectuses, reports, and proxies electronically. You get timely
information without mailbox clutter (and help your fund save printing and
postage costs).
SIGN-UP instructions: If your account is registered with us, go to mfs.com, log
in to your account via MFS Access, and select the eDelivery sign up options.
If you own your MFS fund shares through a financial institution or through a
retirement plan, MFS TALK, MFS Access, and eDelivery may not be available to
you.
[logo] M F S(R)
INVESTMENT MANAGEMENT
(C) 2004 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116.
AGF-ANN-10/04 153M
MFS(R) Mutual Funds
ANNUAL REPORT 8/31/04
MFS(R) MANAGED SECTORS FUND
A path for pursuing opportunity
[graphic omitted]
[logo] M F S(R)
INVESTMENT MANAGEMENT
- -------------------------------------------------------------------------------
MFS(R) PRIVACY POLICY: A COMMITMENT TO YOU
- -------------------------------------------------------------------------------
Privacy is a concern for every investor today. At MFS Investment Management(R)
and the MFS funds, we take this concern very seriously. We want you to
understand our policies about every MFS investment product and service that we
offer and how we protect the nonpublic personal information of investors who
have a direct relationship with us and our wholly owned subsidiaries.
Throughout our business relationship, you provide us with personal information;
we maintain information and records about you, your investments, and the
services you use. Examples of the nonpublic personal information we maintain
include
o data from investment applications and other forms
o share balances and transactional history with us, our affiliates, or others
o facts from a consumer reporting agency
We do not disclose any nonpublic personal information about our customers or
former customers to anyone except as permitted by law. We may share information
with companies or financial institutions that perform marketing services on our
behalf or to other financial institutions with which we have joint marketing
arrangements.
Access to your nonpublic personal information is limited to appropriate
personnel who provide products, services, or information to you. We maintain
physical, electronic, and procedural safeguards that comply with applicable
federal regulations.
If you have any questions about MFS' privacy policy, please call 1-800-225-2606
any business day between 8 a.m. and 8 p.m. Eastern time.
Note: If you own MFS products or receive MFS services in the name of a third
party such as a bank or broker-dealer, their privacy policy may apply to you
instead of ours.
- --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUIF
- --------------------------------------------------------------------------------
MFS(R) MANAGED SECTORS FUND
The fund seeks capital appreciation.
- -------------------------------------------------------------------------------
A PROSPECTUS FOR ANY MFS PRODUCT CAN BE OBTAINED FROM YOUR INVESTMENT
PROFESSIONAL. YOU SHOULD READ THE PROSPECTUS CAREFULLY BEFORE INVESTING AS IT
CONTAINS COMPLETE INFORMATION ON THE FUND'S INVESTMENT OBJECTIVE(s), THE RISKS
ASSOCIATED WITH AN INVESTMENT IN THE FUND, AND THE FEES, CHARGES, AND EXPENSES
INVOLVED. THESE ELEMENTS, AS WELL AS OTHER INFORMATION CONTAINED IN THE
PROSPECTUS, SHOULD BE CONSIDERED CAREFULLY BEFORE INVESTING.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- ----------------------------------------------------
MFS PRIVACY POLICY
- ----------------------------------------------------
LETTER FROM THE CEO 1
- ----------------------------------------------------
MFS ORIGINAL RESEARCH(R) 5
- ----------------------------------------------------
MANAGEMENT REVIEW 6
- ----------------------------------------------------
PORTFOLIO COMPOSITION 10
- ----------------------------------------------------
PERFORMANCE SUMMARY 11
- ----------------------------------------------------
EXPENSE TABLE 15
- ----------------------------------------------------
PORTFOLIO OF INVESTMENTS 17
- ----------------------------------------------------
FINANCIAL STATEMENTS 21
- ----------------------------------------------------
NOTES TO FINANCIAL STATEMENTS 34
- ----------------------------------------------------
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 45
- ----------------------------------------------------
TRUSTEES AND OFFICERS 46
- ----------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS 50
- ----------------------------------------------------
FEDERAL TAX INFORMATION 51
- ----------------------------------------------------
CONTACT INFORMATION BACK COVER
- -------------------------------------------------------------------------------
LETTER FROM THE CEO
- -------------------------------------------------------------------------------
Dear Shareholders,
[Photo of Robert J. Manning]
Our firm was built on the strength of MFS Original Research(R), our in-depth
analysis of every security we consider for our portfolios. We've been honing
this process since 1932, when we created one of the mutual fund industry's
first research departments. And we continue to fine-tune this process so that
we can provide strong and consistent long-term investment performance to help
you achieve your financial goals.
While we have achieved strong investment performance in many of our portfolios,
our goal is to achieve the same strong results across all asset classes. To
ensure that our portfolio teams are doing the best possible job for our firm's
clients and shareholders, I am focusing the vast majority of my time on the
three key elements that I believe truly differentiate MFS from its competitors:
people, process, and culture.
PEOPLE
Our people have always been our most valuable resource. Our philosophy is to
deliver consistent, repeatable investment results by hiring the most talented
investors in our industry. We recruit from the nation's top business schools
and hire experienced analysts, both domestically and around the globe.
Our analysts are the engine that powers our entire investment team because
their recommendations have a direct impact on the investment performance of our
portfolios. To demonstrate our ongoing commitment in this area, we increased
the number of equity analysts at MFS from less than 40 at the end of 2000 to
about 50 in June 2004. During that same period, we doubled the average
investment experience of our domestic equity analysts, in part by recruiting
more seasoned analysts to the firm. Moreover, our international network of
investment personnel now spans key regions of the world with offices in London,
Mexico City, Singapore, and Tokyo, as well as Boston.
One of the major advantages that MFS has over many of its competitors is that
the position of research analyst is a long-term career for many members of our
team, not simply a steppingstone toward becoming a portfolio manager. We have
worked to elevate the stature of the analyst position to be on par with that of
a portfolio manager. In fact, an exceptional research analyst has the
opportunity to earn more at MFS than some portfolio managers.
At the same time, we look within the firm to promote talented analysts who
choose a path toward becoming a portfolio manager. We rarely hire portfolio
managers from our competitors because we believe the best investors are those
steeped in the MFS process and culture. In the past few months, we have
identified three senior research analysts who will assume roles on the
management teams of several of our larger portfolios. MFS is fortunate to have
a deep bench of talented investment personnel, and we welcome the opportunity
to put their skills to work for our clients.
PROCESS
MFS was built on the strength of its bottom-up approach to researching
securities. We have enhanced the mentoring process for our research analysts by
calling on several of our most seasoned portfolio managers to supplement the
work of Director of Global Equity Research David A. Antonelli. These portfolio
managers are taking a special interest in developing the careers of our
research analysts and strengthening our investment process. Kenneth J. Enright
of our value equity group is working with a team of domestic analysts; David E.
Sette-Ducati of our small- and mid-cap equity team is working with analysts
concentrating on small- and mid-cap companies; and Barnaby Wiener of our
international equity team in London heads the European equity research team.
We have combined the bottom-up approach of our research process with a top-
down approach to risk controls on portfolio composition. We have a very strong
quantitative team under the leadership of industry veteran Deborah H. Miller,
who represents the equity management department on the Management Committee of
the firm. Quantitative analysis helps us generate investment ideas and, more
importantly, assess the appropriate level of risk for each portfolio. The risk
assessment is designed to assure that each portfolio operates within its
investment objectives.
Additionally, we have increased the peripheral vision of our investment
personnel across asset classes through the collaboration of our Equity, Fixed
Income, Quantitative Analysis, and Risk Management teams. We recently codified
this key aspect of our culture by forming an Investment Management Committee,
composed of key members of these teams. This committee will work to ensure that
all teams are sharing information, actively debating investment ideas, and
creating a unified investment team.
CULTURE
Teamwork is at the heart of our ability to deliver consistent and competitive
investment performance over time. At MFS, each member of our team is involved
in our success; we have no superstars. The collaborative nature of our process
works to assure a consistent investment approach across all of our products and
provides a high level of continuity in portfolio management because our
investment performance never depends on the contributions of just a single
individual. Our culture is based on an environment of teamwork that allows our
investment personnel to be successful. In turn, we demand superior investment
results from every member of our team.
We have created a meritocracy at our firm based on investment results. We hold
all of our portfolio managers accountable for the performance of their
portfolios and their contributions to the team. We also track the equity and
fixed-income ratings of our analysts so we can evaluate them based on the
performance of their recommendations. We align bonus compensation to investment
performance by weighting rewards to those who have created the greatest
long-term benefit for our shareholders and who contribute most successfully to
the Original Research(SM) process.
The strength of our culture has resulted in a tremendous amount of stability.
Although we have dismissed members of our team whose performance did not meet
MFS" high standards, only one portfolio manager has voluntarily left the firm
over the past six months, based on a decision to retire from the industry.
In short, we can help you achieve your financial goals by hiring talented
people, following a disciplined process, and maintaining our firm's unique
culture. The enhancements described in this letter reflect the collaborative
spirit and the depth of resources in our investment teams.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R)
September 20, 2004
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed.
- -------------------------------------------------------------------------------
MFS ORIGINAL RESEARCH(R)
- -------------------------------------------------------------------------------
THE MFS(R) DIFFERENCE
For 80 years MFS has been offering investors clear paths to pursuing specific
investment objectives. Today, millions of individuals and thousands of
institutions all over the world look to MFS to manage their assets with insight
and care.
Our success, we believe, has to do with the fact that we see investors as
people with plans, not just dollars to invest.
When you invest with MFS, you invest with a company dedicated to helping you
realize your long-term financial goals.
INVESTORS CHOOSE MFS FOR OUR
o global asset management expertise across all asset classes
o time-tested money management process for pursuing consistent results
o full spectrum of investment products backed by MFS Original Research(R)
o resources and services that match real-life needs
TURNING INFORMATION INTO OPPORTUNITY
Sound investments begin with sound information. MFS has been doing its own
research and analyzing findings in-house for decades. The process we use to
uncover opportunity is called MFS Original Research(R).
MFS ORIGINAL RESEARCH INVOLVES
o meeting with the management of 3,000 companies each year to assess their
business plans and the managers" ability to execute those plans
o making onsite visits to more than 2,000 companies annually to gain first-hand
knowledge of their operations and products
o analyzing financial statements and balance sheets
o talking extensively with companies" customers and competitors
o developing our own proprietary estimates of companies" earnings
- -------------------------------------------------------------------------------
MANAGEMENT REVIEW
- -------------------------------------------------------------------------------
MARKET ENVIRONMENT
The recovery in global stock markets that began in the spring of 2003 continued
into the first quarter of 2004. Business capital expenditures, which had been
weak for several years, began to trend upward in the latter half of 2003,
adding support to a recovery that had been fueled largely by consumer spending.
In the spring and summer of 2004, many measures of global economic growth,
including employment, corporate spending, and earnings growth, continued to
improve. But stock prices made only modest gains as investors, in our view,
became increasingly concerned about higher interest rates, rising oil prices, a
slowdown in corporate earnings growth, and continuing unrest in Iraq. The U.S.
Federal Reserve Board raised interest rates in June and again in August, and
set expectations for an ongoing series of modest rate hikes. A pullback in
equity markets near the end of the period was triggered, we believe, by
indications from a number of bellwether companies that earnings growth was
starting to slow.
DETRACTORS FROM PERFORMANCE
Stock selection in leisure and, to a lesser extent, an overweighting in the
sector, held back relative returns. Several media companies in the fund,
including Viacom, Clear Channel Communications, and Westwood One, fell short of
our growth expectations as they failed to enjoy the strong increases in
advertising revenues we had anticipated in an improving economy. By period-end
we had sold our Westwood One position.
In the technology sector, a combination of weak stock selection and a relative
overweighing hurt results. Among the most significant detractors in the sector
were storage management software firm VERITAS Software and online travel vendor
IAC/InterActiveCorp. VERITAS" stock price tumbled as the firm lowered its
earnings projections and moved to restate prior-year results.
IAC/InterActiveCorp lost traction, we feel, on concerns that online booking
agents would be shut out of more desirable flights and rooms as travel demand
recovered.
The fund's positions in semiconductor makers Analog Devices and Texas
Instruments also hurt relative performance. Both stocks lost ground as
investors, we believe, questioned the sustainability of the semiconductor
business cycle. Elsewhere in technology, underweighting cellular communications
products firm QUALCOMM and missing much of the stock's strong rise over the
period also subtracted from relative results.
Stock selection in the financial services sector hurt relative results as well.
No individual stock in the sector was among the fund's top 10 detractors for
the period; rather, the failure of a handful of holdings to keep pace with the
benchmark buffeted performance. Among those stocks were brokerage giant Merrill
Lynch and student loan marketer SLM Corp., also known as Sallie Mae. Merrill
Lynch was not a holding in the fund's benchmark, the Russell 1000 Growth Index,
and both Merrill Lynch and SLM Corp. were sold out of the fund by period-end.
Our investment in discount retailer Kohl's detracted from relative results as
well. Kohl's stock price declined as the company, in our view, struggled to
recover from an excess inventory situation.
CONTRIBUTORS TO PERFORMANCE
On a sector basis, stock selection in the health care and the industrial goods
and services sectors contributed to relative performance. In the industrial
goods and services area, a relative underweighting helped results as well.
Within health care, the fund benefited from its positions in biopharmaceutical
companies Gilead Sciences and Genzyme. Gilead's stock advanced amid strong
earnings and news that the company was developing a single pill for HIV that
combined two different compounds. Genzyme stock rose after the company
announced second-quarter 2004 results that topped consensus expectations. In
addition, we believe Genzyme surprised investors by maintaining previous 2004
earnings projections that many analysts had anticipated would be diluted by the
firm's acquisition of Ilex Oncology. The fund benefited as well from
underweighting Cardinal Health and selling our position before the stock fell
sharply. Shares in the drug and medical supply distributor plummeted following
an earnings disappointment and the announcement of additional investigations
into the firm's accounting practices.
In the industrial goods and services sector, our position in conglomerate
General Electric added to relative returns. We believe GE's stock rose over the
period in part as a result of improving fundamentals (business factors such as
earnings and cash flow growth). Our holding in Lockheed Martin, the world's
largest defense contractor, also helped relative performance.
Stocks in other sectors that contributed to relative performance included eBay,
Avon Products, and Sprint PCS Group. In our view, successful expansion into
international markets was a key driver of Internet auctioneer eBay's strong
performance. The fund's position in direct-sales cosmetics firm Avon Products
rallied as the company reported solid revenue growth across all geographies. We
sold our Avon holdings and took some profits. Stock in wireless carrier Sprint
PCS soared during the period as the bidding war for AT&T Wireless drove up
stock prices across the cellular industry. We sold our Sprint PCS position into
that rally.
Underweighting semiconductor giant Intel, which was a large position in our
benchmark, aided relative performance as well. In our view, the stock declined
because of concerns about the semiconductor industry's near-term prospects.
Respectfully,
/s/ Margaret W. Adams /s/ Stephen Pesek
Margaret W. Adams Stephen Pesek
Portfolio Manager Portfolio Manager
/s/ S. Irfan Ali
S. Irfan Ali
Portfolio Manager
Note to Shareholders: As of November 2003, John E. Lathrop is no longer a
manager of the portfolio.
The views expressed in this report are those of the portfolio managers only
through the end of the period of the report as stated on the cover and do not
necessarily reflect the views of MFS or any other person in the MFS
organization. These views are subject to change at any time based on market and
other conditions, and MFS disclaims any responsibility to update such views.
These views may not be relied upon as investment advice or as an indication of
trading intent on behalf of any MFS fund. References to specific securities are
not recommendations of such securities and may not be representative of any MFS
fund's current or future investments.
The fund will charge a 2% redemption fee on proceeds from shares redeemed or
exchanged within 5 business days of acquiring (either by purchasing or
exchanging) fund shares. See the prospectus for complete details.
- -------------------------------------------------------------------------------
Visit mfs.com for our latest economic and investment outlook.
o Under Updates & Announcements, click Week in Review for a summary of recent
investment- related news.
o From Week in Review, link to MFS Global Perspective for our current view of
the world.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
-----------------------------------------------
PORTFOLIO STRUCTURE
-----------------------------------------------
Stocks 97.2%
Cash and Other Net Assets 2.8%
-----------------------------------------------
TOP 5 SECTOR WEIGHTINGS
-----------------------------------------------
Technology 31.2%
-----------------------------------------------
Health Care 26.8%
-----------------------------------------------
Retailing 10.6%
-----------------------------------------------
Financial Services 9.0%
-----------------------------------------------
Industrial Goods & Svcs. 7.4%
-----------------------------------------------
Percentages are based on total net assets as of 8/31/04.
The portfolio is actively managed, and current holdings may be different.
-----------------------------------------------
TOP 10 STOCK HOLDINGS
-----------------------------------------------
MICROSOFT CORP. 5.0%
-----------------------------------------------
JOHNSON & JOHNSON 4.4%
-----------------------------------------------
PFIZER, INC. 3.5%
-----------------------------------------------
CISCO SYSTEMS, INC. 3.3%
-----------------------------------------------
GENERAL ELECTRIC CO. 3.0%
-----------------------------------------------
CITIGROUP, INC. 2.7%
-----------------------------------------------
AMERICAN INTERNATIONAL GROUP, INC. 2.5%
-----------------------------------------------
SYMANTEC CORP. 2.4%
-----------------------------------------------
LOCKHEED MARTIN CORP. 2.3%
-----------------------------------------------
DELL, INC. 2.3%
-----------------------------------------------
- -------------------------------------------------------------------------------
PERFORMANCE SUMMARY THROUGH 8/31/04
- -------------------------------------------------------------------------------
The following chart illustrates the historical performance of the fund's Class
A shares, which represent the class with the greatest net assets, in comparison
to its benchmark. Performance results include the deduction of the maximum
applicable sales charge and reflect the percentage change in net asset value,
including reinvestment of dividends and capital gains distributions. Benchmark
comparisons are unmanaged and do not reflect any fees or expenses. The
performance of other share classes will be greater than or less than the line
shown. (See Notes to Performance Summary.)
VISIT MFS.COM FOR THE MOST RECENT MONTH-END PERFORMANCE RESULTS. MARKET
VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND CURRENT
PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE
OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. ANY
HIGH SHORT-TERM RETURNS MAY BE AND LIKELY WERE ATTRIBUTABLE TO RECENT FAVORABLE
MARKET CONDITIONS, WHICH MAY NOT BE REPEATED. THE PERFORMANCE SHOWN DOES NOT
REFLECT THE DEDUCTION OF TAXES, IF ANY, THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
MFS Managed
Sectors Fund Russell 100
Class A Growth Index
8/94 $ 9,425 $10,000
8/96 12,352 14,752
8/98 14,569 22,257
8/00 36,173 44,060
8/02 13,999 18,750
8/04 15,880 22,534
- ------------------------
Average annual
without sales charge
- ------------------------
TOTAL RETURNS
Class
Share class inception date 1-yr 3-yr 5-yr 10-yr
- ------------------------------------------------------------------------------
A 9/20/93 0.26% -4.04% -6.79% 5.36%
- ------------------------------------------------------------------------------
B 12/29/86 -0.40% -4.67% -7.41% 4.65%
- ------------------------------------------------------------------------------
C 6/1/00 -0.40% -4.65% -7.37% 4.67%
- ------------------------------------------------------------------------------
I 1/2/97 0.65% -3.72% -6.48% 5.64%
- ------------------------------------------------------------------------------
- ------------------------
Average annual
- ------------------------
Comparative benchmarks
- ------------------------------------------------------------------------------
Average large-cap growth fund+ 2.90% -3.35% -6.08% 6.91%
- ------------------------------------------------------------------------------
Russell 1000 Growth Index# 5.36% -2.20% -7.35% 8.46%
- ------------------------------------------------------------------------------
- ------------------------
Average annual
with sales charge
- ------------------------
Share class
- ------------------------------------------------------------------------------
A -5.50% -5.91% -7.89% 4.73%
- ------------------------------------------------------------------------------
B -4.38% -5.64% -7.68% 4.65%
- ------------------------------------------------------------------------------
C -1.40% -4.65% -7.37% 4.67%
- ------------------------------------------------------------------------------
Class I shares do not have a sales charge. Please see Notes to Performance
Summary for more details.
- ------------------------
Cumulative without
sales charge
- ------------------------
- ------------------------------------------------------------------------------
A 0.26% -11.63% -29.65% 68.49%
- ------------------------------------------------------------------------------
B -0.40% -13.38% -31.95% 57.54%
- ------------------------------------------------------------------------------
C -0.40% -13.30% -31.81% 57.88%
- ------------------------------------------------------------------------------
I 0.65% -10.76% -28.48% 73.06%
- ------------------------------------------------------------------------------
+ Source: Lipper Inc., an independent firm that reports mutual fund performance.
# Source: Standard & Poor's Micropal, Inc.
INDEX DEFINITION
RUSSELL 1000 GROWTH INDEX - measures the performance of those companies in the
Russell 1000 index with higher price to book and forecasted growth values. The
Russell 1000 consists of the 1000 largest market cap companies in the Russell
3000 index.
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
The performance shown reflects a non-recurring accrual made to the fund on July
28, 2004, relating to MFS" revenue sharing settlement with the Securities and
Exchange Commission, without which the performance would have been lower. For
example, the impact on the fund's performance (not including sales charge) for
the one-year period through the date shown would have been lower by
approximately 0.14%.
Class A results, including sales charge, reflect the deduction of the maximum
5.75% sales charge. Class B results, including sales charge, reflect the
deduction of the applicable contingent deferred sales charge (CDSC), which
declines over six years from 4% to 0%. Class C results, including sales charge,
(assuming redemption within one year from the end of the calendar month of
purchase) reflect the deduction of the 1% CDSC. Class I shares have no sales
charges and are available only to certain investors.
Performance for C shares includes the performance of the fund's Class B shares
prior to their offering. For reporting periods ending prior to March 31, 2004,
when quoting performance for the fund's Class I shares, the performance of this
share class included the performance of the fund's Class B shares, rather than
Class A shares. The blending methodology changed for reporting periods ending
on or after March 31, 2004, because Class A and B shares now each has a 10 year
performance history, and share class performance is being blended to Class A
shares based upon the similarity of share class operating expenses. This change
in blending methodology results in better performance for Class I shares than
it had under the prior blending methodology. For a transitional period lasting
until December 31, 2007, performance for Class I shares under the prior
methodology is available at mfs.com. These results represent the percent change
in net asset value.
This blended class performance has been adjusted to take into account
differences in sales loads, if any, applicable to these share classes, but has
not been adjusted to take into account differences in class specific operating
expenses (such as Rule 12b-1 fees). Compared to performance these share classes
would have experienced had they been offered for the entire period, the use of
blended performance generally results in higher performance for share classes
with higher operating expenses than the initial share class to which it is
blended, and lower performance for share classes with lower operating expenses
than the initial share class to which it is blended.
Performance results reflect any applicable expense subsidies and waivers in
effect during the periods shown. Without such subsidies and waivers the fund's
performance results would be less favorable. Please see the prospectus and
financial statements for complete details.
KEY RISK CONSIDERATIONS
The portfolio may invest in foreign and/or emerging markets securities, which
are more susceptible to risks relating to interest rates, currency exchange
rates, economic, and political conditions.
The portfolio focuses on companies in a limited number of sectors or industries
making it more susceptible to adverse economic, political, or regulatory
developments affecting those sectors or industries than a portfolio that
invests more broadly.
The portfolio may invest a relatively high percentage of its assets in a small
number of issuers or even in a single issuer. This makes the fund's value more
sensitive to developments associated with the issuer and the overall market.
The portfolio may invest in growth company securities which will fall to a
greater extent than the overall equity markets (e.g., as represented by the
Standard & Poor's Composite 500 Index) due to changing economic, political or
market conditions or disappointing growth company earnings results.
The fund will allocate its investment among various equity sectors, based upon
judgments made by MFS. The fund could miss attractive investment opportunities
by underweighting sectors where there are significant returns, and could lose
value by overweighting sectors where there are significant declines. Please see
the prospectus for these and other risk considerations.
The portfolio's value will vary daily since its investments will fluctuate in
response to issuer, market, regulatory, economic, or political developments.
Because stocks tend to be more volatile than some other investments, such as
bonds, the more assets a fund dedicates to stocks, generally the more volatile
the portfolio's value will be. Historically, stocks have outperformed bonds
over time. The portfolio's investment risks should be considered prior to
investing.
- -------------------------------------------------------------------------------
EXPENSE TABLE
- -------------------------------------------------------------------------------
FUND EXPENSES BORNE BY SHAREHOLDERS DURING THE PERIOD FROM MARCH 1, 2004,
THROUGH AUGUST 31, 2004.
As a shareholder of the fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on certain purchase or redemption
payments and redemption fees on certain exchanges and redemptions, and
(2) ongoing costs, including management fees; distribution and service
(12b-1) fees; and other fund expenses. This example is intended to help you
understand your ongoing costs (in dollars) of investing in the fund and to
compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of
the period and held for the entire period, March 1, 2004 through August 31,
2004.
ACTUAL EXPENSES
The first line for each share class in the table below provides information
about actual account values and actual expenses. You may use the information in
this line, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the first line under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during
this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line for each share class in the table below provides information
about hypothetical account values and hypothetical expenses based on the fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption fees. Therefore, the second line for each share
class in the table is useful in comparing ongoing costs only, and will not help
you determine the relative total costs of owning different funds. In addition,
if these transactional costs were included, your costs would have been higher.
- --------------
Share Class
- --------------
- -------------------------------------------------------------------------------
Expenses
Paid During
Annualized Beginning Ending Period**
Expense Account Value Account Value* 3/01/04-
Ratio 3/01/04 8/31/04 8/31/04
- --------------------------------------------------------------------------------
Actual 1.44% $1,000 $931 $7.01
A ------------------------------------------------------------------------
Hypothetical 1.44% $1,000 $1,018 $7.32
- --------------------------------------------------------------------------------
Actual 2.09% $1,000 $928 $10.16
B -------------------------------------------------------------------------
Hypothetical 2.09% $1,000 $1,014 $10.61
- --------------------------------------------------------------------------------
Actual 2.09% $1,000 $929 $10.16
C ------------------------------------------------------------------------
Hypothetical 2.09% $1,000 $1,014 $10.61
- --------------------------------------------------------------------------------
Actual 1.09% $1,000 $933 $5.31
I ------------------------------------------------------------------------
Hypothetical 1.09% $1,000 $1,020 $5.55
- --------------------------------------------------------------------------------
* Ending account value reflects each class" ending account value assuming the
actual class return per year before expenses (Actual) and a hypothetical 5%
class return per year before expenses (Hypothetical).
** Expenses paid is equal to each class" annualized expense ratio for the most
recent six month period, as shown above, multiplied by the average account
value over the period, multiplied by the number of days in the period,
divided by the number of days in the year. Expenses paid do not include any
applicable sales charges (loads) or redemption fees. If these transaction
costs had been included, your costs would have been higher.
- -------------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS - 8/31/04
- -------------------------------------------------------------------------------------------------
The Portfolio of Investments is a complete list of all securities owned by your fund. It is
categorized by broad-based asset classes.
Stocks - 97.2%
- -------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
U.S. Stocks - 96.3%
- -------------------------------------------------------------------------------------------------
Consumer Staples - 2.2%
- -------------------------------------------------------------------------------------------------
Colgate-Palmolive Co. 20,300 $1,096,200
- -------------------------------------------------------------------------------------------------
Procter & Gamble Co.^ 58,100 3,251,857
- -------------------------------------------------------------------------------------------------
$4,348,057
- -------------------------------------------------------------------------------------------------
Financial Services - 8.1%
- -------------------------------------------------------------------------------------------------
American Express Co.^ 65,600 $3,281,312
- -------------------------------------------------------------------------------------------------
American International Group, Inc. 67,900 4,837,196
- -------------------------------------------------------------------------------------------------
Citigroup, Inc. 113,500 5,286,830
- -------------------------------------------------------------------------------------------------
Goldman Sachs Group, Inc.^ 9,100 815,815
- -------------------------------------------------------------------------------------------------
Hartford Financial Services Group, Inc.^ 27,400 1,675,784
- -------------------------------------------------------------------------------------------------
$15,896,937
- -------------------------------------------------------------------------------------------------
Healthcare - 26.8%
- -------------------------------------------------------------------------------------------------
Abbott Laboratories 97,900 $4,081,451
- -------------------------------------------------------------------------------------------------
Amgen, Inc.* 70,600 4,185,874
- -------------------------------------------------------------------------------------------------
C.R. Bard, Inc. 48,400 2,715,240
- -------------------------------------------------------------------------------------------------
Celgene Corp.^* 18,900 1,072,575
- -------------------------------------------------------------------------------------------------
Eli Lilly & Co.^ 50,200 3,185,190
- -------------------------------------------------------------------------------------------------
Genentech, Inc.^* 30,200 1,473,156
- -------------------------------------------------------------------------------------------------
Genzyme Corp.^* 75,300 4,066,200
- -------------------------------------------------------------------------------------------------
Gilead Sciences, Inc.* 60,100 4,154,713
- -------------------------------------------------------------------------------------------------
Johnson & Johnson 148,000 8,598,800
- -------------------------------------------------------------------------------------------------
Medtronic, Inc.^ 86,800 4,318,300
- -------------------------------------------------------------------------------------------------
Pfizer, Inc. 207,500 6,779,025
- -------------------------------------------------------------------------------------------------
Waters Corp.^* 92,300 3,997,513
- -------------------------------------------------------------------------------------------------
Wyeth^ 103,900 3,799,623
- -------------------------------------------------------------------------------------------------
$52,427,660
- -------------------------------------------------------------------------------------------------
Industrial Goods & Services - 7.4%
- -------------------------------------------------------------------------------------------------
Emerson Electric Co. 35,300 $2,197,425
- -------------------------------------------------------------------------------------------------
General Electric Co. 180,600 5,921,874
- -------------------------------------------------------------------------------------------------
Illinois Tool Works, Inc.^ 19,200 1,752,768
- -------------------------------------------------------------------------------------------------
Lockheed Martin Corp.^ 85,000 4,571,300
- -------------------------------------------------------------------------------------------------
$14,443,367
- -------------------------------------------------------------------------------------------------
Leisure - 5.7%
- -------------------------------------------------------------------------------------------------
Carnival Corp.^ 74,000 $3,388,460
- -------------------------------------------------------------------------------------------------
Clear Channel Communications, Inc. 64,100 2,147,991
- -------------------------------------------------------------------------------------------------
Comcast Corp., "A"^* 90,200 2,540,934
- -------------------------------------------------------------------------------------------------
Time Warner, Inc.^* 37,300 609,855
- -------------------------------------------------------------------------------------------------
Viacom, Inc., "B" 72,400 2,411,644
- -------------------------------------------------------------------------------------------------
$11,098,884
- -------------------------------------------------------------------------------------------------
Miscellaneous - 2.4%
- -------------------------------------------------------------------------------------------------
Career Education Corp.^* 27,800 $857,352
- -------------------------------------------------------------------------------------------------
Fiserv, Inc.^* 50,400 1,752,912
- -------------------------------------------------------------------------------------------------
Getty Images, Inc.^* 37,600 2,084,920
- -------------------------------------------------------------------------------------------------
$4,695,184
- -------------------------------------------------------------------------------------------------
Retail - 10.6%
- -------------------------------------------------------------------------------------------------
Best Buy Co., Inc. 48,600 $2,260,872
- -------------------------------------------------------------------------------------------------
CVS Corp.^ 78,300 3,132,000
- -------------------------------------------------------------------------------------------------
Kohl's Corp.^* 68,400 3,384,432
- -------------------------------------------------------------------------------------------------
Lowe's Cos., Inc. 37,200 1,848,840
- -------------------------------------------------------------------------------------------------
Nike, Inc., "B"^ 25,400 1,912,874
- -------------------------------------------------------------------------------------------------
Pacific Sunwear of California, Inc.^* 43,500 833,460
- -------------------------------------------------------------------------------------------------
PETsMART, Inc.^ 53,100 1,489,986
- -------------------------------------------------------------------------------------------------
Reebok International Ltd. 42,100 1,430,137
- -------------------------------------------------------------------------------------------------
Target Corp.^ 98,600 4,395,588
- -------------------------------------------------------------------------------------------------
$20,688,189
- -------------------------------------------------------------------------------------------------
Technology - 31.2%
- -------------------------------------------------------------------------------------------------
ADTRAN, Inc.^ 68,500 $1,834,430
- -------------------------------------------------------------------------------------------------
Akamai Technologies, Inc.^* 168,700 2,269,015
- -------------------------------------------------------------------------------------------------
Analog Devices, Inc.^ 85,900 2,982,448
- -------------------------------------------------------------------------------------------------
Cisco Systems, Inc.* 348,100 6,530,356
- -------------------------------------------------------------------------------------------------
Dell, Inc.* 130,500 4,546,620
- -------------------------------------------------------------------------------------------------
eBay, Inc.^* 48,400 4,188,536
- -------------------------------------------------------------------------------------------------
IAC/InterActiveCorp^* 89,400 2,039,214
- -------------------------------------------------------------------------------------------------
Intel Corp. 137,300 2,923,117
- -------------------------------------------------------------------------------------------------
International Business Machines Corp.^ 48,100 4,073,589
- -------------------------------------------------------------------------------------------------
Maxim Integrated Products, Inc.^ 24,600 1,068,378
- -------------------------------------------------------------------------------------------------
Microsoft Corp. 361,500 9,868,950
- -------------------------------------------------------------------------------------------------
Oracle Corp.* 88,600 883,342
- -------------------------------------------------------------------------------------------------
QUALCOMM, Inc. 57,400 2,184,070
- -------------------------------------------------------------------------------------------------
Symantec Corp.^* 96,500 4,628,140
- -------------------------------------------------------------------------------------------------
Texas Instruments, Inc.^ 159,500 3,116,630
- -------------------------------------------------------------------------------------------------
VERITAS Software Corp.^* 171,500 2,867,480
- -------------------------------------------------------------------------------------------------
Xilinx, Inc.^ 55,900 1,533,337
- -------------------------------------------------------------------------------------------------
Yahoo!, Inc.^* 125,800 3,586,558
- -------------------------------------------------------------------------------------------------
$61,124,210
- -------------------------------------------------------------------------------------------------
Transportation - 1.3%
- -------------------------------------------------------------------------------------------------
FedEx Corp.^ 29,500 $2,418,705
- -------------------------------------------------------------------------------------------------
Utilities & Communications - 0.6%
- -------------------------------------------------------------------------------------------------
Andrew Corp.^* 96,500 $1,070,185
- -------------------------------------------------------------------------------------------------
Total U.S. Stocks $188,211,378
- -------------------------------------------------------------------------------------------------
Foreign Stocks - 0.9%
- -------------------------------------------------------------------------------------------------
Bermuda - 0.9%
- -------------------------------------------------------------------------------------------------
Ace Ltd. (Financial Services)^ 46,200 $1,781,010
- -------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $177,840,871) $189,992,388
- -------------------------------------------------------------------------------------------------
Short-Term Obligation - 0.3%
- -------------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
- -------------------------------------------------------------------------------------------------
General Electric Capital Corp., 1.57%, due 9/01/04,
at Amortized Cost $587,000 $587,000
- -------------------------------------------------------------------------------------------------
Collateral for Securities Loaned - 22.8%
- -------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio, at Cost and
Net Asset Value 44,454,334 $44,454,334
- -------------------------------------------------------------------------------------------------
Repurchase Agreement - 2.5%
- -------------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
- -------------------------------------------------------------------------------------------------
Morgan Stanley, 1.57%, dated 8/31/04, due 9/01/04, total to be
received $4,945,216 (secured by various U.S. Treasury and
Federal Agency obligations in a jointly traded account), at
Cost $4,945,000 $4,945,000
- -------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $227,827,205) $239,978,722
- -------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - (22.8)% (44,572,356)
- -------------------------------------------------------------------------------------------------
Net Assets - 100.0% $195,406,366
- -------------------------------------------------------------------------------------------------
* Non-income producing security.
^ All or a portion of this security is on loan.
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------------------------------
This statement represents your fund's balance sheet, which details the assets and liabilities
composing the total value of your fund.
AT 8/31/04
ASSETS
Investments, at value, including $43,440,874 of
securities on loan (identified cost, $227,827,205) $239,978,722
- -----------------------------------------------------------------------------------------------------
Cash 121
- -----------------------------------------------------------------------------------------------------
Receivable for fund shares sold 16,974
- -----------------------------------------------------------------------------------------------------
Interest and dividends receivable 242,655
- -----------------------------------------------------------------------------------------------------
Receivable from administrative proceedings settlement 269,765
- -----------------------------------------------------------------------------------------------------
Other assets 2,856
- -----------------------------------------------------------------------------------------------------
Total assets $240,511,093
- -----------------------------------------------------------------------------------------------------
LIABILITIES
Payable for fund shares reacquired $426,471
- -----------------------------------------------------------------------------------------------------
Collateral for securities loaned, at value 44,454,334
- -----------------------------------------------------------------------------------------------------
Payable to affiliates
- -----------------------------------------------------------------------------------------------------
Management fee 4,033
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 9,144
- -----------------------------------------------------------------------------------------------------
Distribution and service fee 2,526
- -----------------------------------------------------------------------------------------------------
Administrative fee 25
- -----------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 208,194
- -----------------------------------------------------------------------------------------------------
Total liabilities $45,104,727
- -----------------------------------------------------------------------------------------------------
Net assets $195,406,366
- -----------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Paid-in capital $472,201,994
- -----------------------------------------------------------------------------------------------------
Unrealized appreciation on investments 12,151,517
- -----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (288,864,360)
- -----------------------------------------------------------------------------------------------------
Accumulated net investment loss (82,785)
- -----------------------------------------------------------------------------------------------------
Net assets $195,406,366
- -----------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 25,767,529
- -----------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued
Class A shares
Net assets $155,466,402
- -----------------------------------------------------------------------------------------------------
Shares outstanding 20,456,219
- -----------------------------------------------------------------------------------------------------
Net asset value per share $7.60
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/94.25X$7.60) $8.06
- -----------------------------------------------------------------------------------------------------
Class B shares
Net assets $36,651,877
- -----------------------------------------------------------------------------------------------------
Shares outstanding 4,879,239
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $7.51
- -----------------------------------------------------------------------------------------------------
Class C shares
Net assets $1,153,597
- -----------------------------------------------------------------------------------------------------
Shares outstanding 155,242
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $7.43
- -----------------------------------------------------------------------------------------------------
Class I shares
Net assets $2,134,490
- -----------------------------------------------------------------------------------------------------
Shares outstanding 276,829
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $7.71
- -----------------------------------------------------------------------------------------------------
On sales of $50,000 or more, the offering price of Class A shares is reduced. A contingent deferred
sales charge may be imposed on redemptions of Class A, Class B, and Class C shares.
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
This statement describes how much your fund received in investment income and paid in expenses. It
also describes any gains and/or losses generated by fund operations.
FOR YEAR ENDED 8/31/04
NET INVESTMENT LOSS
Income
- -----------------------------------------------------------------------------------------------------
Dividends $1,880,976
- -----------------------------------------------------------------------------------------------------
Interest 81,428
- -----------------------------------------------------------------------------------------------------
Other# 269,765
- -----------------------------------------------------------------------------------------------------
Total investment income $2,232,169
- -----------------------------------------------------------------------------------------------------
Expenses
- -----------------------------------------------------------------------------------------------------
Management fee $1,651,474
- -----------------------------------------------------------------------------------------------------
Trustees" compensation 16,956
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 406,488
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class A) 608,046
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class B) 429,532
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class C) 12,425
- -----------------------------------------------------------------------------------------------------
Administrative fee 17,933
- -----------------------------------------------------------------------------------------------------
Custodian fee 71,159
- -----------------------------------------------------------------------------------------------------
Printing 71,020
- -----------------------------------------------------------------------------------------------------
Postage 26,607
- -----------------------------------------------------------------------------------------------------
Auditing fees 38,200
- -----------------------------------------------------------------------------------------------------
Legal fees 3,937
- -----------------------------------------------------------------------------------------------------
Miscellaneous 96,972
- -----------------------------------------------------------------------------------------------------
Total expenses $3,450,749
- -----------------------------------------------------------------------------------------------------
Fees paid indirectly (2,632)
- -----------------------------------------------------------------------------------------------------
Reduction of expenses by investment adviser (252)
- -----------------------------------------------------------------------------------------------------
Net expenses $3,447,865
- -----------------------------------------------------------------------------------------------------
Net investment loss $(1,215,696)
- -----------------------------------------------------------------------------------------------------
Statement of Operations - continued
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (identified cost basis)
- -----------------------------------------------------------------------------------------------------
Investment transactions $22,293,886
- -----------------------------------------------------------------------------------------------------
Foreign currency transactions 112
- -----------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign
currency transactions $22,293,998
- -----------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
- -----------------------------------------------------------------------------------------------------
Investments $(19,329,122)
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency $2,964,876
- -----------------------------------------------------------------------------------------------------
Increase in net assets from operations $1,749,180
- -----------------------------------------------------------------------------------------------------
# A non-recurring accrual recorded as a result of an administrative proceeding regarding disclosure
of brokerage allocation practices in connection with fund sales, as described in the Legal
Proceedings and Transactions with Affiliates footnotes.
SEE NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------------------------------------------
This statement describes the increases and/or decreases in net assets
resulting from operations, any distributions, and any shareholder
transactions.
FOR YEARS ENDED 8/31 2004 2003
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment loss $(1,215,696) $(1,541,045)
- -------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions 22,293,998 (3,099,503)
- -------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments (19,329,122) 30,289,025
- ----------------------------------------------------------- ------------- --------------
Increase in net assets from operations $1,749,180 $25,648,477
- ----------------------------------------------------------- ------------- --------------
Net decrease in net assets from fund share transactions $(36,010,984) $(33,081,638)
- ----------------------------------------------------------- ------------- --------------
Redemption fees $3 $--
- ----------------------------------------------------------- ------------- --------------
Total decrease in net assets $(34,261,801) $(7,433,161)
- ----------------------------------------------------------- ------------- --------------
NET ASSETS
At beginning of period $229,668,167 $237,101,328
- -------------------------------------------------------------------------------------------------------
At end of period (including accumulated net investment
loss of $82,785 and $104,627, respectively) $195,406,366 $229,668,167
- -------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the fund's financial performance for the past 5 years (or,
if shorter, the period of the fund's operation). Certain information reflects financial results for a single fund share. The
total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund
(assuming reinvestment of all distributions) held for the entire period. This information has been audited by the fund's
independent registered public accounting firm, whose report, together with the fund's financial statements, are included in
this report.
YEARS ENDED 8/31
-------------------------------------------------------------------------------
CLASS A 2004 2003 2002 2001 2000
Net asset value, beginning of period $7.58 $6.70 $8.60 $21.45 $14.95
- ------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.03) $(0.04) $(0.07) $(0.06) $(0.11)
- ------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency 0.05 0.92 (1.83) (9.44) 8.73
- --------------------------------------------- ------ ------ ------ ------ ------
Total from investment operations $0.02 $0.88 $(1.90) $(9.50) $8.62
- --------------------------------------------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments
and foreign currency transactions $-- $-- $-- $(2.78) $(2.12)
- ------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- (0.57) --
- --------------------------------------------- ------ ------ ------ ------ ------
Total distributions declared to
shareholders $-- $-- $-- $(3.35) $(2.12)
- --------------------------------------------- ------ ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- --------------------------------------------- ------ ------ ------ ------ ------
Net asset value, end of period $7.60 $7.58 $6.70 $8.60 $21.45
- --------------------------------------------- ------ ------ ------ ------ ------
Total return (%)(+) 0.26^^^ 13.13^^ (22.09) (50.32) 60.26
- ------------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
-------------------------------------------------------------------------------
CLASS A (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.43 1.51 1.46 1.36 1.32
- ------------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.42) (0.57) (0.92) (0.43) (0.56)
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 84 72 282 319 495
- ------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $155,466 $180,237 $183,797 $276,026 $600,531
- ------------------------------------------------------------------------------------------------------------------------------
(S) For the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its
proportional share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If this fee had been
incurred by the fund, the net investment loss per share and the ratios would have been:
Net investment loss $(0.03)* -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.43* -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.42)* -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
* The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
+++ Per share amount was less than $0.01.
# Per share data is based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
(+) Total returns do not include the applicable sales charge. If the charge had been included, the results would have been
lower.
^^ The fund's net asset value and total return calculation include proceeds received on March 26, 2003 for the partial
payment of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of $0.02 per share based on shares outstanding
on the day the proceeds were received. Excluding the effect of this payment from the ending net asset value per share,
total return for the year ended August 31, 2003 would have been 0.34% lower.
^^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings Footnote. The non-recurring accrual resulted in an increase in the net asset value of
$0.01 per share based on shares outstanding on the day the proceeds were recorded. Excluding the effect of this accrual
from the ending net asset value per share, total return for the year ended August 31, 2004 would have been 0.14% lower.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
---------------------------------------------------------------------------
CLASS B 2004 2003 2002 2001 2000
Net asset value, beginning of period $7.54 $6.71 $8.67 $21.55 $15.04
- ------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.08) $(0.08) $(0.13) $(0.14) $(0.24)
- ------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 0.05 0.91 (1.83) (9.52) 8.78
- ------------------------------------------------ ------ ------ ------ ------ ------
Total from investment operations $(0.03) $0.83 $(1.96) $(9.66) $8.54
- ------------------------------------------------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments and
foreign currency transactions $-- $-- $-- $(2.68) $(2.03)
- ------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- (0.54) --
- ------------------------------------------------ ------ ------ ------ ------ ------
Total distributions declared to shareholders $-- $-- $-- $(3.22) $(2.03)
- ------------------------------------------------ ------ ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- ------------------------------------------------ ------ ------ ------ ------ ------
Net asset value, end of period $7.51 $7.54 $6.71 $8.67 $21.55
- ------------------------------------------------ ------ ------ ------ ------ ------
Total return (%) (0.40)^^^ 12.37^^ (22.61) (50.64) 59.15
- ------------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
---------------------------------------------------------------------------
CLASS B (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.08 2.16 2.11 2.01 1.97
- ------------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.08) (1.22) (1.57) (1.08) (1.20)
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 84 72 282 319 495
- ------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $36,652 $45,982 $49,995 $87,876 $243,420
- ------------------------------------------------------------------------------------------------------------------------------
(S) For the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its
proportional share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If this fee had been
incurred by the fund, the net investment loss per share and the ratios would have been:
Net investment loss $(0.08)* -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.08* -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.08)* -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
* The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
+++ Per share amount was less than $0.01.
# Per share data is based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
^^ The fund's net asset value and total return calculation include proceeds received on March 26, 2003 for the partial
payment of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of $0.02 per share based on shares outstanding
on the day the proceeds were received. Excluding the effect of this payment from the ending net asset value per share,
total return for the year ended August 31, 2003 would have been 0.35% lower.
^^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings Footnote. The non-recurring accrual resulted in an increase in the net asset value of
$0.01 per share based on shares outstanding on the day the proceeds were recorded. Excluding the effect of this accrual
from the ending net asset value per share, total return for the year ended August 31, 2004 would have been 0.13% lower.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31 PERIOD
----------------------------------------------------------- ENDED
CLASS C 2004 2003 2002 2001 8/31/00**
Net asset value, beginning of period $7.46 $6.65 $8.57 $21.57 $19.62
- ------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.08) $(0.08) $(0.13) $(0.12) $(0.08)
- ------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 0.05 0.89 (1.79) (9.47) 2.03
- ------------------------------------------------ ------ ------ ------ ------ ------
Total from investment operations $(0.03) $0.81 $(1.92) $(9.59) $1.95
- ------------------------------------------------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments and
foreign currency transactions $-- $-- $-- $(2.83) $--
- ------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments
and foreign currency transactions -- -- -- (0.58) --
- ------------------------------------------------ ------ ------ ------ ------ ------
Total distributions declared to shareholders $-- $-- $-- $(3.41) $--
- ------------------------------------------------ ------ ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- ------------------------------------------------ ------ ------ ------ ------ ------
Net asset value, end of period $7.43 $7.46 $6.65 $8.57 $21.57
- ------------------------------------------------ ------ ------ ------ ------ ------
Total return (%) (0.40)^^^ 12.18^^ (22.40) (50.62) 9.94++^
- ------------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31 PERIOD
----------------------------------------------------------- ENDED
CLASS C (CONTINUED) 2004 2003 2002 2001 8/31/00**
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.08 2.16 2.11 2.01 1.97+
- ------------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.06) (1.22) (1.57) (1.08) (1.53)+
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 84 72 282 319 495
- ------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $1,154 $1,199 $1,240 $1,505 $1,022
- ------------------------------------------------------------------------------------------------------------------------------
(S) For the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its
proportional share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If this fee had been
incurred by the fund, the net investment loss per share and the ratios would have been:
Net investment loss $(0.08)* -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.08* -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.06)* -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
* The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
** For the period from the inception of Class C shares, June 1, 2000 through August 31, 2000.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data is based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
^ The total return previously reported for the period ended August 31, 2000 has been revised, from 59.30% to 9.94%.
^^ The fund's net asset value and total return calculation include proceeds received on March 26, 2003 for the partial
payment of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of $0.02 per share based on shares outstanding
on the day the proceeds were received. Excluding the effect of this payment from the ending net asset value per share,
total return for the year ended August 31, 2003 would have been 0.35% lower.
^^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings Footnote. The non-recurring accrual resulted in an increase in the net asset value of
$0.01 per share based on shares outstanding on the day the proceeds were recorded. Excluding the effect of this accrual
from the ending net asset value per share, total return for the year ended August 31, 2004 would have been 0.13% lower.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
---------------------------------------------------------------------------
CLASS I 2004 2003 2002 2001 2000
Net asset value, beginning of period $7.66 $6.75 $8.64 $21.54 $14.99
- ------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.01) $(0.01) $(0.05) $(0.01) $(0.04)
- ------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 0.06 0.92 (1.84) (9.47) 8.76
- ------------------------------------------------ ------ ------ ------ ------ ------
Total from investment operations $0.05 $0.91 $(1.89) $(9.48) $8.72
- ------------------------------------------------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments and
foreign currency transactions $-- $-- $-- $(2.84) $(2.17)
- ------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- (0.58) --
- ------------------------------------------------ ------ ------ ------ ------ ------
Total distributions declared to shareholders $-- $-- $-- $(3.42) $(2.17)
- ------------------------------------------------ ------ ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- ------------------------------------------------ ------ ------ ------ ------ ------
Net asset value, end of period $7.71 $7.66 $6.75 $8.64 $21.54
- ------------------------------------------------ ------ ------ ------ ------ ------
Total return (%) 0.65^^^ 13.48^^ (21.88) (50.14) 60.76
- ------------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
---------------------------------------------------------------------------
CLASS I (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.08 1.16 1.11 1.01 0.97
- ------------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.07) (0.22) (0.57) (0.08) (0.21)
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 84 72 282 319 495
- ------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $2,134 $2,250 $2,070 $2,739 $6,418
- ------------------------------------------------------------------------------------------------------------------------------
(S) For the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its
proportional share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If this fee had been
incurred by the fund, the net investment loss per share and the ratios would have been:
Net investment loss $(0.01)* -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.08* -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.07)* -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
* The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
+++ Per share amount was less than $0.01.
# Per share data is based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
^^ The fund's net asset value and total return calculation include proceeds received on March 26, 2003 for the partial
payment of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of $0.02 per share based on shares outstanding
on the day the proceeds were received. Excluding the effect of this payment from the ending net asset value per share,
total return for the year ended August 31, 2003 would have been 0.35% lower.
^^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings Footnote. The non-recurring accrual resulted in an increase in the net asset value of
$0.01 per share based on shares outstanding on the day the proceeds were recorded. Excluding the effect of this accrual
from the ending net asset value per share, total return for the year ended August 31, 2004 would have been 0.14% lower.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(1) BUSINESS AND ORGANIZATION
MFS Managed Sectors Fund (the fund) is a non-diversified series of MFS Series
Trust I (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 U.S.
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. The fund
can invest in foreign securities. 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 in the fund's portfolio for which
market quotations are available are valued at the last sale or official closing
price as reported by an independent pricing service on the primary market or
exchange on which they are primarily traded, or at the last quoted bid price
for securities in which there were no sales during the day. Equity securities
traded over the counter are valued at the last sales price traded each day as
reported by an independent pricing service, or to the extent there are no sales
reported, such securities are valued on the basis of quotations obtained from
brokers and dealers. Short-term obligations with a remaining maturity in excess
of 60 days will be valued upon dealer-supplied valuations. All other short-term
obligations in the fund's portfolio are valued at amortized cost, which
constitutes market value as determined by the Board of Trustees. Money market
mutual funds are valued at net asset value. 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. When
pricing service information or market quotations are not readily available,
securities are priced at fair value as determined under the direction of the
Board of Trustees. For example, significant events (such as movement in the
U.S. securities market, or other regional and local developments) may occur
between the time that foreign markets close (where the security is principally
traded) and the time that the fund calculates its net asset value (generally,
the close of the NYSE) that may impact the value of securities traded in these
foreign markets. In these cases, the fund may utilize information from an
external vendor or other sources to adjust closing market quotations of foreign
equity securities to reflect what it believes to be the fair value of the
securities as of the fund's valuation time. Because the frequency of
significant events is not predictable, fair valuation of foreign equity
securities may occur on a frequent basis.
REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements with
institutions that the fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The fund requires
that the securities collateral in a repurchase transaction be transferred to
the custodian in a manner sufficient to enable the fund to obtain those
securities in the event of a default under the repurchase agreement. The fund
monitors, on a daily basis, the value of the collateral to ensure that its
value, including accrued interest, is greater than amounts owed to the fund
under each such repurchase agreement. The fund, along with other affiliated
entities of Massachusetts Financial Services Company (MFS), may utilize a joint
trading account for the purpose of entering into one or more repurchase
agreements.
FOREIGN CURRENCY TRANSLATION - 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.
SECURITY LOANS - State Street Bank and Trust Company ("State Street"), as
lending agent, may loan the securities of the fund to certain qualified
institutions (the "Borrowers") approved by the fund. The loans are
collateralized at all times by cash and/or U.S. Treasury securities in an
amount at least equal to the market value of the securities loaned. State
Street provides the fund with indemnification against Borrower default. The
fund bears the risk of loss with respect to the investment of cash collateral.
On loans collateralized by cash, the cash collateral is invested in a money
market fund or short-term securities. A portion of the income generated upon
investment of the collateral is remitted to the Borrowers, and the remainder is
allocated between the fund and the lending agent. On loans collateralized by
U.S. Treasury securities, a fee is received from the Borrower, and is allocated
between the fund and the lending agent. Income from securities lending is
included in interest income on the Statement of Operations. The dividend and
interest income earned on the securities loaned is accounted for in the same
manner as other dividend and interest income.
SHORT TERM FEES - For purchases made on or after July 1, 2004, the fund will
charge a 2% redemption fee (which is retained by the fund) on proceeds from
shares redeemed or exchanged within 5 business days following their acquisition
(either by purchase or exchange). The fund may change the redemption fee period
in the future, including changes in connection with pending Securities and
Exchange rules. See the fund's prospectus for details. These fees are accounted
for as an addition to paid-in-capital.
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 tax reporting purposes as required by federal income tax
regulations. Dividends received in cash are recorded on the ex- dividend date.
The fund was a participant in a class-action lawsuit against Cendant
Corporation. On March 26, 2003 the fund received a partial cash settlement in
the amount of $743,793, recorded as a realized gain on investment transactions.
The partial proceeds from the non-recurring litigation settlement resulted in
an increase in net asset value of $0.02 per share based on the shares
outstanding on the day the proceeds were received. Excluding the effect of this
payment from the fund's ending net asset value per share, total return for the
year ended August 31, 2003 would have been lower by 0.34%, 0.35%, 0.35% and
0.35% for Class A, B, C, and I shares, respectively.
FEES PAID INDIRECTLY - The fund's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by the
fund. During the year ended August 31, 2004, the fund's custodian fees were
reduced by $663 under this arrangement. The fund has entered into a commission
recapture agreement, under which certain brokers will credit the fund a portion
of the commissions generated, to offset certain expenses of the fund. For the
year ended August 31, 2004, the fund's miscellaneous expenses were reduced by
$1,969 under this agreement. These amounts are shown as a reduction of total
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 net 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 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. Common
types of book and tax differences that could occur include differences in
accounting for currency transactions.
The fund paid no distributions for the years ended August 31, 2004 and August
31, 2003.
During the year ended August 31, 2004, accumulated net investment loss
decreased by $1,237,538, accumulated net realized loss on investments and
foreign currency transactions increased by $112, and paid-in capital decreased
by $1,237,426 due to differences between book and tax accounting for currency
transactions. This change had no effect on the net assets or net asset value
per share.
As of August 31, 2004, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Capital loss carryforward $288,484,439
--------------------------------------------------------
Unrealized appreciation 11,771,596
--------------------------------------------------------
Other temporary differences (82,785)
--------------------------------------------------------
For federal income tax purposes, the capital loss carryforward may be applied
against any net taxable realized gains of each succeeding year until the
earlier of its utilization or expiration August 31, 2010 ($209,247,033) and
August 31, 2011 ($79,237,406).
MULTIPLE CLASSES OF SHARES OF BENEFICIAL INTEREST - The fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the fund based on daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class. Differences in per share dividend rates are
generally due to differences in separate class expenses. Class B shares will
convert to Class A shares approximately eight years after purchase.
(3) TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISER - The fund has an investment advisory agreement with MFS to
provide overall investment advisory and administrative services, and general
office facilities.
The management fee is computed daily and paid monthly at the following annual
rates:
First $2.5 billion of average net assets 0.75%
----------------------------------------------------------
Average net assets in excess of $2.5 billion 0.70%
----------------------------------------------------------
Management fees incurred for the year ended August 31, 2004 were an effective
rate of 0.75% of average daily net assets on an annualized basis.
The fund pays compensation to its Independent Trustees in the form of a
retainer, attendance fees, and additional compensation to Board and Committee
chairpersons, and 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). The fund has an
unfunded defined benefit plan for retired Independent Trustees and an unfunded
retirement benefit deferral plan for current Independent Trustees. Included in
Trustees" compensation is a net increase of $914 as a result of the change in
the fund's unfunded retirement benefit deferral plan for certain current
Independent Trustees and a pension expense of $4,867 for retired Independent
Trustees for the year ended August 31, 2004.
The MFS funds, including this fund, have entered into a services agreement (the
"Agreement") which provides for payment of fees by the MFS funds to Tarantino
LLC in return for the provision of services of an Independent Chief Compliance
Officer (ICCO) for the MFS funds. The ICCO is an officer of the MFS funds and
the sole member of Tarantino LLC. MFS has agreed to reimburse each of the MFS
funds for a proportional share of substantially all of the payments made by the
MFS funds to Tarantino LLC and also to provide office space and other
administrative support and supplies to the ICCO. The MFS funds can terminate
the Agreement with Tarantino LLC at any time under the terms of the Agreement.
The fund's investment adviser, MFS, has been the subject of an administrative
proceeding regarding disclosure of brokerage allocation practices in connection
with fund sales, as described in the Legal Proceedings Footnote. Pursuant to
the SEC Order, MFS, on July 28, 2004, transferred $1.00 in disgorgement and $50
million in penalty to the SEC (the "Payments"). A plan for distribution of
these Payments has been submitted to the SEC. Contemporaneous with the
transfer, the fund accrued an estimate of the amount to be received upon final
approval of the plan of distribution. The non- recurring accrual in the amount
of $269,765 resulted in an increase in the net asset value of $0.01 per share
based on the shares outstanding on the day the proceeds were recorded.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment advisor. Under an administrative services
agreement between the funds and MFS, MFS is entitled to partial reimbursement
of the costs MFS incurs to provide these services, subject to review and
approval by the Board of Trustees. Each fund is allocated a portion of these
administrative costs based on its size and relative average net assets. Prior
to April 1, 2004, the fund paid MFS an administrative fee up to the following
annual percentage rates of the fund's average daily net assets:
First $2 billion 0.0175%
----------------------------------------------------------
Next $2.5 billion 0.0130%
----------------------------------------------------------
Next $2.5 billion 0.0005%
----------------------------------------------------------
In excess of $7 billion 0.0000%
----------------------------------------------------------
Effective April 1, 2004, the fund paid MFS an administrative fee up to the
following annual percentage rates of the fund's average daily net assets:
First $2 billion 0.01120%
----------------------------------------------------------
Next $2.5 billion 0.00832%
----------------------------------------------------------
Next $2.5 billion 0.00032%
----------------------------------------------------------
In excess of $7 billion 0.00000%
----------------------------------------------------------
For the year ended August 31, 2004, the fund paid MFS $17,933 equivalent to
0.0081% of average daily net assets, to partially reimburse MFS for the costs
of providing administrative services.
DISTRIBUTOR - MFD, a wholly owned subsidiary of MFS, as distributor, received
$9,616 for the year ended August 31, 2004, as its portion of the sales charge
on sales of Class A shares of the fund.
The Trustees have adopted a distribution plan for Class A, Class B, and Class
C shares pursuant to rule 12b-1 of the Investment Company Act of 1940
as follows:
The fund's distribution plan provides that the fund will pay MFD an annual
percentage of its average daily net assets attributable to certain share
classes in order that MFD may pay expenses on behalf of the fund related to
the distribution and servicing of its shares. These expenses include a service
fee paid to each securities dealer that enters into a sales agreement with MFD
based on the average daily net assets of accounts attributable to such
dealers. The fees are calculated based on each class" average daily net
assets. The maximum distribution and service fees for each class of shares are
as follows:
CLASS A CLASS B CLASS C
Distribution Fee 0.10% 0.75% 0.75%
- -------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25%
- -------------------------------------------------------------------------------
Total Distribution Plan 0.35% 1.00% 1.00%
- -------------------------------------------------------------------------------
MFD retains the service fee for accounts not attributable to a securities
dealer, which for the year ended August 31, 2004, amounted to:
CLASS A CLASS B CLASS C
Service Fee Retained by MFD $15,864 $1,668 $24
- -------------------------------------------------------------------------------
Fees incurred under the distribution plan during the year ended August 31,
2004, were as follows:
CLASS A CLASS B CLASS C
Effective Annual Percentage Rates 0.35% 1.00% 1.00%
- -------------------------------------------------------------------------------
Certain Class A and Class C shares are subject to a contingent deferred sales
charge in the event of a shareholder redemption within, for Class A shares, 12
months following the purchase, and, for Class C shares, the first year from
the end of the calendar month of purchase. A contingent deferred sales charge
is imposed on shareholder redemptions of Class B shares in the event of a
shareholder redemption within six years from the end of the calendar month of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended August 31, 2004 were
as follows:
CLASS A CLASS B CLASS C
Contingent Deferred Sales Charges Imposed $761 $81,661 $269
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT - Included in shareholder servicing costs is a fee
paid to MFSC, a wholly owned subsidiary of MFS, for its services as
shareholder servicing agent. The fee, which is calculated as a percentage of
the fund's average daily net assets is set periodically under the supervision
of the fund's Trustees. Prior to April 1, 2004, the fee was set at 0.11% of
the fund's average daily net assets. For the period April 1, 2004 through June
30, 2004, the fee was set at 0.10% of the fund's average daily net assets.
Effective July 1, 2004, the fund is charged up to 0.0861% of its average daily
net assets. For the year ended August 31, 2004, the fund paid MFSC a fee of
$227,766 for shareholder services which equated to 0.1029% of the fund's
average net assets. Also included in shareholder servicing costs are out-of-
pocket expenses, paid to MFSC, which amounted to $36,292 for the year ended
August 31, 2004, as well as other expenses paid to unaffiliated vendors.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$183,408,567 and $222,708,508, 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 $228,207,126
--------------------------------------------------------
Gross unrealized appreciation $17,527,544
--------------------------------------------------------
Gross unrealized depreciation (5,755,948)
--------------------------------------------------------
Net unrealized appreciation $11,771,596
--------------------------------------------------------
(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:
Year ended 8/31/04 Year ended 8/31/03
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares sold 1,200,290 $9,467,545 1,956,338 $12,960,002
- --------------------------------------------------------------------------------
Shares reacquired (4,537,224) (35,764,681) (5,584,582) (36,876,148)
- --------------------------------------------------------------------------------
Net decrease (3,336,934) (26,297,136) (3,628,244) $(23,916,146)
- --------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 490,524 $3,845,853 818,965 $5,502,570
- --------------------------------------------------------------------------------
Shares reacquired (1,712,739) (13,373,666) (2,166,390) (14,423,562)
- --------------------------------------------------------------------------------
Net decrease (1,222,215) $(9,527,813) (1,347,425) $(8,920,992)
- --------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 46,113 $356,726 160,262 $1,068,677
- --------------------------------------------------------------------------------
Shares reacquired (51,719) (401,707) (185,934) (1,225,803)
- --------------------------------------------------------------------------------
Net decrease (5,606) $(44,981) (25,672) $(157,126)
- --------------------------------------------------------------------------------
CLASS I SHARES
Shares sold 16,395 $129,961 26,922 $183,217
- --------------------------------------------------------------------------------
Shares reacquired (33,274) (271,015) (39,742) (270,591)
- --------------------------------------------------------------------------------
Net decrease (16,879) $(141,054) (12,820) $(87,374)
- --------------------------------------------------------------------------------
(6) LINE OF CREDIT
The fund and other affiliated funds participate in an $800 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the Federal
Reserve fund's rate plus 0.50%. 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 calendar quarter. The commitment fee
allocated to the fund for the year ended August 31, 2004 was $1,068, and is
included in miscellaneous expense. The fund had no significant borrowings
during the year ended August 31, 2004.
(7) LEGAL PROCEEDINGS
On March 31, 2004, MFS settled an administrative proceeding with the Securities
and Exchange Commission ("SEC") regarding disclosure of brokerage allocation
practices in connection with MFS fund sales (the term "MFS funds" means the
open-end registered management investment companies sponsored by MFS). Under
the terms of the settlement, in which MFS neither admitted nor denied any
wrongdoing, MFS agreed to pay (one dollar) $1.00 in disgorgement and $50
million in penalty to certain MFS funds, pursuant to a plan developed by an
independent distribution consultant. The brokerage allocation practices which
were the subject of this proceeding were discontinued by MFS in November 2003.
The agreement with the SEC is reflected in an order of the SEC. Pursuant to the
SEC order, on July 28, 2004, MFS transferred these settlement amounts to the
SEC, and those MFS funds entitled to these settlement amounts accrued an
estimate of their pro rata portion of these amounts. Once the final
distribution plan is approved by the SEC, these amounts will be distributed by
the SEC to the affected MFS funds. The SEC settlement order states that MFS
failed to adequately disclose to the Boards of Trustees and to shareholders of
the MFS funds the specifics of its preferred arrangements with certain
brokerage firms selling MFS fund shares. The SEC settlement order states that
MFS had in place policies designed to obtain best execution of all MFS fund
trades. As part of the settlement, MFS retained an independent compliance
consultant to review the completeness of its current policies and practices
regarding disclosure to MFS fund trustees and to MFS fund shareholders of
strategic alliances between MFS or its affiliates and broker-dealers and other
financial advisers who support the sale of MFS fund shares.
In addition, in February, 2004, MFS reached agreement with the SEC, the New
York Attorney General ("NYAG") and the Bureau of Securities Regulation of the
State of New Hampshire ("NH") to settle administrative proceedings alleging
false and misleading information in certain MFS retail fund prospectuses
regarding market timing and related matters (the "February Settlements"). These
regulators alleged that prospectus language for certain MFS retail funds was
false and misleading because, although the prospectuses for those funds in the
regulators" view indicated that the MFS funds prohibited market timing, MFS did
not limit trading activity in 11 domestic large cap stock, high grade bond and
money market funds. MFS" former Chief Executive Officer, John W. Ballen, and
former President, Kevin R. Parke, also reached agreement with the SEC in which
they agreed to, among other terms, monetary fines and temporary suspensions
from association with any investment adviser or registered investment company.
Messrs. Ballen and Parke have resigned their positions with, and will not be
returning to, MFS and the MFS funds. Under the terms of the February
Settlements, MFS and the executives neither admit nor deny wrongdoing.
Under the terms of the February Settlements, a $225 million pool has been
established for distribution to shareholders in certain MFS retail funds, which
has been funded by MFS and of which $50 million is characterized as a penalty.
This pool will be distributed in accordance with a methodology developed by an
independent distribution consultant in consultation with MFS and the Board of
Trustees of the MFS retail funds, and acceptable to the SEC. MFS has further
agreed with NYAG to reduce its management fees in the aggregate amount of
approximately $25 million annually over the next five years, and not to
increase certain management fees during this period. MFS has also paid an
administrative fine to NH in the amount of $1 million, which will be used for
investor education purposes (NH retained $250,000 and $750,000 was contributed
to the North American Securities Administrators Association's Investor
Protection Trust). In addition, under the terms of the February Settlements,
MFS is in the process of adopting certain governance changes and reviewing its
policies and procedures.
Since December 2003, MFS, Sun Life Financial Inc., various MFS funds, the
Trustees of these MFS funds, and certain officers of MFS have been named as
defendants in multiple lawsuits filed in federal and state courts. The lawsuits
variously have been commenced as class actions or individual actions on behalf
of investors who purchased, held or redeemed shares of the MFS funds during
specified periods, as class actions on behalf of participants in certain
retirement plan accounts, or as derivative actions on behalf of the MFS funds.
The lawsuits relating to market timing and related matters have been
transferred to, and consolidated before, the United States District Court for
the District of Maryland, as part of a multi-district litigation of market
timing and related claims involving several other fund complexes (In re Mutual
Funds Investment Litigation (Alger, Columbia, Janus, MFS, One Group, Putnam,
PIMCO), No. 1:04-md-15863 (transfer began March 19, 2004)). Four lawsuits
alleging improper brokerage allocation practices and excessive compensation are
pending in the United States District Court for the District of Massachusetts
(Forsythe v. Sun Life Financial Inc., et al., No. 04cv10584 (GAO) (March 25,
2004); Eddings v. Sun Life Financial Inc., et al., No. 04cv10764 (GAO) (April
15, 2004); Marcus Dumond, et al. v. Massachusetts Financial Servs. Co., et al.,
No. 04cv11458 (GAO) (May 4, 2004); and Koslow v. Sun Life Financial Inc., et
al., No. 04cv11019 (GAO) (May 20, 2004)). The lawsuits generally allege that
some or all of the defendants (i) permitted or acquiesced in market timing
and/or late trading in some of the MFS funds, inadequately disclosed MFS"
internal policies concerning market timing and such matters, and received
excessive compensation as fiduciaries to the MFS funds, or (ii) permitted or
acquiesced in the improper use of fund assets by MFS to support the
distribution of MFS fund shares and inadequately disclosed MFS" use of fund
assets in this manner. The actions assert that some or all of the defendants
violated the federal securities laws, including the Securities Act of 1933 and
the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the
Investment Advisers Act of 1940, the Employee Retirement Income Security Act of
1974, as well as fiduciary duties and other violations of common law. The
lawsuits seek unspecified damages. Insofar as any of the actions is
appropriately brought derivatively on behalf of any of the MFS funds, any
recovery will inure to the benefit of the MFS funds. The defendants are
reviewing the allegations of the multiple complaints and will respond
appropriately. Additional lawsuits based on similar allegations may be filed in
the future.
Any potential resolution of these matters may include, but not be limited to,
judgments or settlements for damages against MFS, the MFS funds, or any other
named defendant. As noted above, as part of the regulatory settlements, MFS has
established a restitution pool in the amount of $225 million to compensate
certain shareholders of the MFS retail funds for damages that they allegedly
sustained as a result of market timing or late trading in certain of the MFS
retail funds, and transferred $50 million for distribution to affected MFS
funds to compensate those funds based upon the amount of brokerage commissions
allocated in recognition of MFS fund sales. It is not clear whether these
amounts will be sufficient to compensate shareholders for all of the damage
they allegedly sustained, whether certain shareholders or putative class
members may have additional claims to compensation, or whether the damages that
may be awarded in any of the actions will exceed these amounts. In the event
the MFS funds incur any losses, costs or expenses in connection with such
lawsuits, the Boards of Trustees of the affected MFS funds may pursue claims on
behalf of such funds against any party that may have liability to the funds in
respect thereof.
Review of these matters by the independent Trustees of the MFS funds and their
counsel is continuing. There can be no assurance that these regulatory actions
and lawsuits, or the adverse publicity associated with these developments, will
not result in increased fund redemptions, reduced sales of fund shares, or
other adverse consequences to the MFS funds.
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------------------------------
To the Trustees of MFS Series Trust I and the Shareholders of
MFS Managed Sectors Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Managed Sectors Fund (one of the series
comprising MFS Series Trust I) (the "Trust") as of August 31, 2004, and the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Trust'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 standards of the Public Company
Accounting Oversight Board (United States). 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 as of August 31, 2004, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such financial present fairly, in all material respects, the
financial position of MFS Managed Sectors Fund as of August 31, 2004, the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and its financial
highlights for each of the five years in the period then ended, in conformity
with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 25, 2004
- ------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
- ------------------------------------------------------------------------------------------------------
The Trustees and officers of the Trust, as of October 10, 2004, are listed below, together with
their principal occupations during the past five years. (Their titles may have varied during that
period.) The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts
02116.
PRINCIPAL OCCUPATIONS & OTHER
POSITION(s) HELD TRUSTEE/OFFICER DIRECTORSHIPS(2) DURING
NAME, DATE OF BIRTH WITH FUND SINCE(1) THE PAST FIVE YEARS
- ------------------- ---------------- --------------- -----------------------------
INTERESTED TRUSTEES
Robert J. Manning(3) Trustee and February 2004 Massachusetts Financial
(born 10/20/63) President Services Company, Chief
Executive Officer, President,
Chief Investment Officer and
Director
Robert C. Pozen(3) Trustee February 2004 Massachusetts Financial
(born 08/08/46) Services Company, Chairman
(since February 2004);
Harvard Law School
(education), John Olin
Visiting Professor (since
July 2002); Secretary of
Economic Affairs, The
Commonwealth of Massachusetts
(January 2002 to December
2002); Fidelity Investments,
Vice Chairman (June 2000 to
December 2001); Fidelity
Management & Research Company
(investment adviser),
President (March 1997 to July
2001); The Bank of New York
(financial services),
Director; Bell Canada
Enterprises
(telecommunications),
Director; Telesat (satellite
communications), Director
INDEPENDENT TRUSTEES
J. Atwood Ives Trustee and Chair of February 1992 Private investor; Eastern
(born 05/01/36) Trustees Enterprises (diversified
services company), Chairman,
Trustee and Chief Executive
Officer (until November 2000)
Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital,
(born 03/11/37) Chief of Cardiac Surgery;
Harvard Medical School,
Professor of Surgery
David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining
(born 05/30/42) products and service
provider), Vice Chairman/
Director (since April 2001);
Encinitos Ventures (private
investment company),
Principal (1997 to April
2001); Lincoln Electric
Holdings, Inc. (welding
equipment manufacturer),
Director; Southwest Gas
Corporation (natural gas
distribution company),
Director
William R. Gutow Trustee December 1993 Private investor and real
(born 09/27/41) estate consultant; Capitol
Entertainment Management
Company (video franchise),
Vice Chairman
Amy B. Lane Trustee January 2004 Retired; Merrill Lynch & Co.,
(born 02/08/53) Inc., Managing Director,
Investment Banking Group
(1997 to February 2001);
Borders Group, Inc. (book and
music retailer), Director;
Federal Realty Investment
Trust (real estate investment
trust), Trustee
Lawrence T. Perera Trustee July 1981 Hemenway & Barnes
(born 06/23/35) (attorneys), Partner
William J. Poorvu Trustee August 1982 Private investor; Harvard
(born 04/10/35) University Graduate School of
Business Administration,
Class of 1961 Adjunct
Professor in Entrepreneurship
Emeritus; CBL & Associates
Properties, Inc. (real estate
investment trust), Director
J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 09/23/38) (acquisition planning
specialists), President;
Wellfleet Investments
(investor in health care
companies), Managing General
Partner (since 1993);
Cambridge Nutraceuticals
(professional nutritional
products), Chief Executive
Officer (until May 2001)
Elaine R. Smith Trustee February 1992 Independent health care
(born 04/25/46) industry consultant
OFFICERS
Robert J. Manning(3) President and February 2004 Massachusetts Financial
(born 10/20/63) Trustee Services Company, Chief
Executive Officer, President,
Chief Investment Officer and
Director
James R. Bordewick, Jr.(3) Assistant Secretary September 1990 Massachusetts Financial
(born 03/06/59) and Assistant Clerk Services Company, Senior Vice
President and Associate
General Counsel
Jeffrey N. Carp(3) Secretary and Clerk September 2004 Massachusetts Financial
(born 12/01/56) Services Company, Senior Vice
President, General Counsel
and Secretary (since April
2004); Hale and Dorr LLP (law
firm) (prior to April 2004)
James F. DesMarais(3) Assistant Secretary September 2004 Massachusetts Financial
(born 03/09/61) and Assistant Clerk Services Company, Assistant
General Counsel
Stephanie A. DeSisto(3) Assistant Treasurer May 2003 Massachusetts Financial
(born 10/01/53) Services Company, Vice
President (since April 2003);
Brown Brothers Harriman &
Co., Senior Vice President
(November 2002 to April
2003); ING Groep N.V./Aeltus
Investment Management, Senior
Vice President (prior to
November 2002)
Robert R. Flaherty(3) Assistant Treasurer August 2000 Massachusetts Financial
(born 09/18/63) Services Company, Vice
President (since August
2000); UAM Fund Services,
Senior Vice President (prior
to August 2000)
Richard M. Hisey(3) Treasurer August 2002 Massachusetts Financial
(born 08/29/58) Services Company, Senior Vice
President (since July 2002);
The Bank of New York, Senior
Vice President (September
2000 to July 2002); Lexington
Global Asset Managers, Inc.,
Executive Vice President and
Chief Financial Officer
(prior to September 2000);
Lexington Funds, Chief
Financial Officer (prior to
September 2000)
Brian T. Hourihan(3) Assistant Secretary September 2004 Massachusetts Financial
(born 11/11/64) and Assistant Clerk Services Company, Vice
President, Senior Counsel and
Assistant Secretary (since
June 2004); Affiliated
Managers Group, Inc., Chief
Legal Officer/Centralized
Compliance Program (January
to April 2004); Fidelity
Research & Management
Company, Assistant General
Counsel (prior to January
2004)
Ellen Moynihan(3) Assistant Treasurer April 1997 Massachusetts Financial
(born 11/13/57) Services Company, Vice
President
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of
(born 03/07/44) Compliance Officer compliance services),
Principal (since June 2004);
CRA Business Strategies Group
(consulting services),
Executive Vice President
(April 2003 to June 2004);
David L. Babson & Co.
(investment adviser),
Managing Director, Chief
Administrative Officer and
Director (February 1997 to
March 2003)
James O. Yost(3) Assistant Treasurer September 1990 Massachusetts Financial
(born 06/12/60) Services Company, Senior Vice
President
- ----------------
(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served
continuously since appointment unless indicated otherwise.
(2) Directorships or trusteeships of companies required to report to the Securities and Exchange
Commission (i.e., "public companies").
(3) "Interested person" of MFS within the meaning of the Investment Company Act of 1940 (referred to
as the 1940 Act), which is the principle federal law governing investment companies like the fund.
The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
The Trust does not hold annual shareholder meetings for the purpose of electing Trustees, and
Trustees are not elected for fixed terms. The Trust will hold a shareholders" meeting in 2005 and at
least once every five years thereafter to elect Trustees. Each Trustee and officer holds office
until his or her successor is chosen and qualified or until his or her earlier death, resignation,
retirement or removal.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of
which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the
officers, with certain affiliates of MFS. Each Trustee serves as a board member of 109 funds within
the MFS Family of Funds.
The Statement of Additional Information contains further information about the Trustees and is
available without charge upon request by calling 1-800-225-2606.
- ------------------------------------------------------------------------------------------------------
INVESTMENT ADVISER CUSTODIANS
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 225 Franklin Street, Boston, MA 02110
02116-3741
JP Morgan Chase Bank
DISTRIBUTOR One Chase Manhattan Plaza
MFS Fund Distributors, Inc. New York, NY 10081
500 Boylston Street, Boston, MA
02116-3741 INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
PORTFOLIO MANAGERS Deloitte & Touche LLP
Margaret W. Adams 200 Berkeley Street, Boston, MA 02116
S. Irfan Ali
Stephen Pesek
QUARTERLY PORTFOLIO DISCLOSURE
Beginning with the fund's first and third fiscal quarters following this report, the fund will file
a complete schedule of portfolio holdings with the Securities and Exchange Commission (the
Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q
may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-0102
Information on the operation of the Public Reference Room may be obtained by calling the Commission
at 1-800-SEC-0330. The fund's Form N-Q is available on the EDGAR database on the Commission's
Internet website at http://www.sec.gov, and copies of this information may be obtained, upon payment
of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or
by writing the Public Reference Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at www.mfs.com.
- -------------------------------------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS
- -------------------------------------------------------------------------------
YOUR GOALS ARE IMPORTANT
MFS offers a complete range of investments and investment services to address
specific financial needs over time. When your investing goals change, you can
easily stay with MFS for the products you need, when you need them. Whether
you're investing for college or retirement expenses or for tax management or
estate planning, MFS will be there.
Ask your investment professional how MFS can help you move toward the goals
you've set.
MFS FAMILY OF FUNDS(R)
More than 50 portfolios offer domestic and international
equity and fixed-income investments across the full risk
spectrum
VARIABLE ANNUITIES
A selection of annuity products with advantages for
building and preserving wealth
MFS 401(k) AND IRA SUITES
Retirement plans for businesses and individuals
MFS COLLEGE SAVINGS PLANS
Investment products to help meet education expenses
MFS PRIVATE PORTFOLIO SERVICES
Investment advisory services that provide custom products
for high-net-worth individuals
Variable annuities are offered through MFS/Sun Life Financial Distributors,
Inc.
- -------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED)
In January 2005, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 2004.
The fund has the option to use equalization, which is a tax basis dividends
paid deduction from earnings and profits distributed to shareholders upon
redemption of shares.
- -------------------------------------------------------------------------------
CONTACT INFORMATION
INVESTOR INFORMATION
For information on MFS mutual funds, call your investment professional or, for
an information kit, call toll free: 1-800-225-2606 any business day from 8 a.m.
to 8 p.m. Eastern time.
A general description of the MFS funds" proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the About MFS section of mfs.com or by visiting the SEC's Web site at
http://www.sec. gov.
Information regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is
available without charge by visiting the Proxy Voting section of mfs.com or by
visiting the SEC's Web site at http://www.sec.gov.
INVESTOR SERVICE
Write to us at: MFS Service Center, Inc.
P.O. Box 55824
Boston, MA 02205-5824
Type of Information Phone number Hours, Eastern Time
- --------------------------------------------------------------------------------
General information 1-800-225-2606 8 a.m. to 8 p.m., any
business day
- --------------------------------------------------------------------------------
Speech- or hearing-impaired 1-800-637-6576 9 a.m. to 5 p.m., any
business day
- --------------------------------------------------------------------------------
Shares prices, account 1-800-MFS-TALK
balances exchanges (1-800-637-8255) 24 hours a day, 365 days a
or stock and bond outlooks touch-tone required year
- --------------------------------------------------------------------------------
WORLD WIDE WEB
Go to MFS.COM for a clear view of market events, investor education, account
access, and product and performance insights.
Go paperless with EDELIVERY: Join your fellow shareholders who are already
taking advantage of this great new benefit from MFS. With eDelivery, we send
you prospectuses, reports, and proxies electronically. You get timely
information without mailbox clutter (and help your fund save printing and
postage costs).
SIGN-UP instructions: If your account is registered with us, go to mfs.com, log
in to your account via MFS Access, and select the eDelivery sign up options.
If you own your MFS fund shares through a financial institution or through a
retirement plan, MFS TALK, MFS Access, and eDelivery may not be available to
you.
[logo] M F S(R)
INVESTMENT MANAGEMENT
(C) 2004 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116.
MMS-ANN-10/04 45M
MFS(R) Mutual Funds
ANNUAL REPORT 8/31/04
MFS(R) VALUE FUND
[graphic omitted]
A path for pursuing opportunity
[logo] M F S(R)
INVESTMENT MANAGEMENT
- --------------------------------------------------------------------------------
MFS(R) PRIVACY POLICY: A COMMITMENT TO YOU
- --------------------------------------------------------------------------------
Privacy is a concern for every investor today. At MFS Investment Management(R)
and the MFS funds, we take this concern very seriously. We want you to
understand our policies about every MFS investment product and service that we
offer and how we protect the nonpublic personal information of investors who
have a direct relationship with us and our wholly owned subsidiaries.
Throughout our business relationship, you provide us with personal information;
we maintain information and records about you, your investments, and the
services you use. Examples of the nonpublic personal information we maintain
include
o data from investment applications and other forms
o share balances and transactional history with us, our affiliates, or others
o facts from a consumer reporting agency
We do not disclose any nonpublic personal information about our customers or
former customers to anyone except as permitted by law. We may share information
with companies or financial institutions that perform marketing services on our
behalf or to other financial institutions with which we have joint marketing
arrangements.
Access to your nonpublic personal information is limited to appropriate
personnel who provide products, services, or information to you. We maintain
physical, electronic, and procedural safeguards that comply with applicable
federal regulations.
If you have any questions about MFS' privacy policy, please call 1-800-225-2606
any business day between 8 a.m. and 8 p.m. Eastern time.
Note: If you own MFS products or receive MFS services in the name of a third
party such as a bank or broker-dealer, their privacy policy may apply to you
instead of ours.
- --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK OR CREDIT UNION GUARANTEE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
- --------------------------------------------------------------------------------
MFS(R) VALUE FUND
The fund seeks capital appreciation and reasonable income.
- -------------------------------------------------------------------------------
A PROSPECTUS FOR ANY MFS PRODUCT CAN BE OBTAINED FROM YOUR INVESTMENT
PROFESSIONAL. YOU SHOULD READ THE PROSPECTUS CAREFULLY BEFORE INVESTING AS IT
CONTAINS COMPLETE INFORMATION ON THE FUND'S INVESTMENT OBJECTIVE(s), THE RISKS
ASSOCIATED WITH AN INVESTMENT IN THE FUND, AND THE FEES, CHARGES, AND EXPENSES
INVOLVED. THESE ELEMENTS, AS WELL AS OTHER INFORMATION CONTAINED IN THE
PROSPECTUS, SHOULD BE CONSIDERED CAREFULLY BEFORE INVESTING.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- ----------------------------------------------------
MFS PRIVACY POLICY
- ----------------------------------------------------
LETTER FROM THE CEO 1
- ----------------------------------------------------
MFS ORIGINAL RESEARCH(R) 5
- ----------------------------------------------------
MANAGEMENT REVIEW 6
- ----------------------------------------------------
PORTFOLIO COMPOSITION 9
- ----------------------------------------------------
PERFORMANCE SUMMARY 10
- ----------------------------------------------------
EXPENSE TABLE 14
- ----------------------------------------------------
PORTFOLIO OF INVESTMENTS 16
- ----------------------------------------------------
FINANCIAL STATEMENTS 22
- ----------------------------------------------------
NOTES TO FINANCIAL STATEMENTS 41
- ----------------------------------------------------
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 54
- ----------------------------------------------------
TRUSTEES AND OFFICERS 55
- ----------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS 59
- ----------------------------------------------------
FEDERAL TAX INFORMATION 60
- ----------------------------------------------------
ASSET ALLOCATION 61
- ----------------------------------------------------
CONTACT INFORMATION BACK COVER
- --------------------------------------------------------------------------------
LETTER FROM THE CEO
- --------------------------------------------------------------------------------
Dear Shareholders,
[Photo of Robert J. Manning]
Our firm was built on the strength of MFS Original Research(R), our in-depth
analysis of every security we consider for our portfolios. We've been honing
this process since 1932, when we created one of the mutual fund industry's first
research departments. And we continue to fine-tune this process so that we can
provide strong and consistent long-term investment performance to help you
achieve your financial goals.
While we have achieved strong investment performance in many of our portfolios,
our goal is to achieve the same strong results across all asset classes. To
ensure that our portfolio teams are doing the best possible job for our firm's
clients and shareholders, I am focusing the vast majority of my time on the
three key elements that I believe truly differentiate MFS from its competitors:
people, process, and culture.
PEOPLE
Our people have always been our most valuable resource. Our philosophy is to
deliver consistent, repeatable investment results by hiring the most talented
investors in our industry. We recruit from the nation's top business schools and
hire experienced analysts, both domestically and around the globe.
Our analysts are the engine that powers our entire investment team because their
recommendations have a direct impact on the investment performance of our
portfolios. To demonstrate our ongoing commitment in this area, we increased the
number of equity analysts at MFS from less than 40 at the end of 2000 to about
50 in June 2004. During that same period, we doubled the average investment
experience of our domestic equity analysts, in part by recruiting more seasoned
analysts to the firm. Moreover, our international network of investment
personnel now spans key regions of the world with offices in London, Mexico
City, Singapore, and Tokyo, as well as Boston.
One of the major advantages that MFS has over many of its competitors is that
the position of research analyst is a long-term career for many members of our
team, not simply a steppingstone toward becoming a portfolio manager. We have
worked to elevate the stature of the analyst position to be on par with that of
a portfolio manager. In fact, an exceptional research analyst has the
opportunity to earn more at MFS than some portfolio managers.
At the same time, we look within the firm to promote talented analysts who
choose a path toward becoming a portfolio manager. We rarely hire portfolio
managers from our competitors because we believe the best investors are those
steeped in the MFS process and culture. In the past few months, we have
identified three senior research analysts who will assume roles on the
management teams of several of our larger portfolios. MFS is fortunate to have a
deep bench of talented investment personnel, and we welcome the opportunity to
put their skills to work for our clients.
PROCESS
MFS was built on the strength of its bottom-up approach to researching
securities. We have enhanced the mentoring process for our research analysts by
calling on several of our most seasoned portfolio managers to supplement the
work of Director of Global Equity Research David A. Antonelli. These portfolio
managers are taking a special interest in developing the careers of our research
analysts and strengthening our investment process. Kenneth J. Enright of our
value equity group is working with a team of domestic analysts; David E.
Sette-Ducati of our small- and mid-cap equity team is working with analysts
concentrating on small- and mid-cap companies; and Barnaby Wiener of our
international equity team in London heads the European equity research team.
We have combined the bottom-up approach of our research process with a top- down
approach to risk controls on portfolio composition. We have a very strong
quantitative team under the leadership of industry veteran Deborah H. Miller,
who represents the equity management department on the Management Committee of
the firm. Quantitative analysis helps us generate investment ideas and, more
importantly, assess the appropriate level of risk for each portfolio. The risk
assessment is designed to assure that each portfolio operates within its
investment objectives.
Additionally, we have increased the peripheral vision of our investment
personnel across asset classes through the collaboration of our Equity, Fixed
Income, Quantitative Analysis, and Risk Management teams. We recently codified
this key aspect of our culture by forming an Investment Management Committee,
composed of key members of these teams. This committee will work to ensure that
all teams are sharing information, actively debating investment ideas, and
creating a unified investment team.
CULTURE
Teamwork is at the heart of our ability to deliver consistent and competitive
investment performance over time. At MFS, each member of our team is involved in
our success; we have no superstars. The collaborative nature of our process
works to assure a consistent investment approach across all of our products and
provides a high level of continuity in portfolio management because our
investment performance never depends on the contributions of just a single
individual. Our culture is based on an environment of teamwork that allows our
investment personnel to be successful. In turn, we demand superior investment
results from every member of our team.
We have created a meritocracy at our firm based on investment results. We hold
all of our portfolio managers accountable for the performance of their
portfolios and their contributions to the team. We also track the equity and
fixed-income ratings of our analysts so we can evaluate them based on the
performance of their recommendations. We align bonus compensation to investment
performance by weighting rewards to those who have created the greatest
long-term benefit for our shareholders and who contribute most successfully to
the Original Research(SM) process.
The strength of our culture has resulted in a tremendous amount of stability.
Although we have dismissed members of our team whose performance did not meet
MFS' high standards, only one portfolio manager has voluntarily left the firm
over the past six months, based on a decision to retire from the industry.
In short, we can help you achieve your financial goals by hiring talented
people, following a disciplined process, and maintaining our firm's unique
culture. The enhancements described in this letter reflect the collaborative
spirit and the depth of resources in our investment teams.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R)
September 20, 2004
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed.
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MFS ORIGINAL RESEARCH(R)
- --------------------------------------------------------------------------------
THE MFS(R) DIFFERENCE
For 80 years MFS has been offering investors clear paths to pursuing specific
investment objectives. Today, millions of individuals and thousands of
institutions all over the world look to MFS to manage their assets with insight
and care.
Our success, we believe, has to do with the fact that we see investors as people
with plans, not just dollars to invest.
When you invest with MFS, you invest with a company dedicated to helping you
realize your long-term financial goals.
INVESTORS CHOOSE MFS FOR OUR
o global asset management expertise across all asset classes
o time-tested money management process for pursuing consistent results
o full spectrum of investment products backed by MFS Original Research(R)
o resources and services that match real-life needs
TURNING INFORMATION INTO OPPORTUNITY
Sound investments begin with sound information. MFS has been doing its own
research and analyzing findings in-house for decades. The process we use to
uncover opportunity is called MFS Original Research(R).
MFS ORIGINAL RESEARCH INVOLVES
o meeting with the management of 3,000 companies each year to assess their
business plans and the managers' ability to execute those plans
o making onsite visits to more than 2,000 companies annually to gain first-hand
knowledge of their operations and products
o analyzing financial statements and balance sheets
o talking extensively with companies' customers and competitors
o developing our own proprietary estimates of companies' earnings
- --------------------------------------------------------------------------------
MANAGEMENT REVIEW
- --------------------------------------------------------------------------------
MARKET ENVIRONMENT
The recovery in global stock markets that began in the spring of 2003 continued
into the first quarter of 2004. Business capital expenditures, which had been
weak for several years, began to trend upward in the latter half of 2003,
adding support to a recovery that had been fueled largely by consumer spending.
In the spring and summer of 2004, many measures of global economic growth,
including employment, corporate spending, and earnings growth, continued to
improve. But stock prices made only modest gains as investors, in our view,
became increasingly concerned about higher interest rates, rising oil prices, a
slowdown in corporate earnings growth, and continued unrest in Iraq. The U.S.
Federal Reserve Board raised interest rates in June and again in August, and
set expectations for an ongoing series of modest rate hikes. A pullback in
equity markets near the end of the period was triggered, we believe, by
indications from a number of bellwether companies that earnings growth was
starting to slow.
DETRACTORS FROM PERFORMANCE
Stock selection and, to a lesser extent, our underweighting in the strong-
performing financial services sector were the primary causes of the fund's
underperformance relative to its benchmark during the period.
Some individual detractors from the financial services group included the asset
manager Mellon Financial Corp., and the investment bank and asset manager
Goldman Sachs Group.
Stock selection in the leisure sector held back the fund's relative performance
as well. The primary individual detractors in the leisure group were the media
conglomerate Viacom and the Tribune Co., a newspaper publisher and owner of
local TV stations.
The fund's cash position, which averaged less than 3% for the period, also
detracted from its relative return. As with nearly all mutual funds, this fund
holds some cash to buy new holdings and maintain liquidity. In a period when
large-cap U.S. value stocks - as measured by the Russell 1000 Value Index -
rose sharply, holding cash hurt performance relative to the index, which has no
cash position.
Individual stocks in other sectors that hurt relative performance included the
railroad freight carrier Union Pacific and the energy conglomerates Exxon Mobil
and ChevronTexaco. By the end of the period, the fund no longer owned
ChevronTexaco.
CONTRIBUTORS TO PERFORMANCE
On the positive side, the decision to underweight the relatively poor-
performing technology sector proved helpful. To a lesser extent, stock
selection in the technology sector also contributed to the fund's relative
return. Top individual contributors within the technology group included
Motorola Inc., a manufacturer of wireless handsets and wireless infrastructure
equipment; the telecommunications equipment company Nortel Networks Corp.; and
Hewlett-Packard Co., a manufacturer of computer hardware and provider of
information technology services. Both Motorola and Nortel were sold out of the
fund by the end of the period.
Strong stock selection in the health care sector helped relative performance,
as well. In particular, underweighting the poor-performing pharmaceutical firm
Merck & Co. made a positive contribution to the fund's relative performance.
Another major contributor to relative returns was our stock selection in
utilities and communications, with the strong performance of Texas-based energy
supplier TXU Corp. leading the way for the sector.
Additionally, relative performance was helped by our overweighting the above-
average-performing consumer staples sector and our stock selection within the
sector. A strong individual contributor in the group was Kimberly-Clark Corp.,
the world's top maker of personal paper products.
While financial services was one of the worst-performing sectors for the
portfolio during the period, our investment in the regional bank FleetBoston
Financial proved to be the strongest overall contributor to the fund's relative
performance. Fleet was acquired by Bank of America during the period.
Other top individual contributors to the fund's relative performance were the
Swiss agricultural chemical firm Syngenta AG, the energy conglomerate BP PLC,
and the aerospace firm Lockheed Martin Corp. Neither Syngenta nor BP PLC are
held in the index.
Respectfully,
/s/ Edward B. Baldini /s/ Steven R. Gorham
Edward B. Baldini Steven R. Gorham
Portfolio Manager Portfolio Manager
Note to Shareholders: Lisa Nurme retired from MFS on May 31, 2004. Effective
July 1, 2004, Edward Baldini became a co-manager of the fund with Mr. Gorham.
The views expressed in this report are those of the portfolio managers only
through the end of the period of the report as stated on the cover and do not
necessarily reflect the views of MFS or any other person in the MFS
organization. These views are subject to change at any time based on market and
other conditions, and MFS disclaims any responsibility to update such views.
These views may not be relied upon as investment advice or as an indication of
trading intent on behalf of any MFS fund. References to specific securities are
not recommendations of such securities and may not be representative of any MFS
fund's current or future investments.
The fund will charge a 2% redemption fee on proceeds from Class A, B, C, and I
shares redeemed or exchanged within 5 business days of acquiring (either by
purchasing or exchanging) fund shares. See the prospectus for complete details.
- -------------------------------------------------------------------------------
Visit mfs.com for our latest economic and investment outlook.
o Under Updates & Announcements, click Week in Review for a summary of recent
investment-related news.
o From Week in Review, link to MFS Global Perspective for our current view of
the world.
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- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
-------------------------------------------------------
PORTFOLIO STRUCTURE
-------------------------------------------------------
Stocks 97.5%
Cash and Other Net Assets 2.5%
-------------------------------------------------------
TOP 5 SECTOR WEIGHTINGS
-------------------------------------------------------
Financial Services 28.7%
-------------------------------------------------------
Utilities & Communications 11.1%
-------------------------------------------------------
Energy 10.8%
-------------------------------------------------------
Consumer Staples 9.8%
-------------------------------------------------------
Basic Materials 9.5%
-------------------------------------------------------
-------------------------------------------------------
TOP 10 HOLDINGS
-------------------------------------------------------
BANK OF AMERICA CORP. 4.3%
-------------------------------------------------------
CITIGROUP, INC. 3.9%
-------------------------------------------------------
FANNIE MAE 2.5%
-------------------------------------------------------
SUNTRUST BANKS, INC. 2.4%
-------------------------------------------------------
ALTRIA GROUP, INC. 2.2%
-------------------------------------------------------
VERIZON COMMUNICATIONS, INC. 2.2%
-------------------------------------------------------
GOLDMAN SACHS GROUP, INC. 2.2%
-------------------------------------------------------
JOHNSON & JOHNSON 2.1%
-------------------------------------------------------
CONOCOPHILLIPS 2.1%
-------------------------------------------------------
BP PLC 2.0%
-------------------------------------------------------
Percentages are based on total net assets as of 8/31/04.
The portfolio is actively managed, and current holdings may be different.
- -------------------------------------------------------------------------------
PERFORMANCE SUMMARY THROUGH 8/31/04
- -------------------------------------------------------------------------------
The following chart illustrates the historical performance of the fund's
original share class in comparison to its benchmark. Performance results
include the deduction of the maximum applicable sales charge and reflect the
percentage change in net asset value, including reinvestment of dividends and
capital gains distributions. Benchmark comparisons are unmanaged and do not
reflect any fees or expenses. The performance of other share classes will be
greater than or less than the line shown. (See Notes to Performance Summary.)
VISIT MFS.COM FOR THE MOST RECENT MONTH-END PERFORMANCE RESULTS. MARKET
VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND CURRENT
PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE
OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. ANY
HIGH SHORT-TERM RETURNS MAY BE AND LIKELY WERE ATTRIBUTABLE TO RECENT FAVORABLE
MARKET CONDITIONS, WHICH MAY NOT BE REPEATED. THE PERFORMANCE SHOWN DOES NOT
REFLECT THE DEDUCTION OF TAXES, IF ANY, THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from the commencement of the fund's investment operations,
January 2, 1996, through August 31, 2004. Index information is from January 2,
1996.)
MFS Value Russell 1000
Fund -- Class A Growth Index
1/96 $ 9,425 $10,000
8/96 10,433 10,638
8/98 15,772 15,421
8/00 22,727 20,893
8/02 21,190 17,946
8/04 26,364 23,542
TOTAL RETURNS
- --------------------
Average annual
without sales charge
- --------------------
Class
Share class inception date 1-yr 3-yr 5-yr Life*
- ------------------------------------------------------------------------------
A 1/2/96 17.13% 3.98% 6.11% 12.61%
- ------------------------------------------------------------------------------
B 11/4/97 16.35% 3.30% 5.42% 12.04%
- ------------------------------------------------------------------------------
C 11/5/97 16.32% 3.29% 5.42% 12.04%
- ------------------------------------------------------------------------------
I 1/2/97 17.47% 4.32% 6.47% 12.86%
- ------------------------------------------------------------------------------
R1 12/31/02 16.92% 3.90% 6.06% 12.58%
- ------------------------------------------------------------------------------
R2 10/31/03 16.76% 3.87% 6.04% 12.57%
- ------------------------------------------------------------------------------
529A 7/31/02 16.63% 3.75% 5.97% 12.52%
- ------------------------------------------------------------------------------
529B 7/31/02 16.03% 3.33% 5.71% 12.36%
- ------------------------------------------------------------------------------
529C 7/31/02 16.03% 3.34% 5.72% 12.37%
- ------------------------------------------------------------------------------
- --------------------
Average annual
- --------------------
Comparative benchmarks
- ------------------------------------------------------------------------------
Average equity income fund+ 14.10% 2.48% 2.38% 7.98%
- ------------------------------------------------------------------------------
Russell 1000 Value Index# 17.52% 4.45% 3.25% 10.38%
- ------------------------------------------------------------------------------
- --------------------
Average annual
with sales charge
- --------------------
Share class
- ------------------------------------------------------------------------------
A 10.40% 1.95% 4.86% 11.84%
- ------------------------------------------------------------------------------
B 12.35% 2.35% 5.10% 12.04%
- ------------------------------------------------------------------------------
C 15.32% 3.29% 5.42% 12.04%
- ------------------------------------------------------------------------------
529A 9.93% 1.72% 4.72% 11.76%
- ------------------------------------------------------------------------------
529B 12.03% 2.39% 5.39% 12.36%
- ------------------------------------------------------------------------------
529C 15.03% 3.34% 5.72% 12.37%
- ------------------------------------------------------------------------------
I, R1, and R2 Class shares do not have a sales charge. Please see Notes to
Performance Summary for more details.
- --------------------
Cumulative
without sales charge
- --------------------
Share class
- ------------------------------------------------------------------------------
A 17.13% 12.42% 34.51% 179.73%
- ------------------------------------------------------------------------------
B 16.35% 10.23% 30.21% 167.78%
- ------------------------------------------------------------------------------
C 16.32% 10.20% 30.23% 167.75%
- ------------------------------------------------------------------------------
I 17.47% 13.53% 36.83% 185.17%
- ------------------------------------------------------------------------------
R1 16.92% 12.15% 34.18% 179.04%
- ------------------------------------------------------------------------------
R2 16.76% 12.07% 34.08% 178.84%
- ------------------------------------------------------------------------------
529A 16.63% 11.68% 33.62% 177.89%
- ------------------------------------------------------------------------------
529B 16.03% 10.33% 32.00% 174.51%
- ------------------------------------------------------------------------------
529C 16.03% 10.36% 32.03% 174.58%
- ------------------------------------------------------------------------------
* For the period from the commencement of the fund's investment operations,
January 2, 1996, through August 31, 2004. Index information is from January
2, 1996.
+ Source: Lipper Inc., an independent firm that reports mutual fund
performance.
# Source: Bloomberg.
INDEX DEFINITION
RUSSELL 1000 VALUE INDEX - measures the performance of those companies in the
Russell 1000 index with lower price to book and forecasted growth values. The
Russell 1000 consists of the 1000 largest market cap companies in the Russell
3000 index.
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
The performance shown reflects a non-recurring accrual made to the fund on July
28, 2004, relating to MFS' revenue sharing settlement with the Securities and
Exchange Commission, without which the performance would have been lower.
Class A and 529A results, including sales charge, reflect the deduction of the
maximum 5.75% sales charge. Class B and 529B results, including sales charge,
reflect the deduction of the applicable contingent deferred sales charge
(CDSC), which declines over six years from 4% to 0%. Class C and 529C results
including sales charge (assuming redemption within one year from the end of the
calendar month of purchase), reflect the deduction of the 1% CDSC. Class I
shares have no sales charges and are available only to certain investors. Class
R1 and R2 shares have no sales charges and are available only to certain
retirement plans. Class 529A, 529B, and 529C shares are only available in
conjunction with qualified tuition programs, such as the MFS 529 Savings Plan.
Performance for share classes offered after Class A shares includes the
performance of the fund's Class A shares for periods prior to their offering.
This blended class performance has been adjusted to take into account
differences in sales loads, if any, applicable to these share classes, but has
not been adjusted to take into account differences in class specific operating
expenses (such as Rule 12b-1 fees). Compared to performance these share classes
would have experienced had they been offered for the entire period, the use of
blended performance generally results in higher performance for share classes
with higher operating expenses than the initial share class to which it is
blended, and lower performance for share classes with lower operating expenses
than the initial share class to which it is blended.
Performance results reflect any applicable expense subsidies and waivers in
effect during the periods shown. Without such subsidies and waivers, the fund's
performance results would be less favorable. Please see the prospectus and
financial statements for complete details. There also is an additional annual
fee, which is detailed in the program description, on qualified tuition
programs. If this fee were reflected the performance for Class 529 shares would
have been lower.
KEY RISK CONSIDERATIONS
The portfolio may invest in foreign and/or emerging markets securities, which
are more susceptible to risks relating to interest rates, currency exchange
rates, economic, and political conditions.
The portfolio's value will vary daily since its investments will fluctuate in
response to issuer, market, regulatory, economic, or political developments.
Because stocks tend to be more volatile than some other investments, such as
bonds, the more assets a fund dedicates to stocks, generally the more volatile
the portfolio's value will be. Historically, stocks have outperformed bonds
over time. The portfolio's investment risks should be considered prior to
investing.
Please see the prospectus for further information regarding these and other
risk considerations.
- --------------------------------------------------------------------------------
EXPENSE TABLE
- --------------------------------------------------------------------------------
FUND EXPENSES BORNE BY SHAREHOLDERS DURING THE PERIOD FROM MARCH 1, 2004,
THROUGH AUGUST 31, 2004.
As a shareholder of the fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on certain purchase or redemption
payments and redemption fees on certain exchanges and redemptions, and (2)
ongoing costs, including management fees; distribution and service (12b-1)
fees; and other fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of
the period and held for the entire period, March 1, 2004 through August 31,
2004.
ACTUAL EXPENSES
The first line for each share class in the table below provides information
about actual account values and actual expenses. You may use the information in
this line, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the first line under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during
this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line for each share class in the table below provides information
about hypothetical account values and hypothetical expenses based on the fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption fees. Therefore, the second line for each share
class in the table is useful in comparing ongoing costs only, and will not help
you determine the relative total costs of owning different funds. In addition,
if these transactional costs were included, your costs would have been higher.
- --------------
Share Class
- --------------
- -------------------------------------------------------------------------------
Expenses
Paid During
Annualized Beginning Ending Period**
Expense Account Value Account Value* 3/01/04-
Ratio 3/01/04 8/31/04 8/31/04
- -------------------------------------------------------------------------------
Actual 1.17% $1,000 $1,000 $5.90
A -------------------------------------------------------------------------
Hypothetical 1.17% $1,000 $1,019 $5.95
- -------------------------------------------------------------------------------
Actual 1.81% $1,000 $997 $9.11
B -------------------------------------------------------------------------
Hypothetical 1.81% $1,000 $1,016 $9.20
- -------------------------------------------------------------------------------
Actual 1.81% $1,000 $997 $9.11
C -------------------------------------------------------------------------
Hypothetical 1.81% $1,000 $1,016 $9.20
- -------------------------------------------------------------------------------
Actual 0.82% $1,000 $1,002 $4.14
I -------------------------------------------------------------------------
Hypothetical 0.82% $1,000 $1,021 $4.18
- -------------------------------------------------------------------------------
Actual 1.32% $1,000 $999 $6.65
R1 -------------------------------------------------------------------------
Hypothetical 1.32% $1,000 $1,018 $6.72
- -------------------------------------------------------------------------------
Actual 1.59% $1,000 $998 $8.01
R2 -------------------------------------------------------------------------
Hypothetical 1.59% $1,000 $1,017 $8.08
- -------------------------------------------------------------------------------
Actual 1.42% $1,000 $998 $7.15
529A -------------------------------------------------------------------------
Hypothetical 1.42% $1,000 $1,018 $7.22
- -------------------------------------------------------------------------------
Actual 2.06% $1,000 $996 $10.36
529B -------------------------------------------------------------------------
Hypothetical 2.06% $1,000 $1,015 $10.46
- -------------------------------------------------------------------------------
Actual 2.06% $1,000 $996 $10.36
529C -------------------------------------------------------------------------
Hypothetical 2.06% $1,000 $1,015 $10.46
- -------------------------------------------------------------------------------
* Ending account value reflects each class' ending account value assuming the
actual class return per year before expenses (Actual) and a hypothetical 5%
class return per year before expenses (Hypothetical).
** Expenses paid is equal to each class' annualized expense ratio for the most
recent six month period, as shown above, multiplied by the average account
value over the period, multiplied by the number of days in the period,
divided by the number of days in the year. Expenses paid do not include any
applicable sales charges (loads) or redemption fees. If these transaction
costs had been included, your costs would have been higher.
- -------------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS - 8/31/04
- -------------------------------------------------------------------------------------------------
The Portfolio of Investments is a complete list of all securities owned by your fund. It is
categorized by broad-based asset classes.
Stocks - 97.5%
- -------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
U.S. Stocks - 88.2%
- -------------------------------------------------------------------------------------------------
Aerospace - 3.3%
- -------------------------------------------------------------------------------------------------
Honeywell International, Inc. 474,010 $17,054,880
- -------------------------------------------------------------------------------------------------
Lockheed Martin Corp.^ 1,952,300 104,994,694
- -------------------------------------------------------------------------------------------------
Northrop Grumman Corp.^ 1,625,000 83,931,250
- -------------------------------------------------------------------------------------------------
$205,980,824
- -------------------------------------------------------------------------------------------------
Banks & Credit Companies - 18.8%
- -------------------------------------------------------------------------------------------------
American Express Co. 1,503,400 $75,200,068
- -------------------------------------------------------------------------------------------------
Bank of America Corp. 5,812,294 261,436,984
- -------------------------------------------------------------------------------------------------
Citigroup, Inc. 5,169,300 240,785,994
- -------------------------------------------------------------------------------------------------
Fannie Mae 2,044,920 152,244,294
- -------------------------------------------------------------------------------------------------
J.P. Morgan Chase & Co. 1,879,756 74,400,742
- -------------------------------------------------------------------------------------------------
MBNA Corp. 968,600 23,382,004
- -------------------------------------------------------------------------------------------------
Mellon Financial Corp.^ 3,481,000 100,461,660
- -------------------------------------------------------------------------------------------------
PNC Financial Services Group, Inc. 1,477,400 79,292,058
- -------------------------------------------------------------------------------------------------
SunTrust Banks, Inc.^ 2,127,330 144,871,173
- -------------------------------------------------------------------------------------------------
$1,152,074,977
- -------------------------------------------------------------------------------------------------
Broadcast & Cable TV - 2.3%
- -------------------------------------------------------------------------------------------------
Comcast Corp., "Special A"* 3,214,800 $89,210,700
- -------------------------------------------------------------------------------------------------
Cox Communications, Inc., "A"^* 742,700 24,405,122
- -------------------------------------------------------------------------------------------------
Time Warner, Inc.* 1,628,700 26,629,245
- -------------------------------------------------------------------------------------------------
$140,245,067
- -------------------------------------------------------------------------------------------------
Brokerage & Asset Managers - 3.9%
- -------------------------------------------------------------------------------------------------
Franklin Resources, Inc.^ 372,300 $19,832,421
- -------------------------------------------------------------------------------------------------
Goldman Sachs Group, Inc. 1,479,800 132,664,070
- -------------------------------------------------------------------------------------------------
Merrill Lynch & Co., Inc. 1,723,000 87,993,610
- -------------------------------------------------------------------------------------------------
$240,490,101
- -------------------------------------------------------------------------------------------------
Business Services - 0.2%
- -------------------------------------------------------------------------------------------------
Fiserv, Inc.^* 360,000 $12,520,800
- -------------------------------------------------------------------------------------------------
Chemicals - 6.5%
- -------------------------------------------------------------------------------------------------
Air Products & Chemicals, Inc.^ 1,343,368 $70,365,616
- -------------------------------------------------------------------------------------------------
Dow Chemical Co. 1,428,600 61,158,366
- -------------------------------------------------------------------------------------------------
E.I. du Pont de Nemours & Co. 2,268,600 95,871,036
- -------------------------------------------------------------------------------------------------
Monsanto Co. 1,514,500 55,430,700
- -------------------------------------------------------------------------------------------------
PPG Industries, Inc. 1,674,200 100,066,934
- -------------------------------------------------------------------------------------------------
Praxair, Inc.^ 335,400 13,610,532
- -------------------------------------------------------------------------------------------------
$396,503,184
- -------------------------------------------------------------------------------------------------
Computer Software - Systems - 0.9%
- -------------------------------------------------------------------------------------------------
Hewlett-Packard Co.^ 1,524,500 $27,273,305
- -------------------------------------------------------------------------------------------------
International Business Machines Corp. 358,700 30,378,303
- -------------------------------------------------------------------------------------------------
$57,651,608
- -------------------------------------------------------------------------------------------------
Construction - 0.8%
- -------------------------------------------------------------------------------------------------
Masco Corp.^ 1,468,300 $47,176,479
- -------------------------------------------------------------------------------------------------
Consumer Goods & Services - 1.9%
- -------------------------------------------------------------------------------------------------
Colgate-Palmolive Co. 105,700 $5,707,800
- -------------------------------------------------------------------------------------------------
Kimberly-Clark Corp.^ 1,660,500 110,755,350
- -------------------------------------------------------------------------------------------------
$116,463,150
- -------------------------------------------------------------------------------------------------
Containers - 0.4%
- -------------------------------------------------------------------------------------------------
Smurfit-Stone Container Corp.^* 1,458,000 $25,864,920
- -------------------------------------------------------------------------------------------------
Electrical Equipment - 1.8%
- -------------------------------------------------------------------------------------------------
Cooper Industries Ltd., "A"^ 629,300 $34,749,946
- -------------------------------------------------------------------------------------------------
Emerson Electric Co. 1,233,500 76,785,375
- -------------------------------------------------------------------------------------------------
$111,535,321
- -------------------------------------------------------------------------------------------------
Electronics - 0.3%
- -------------------------------------------------------------------------------------------------
Novellus Systems, Inc.^* 663,100 $16,199,533
- -------------------------------------------------------------------------------------------------
Energy - Independent - 2.2%
- -------------------------------------------------------------------------------------------------
Devon Energy Corp. 395,610 $25,639,484
- -------------------------------------------------------------------------------------------------
EOG Resources, Inc.^ 485,200 28,030,004
- -------------------------------------------------------------------------------------------------
Unocal Corp.^ 2,228,186 83,200,465
- -------------------------------------------------------------------------------------------------
$136,869,953
- -------------------------------------------------------------------------------------------------
Energy - Integrated - 3.9%
- -------------------------------------------------------------------------------------------------
ConocoPhillips 1,694,000 $126,084,420
- -------------------------------------------------------------------------------------------------
Exxon Mobil Corp. 2,412,670 111,224,087
- -------------------------------------------------------------------------------------------------
$237,308,507
- -------------------------------------------------------------------------------------------------
Entertainment - 2.0%
- -------------------------------------------------------------------------------------------------
Viacom, Inc., "B"^ 3,173,843 $105,720,710
- -------------------------------------------------------------------------------------------------
Walt Disney Co.^ 651,300 14,621,685
- -------------------------------------------------------------------------------------------------
$120,342,395
- -------------------------------------------------------------------------------------------------
Food & Non-Alcoholic Beverages - 5.2%
- -------------------------------------------------------------------------------------------------
Archer Daniels Midland Co.^ 5,788,315 $92,439,390
- -------------------------------------------------------------------------------------------------
H.J. Heinz Co.^ 1,419,900 53,828,409
- -------------------------------------------------------------------------------------------------
Kellogg Co.^ 2,308,000 96,889,840
- -------------------------------------------------------------------------------------------------
PepsiCo, Inc. 366,376 18,318,800
- -------------------------------------------------------------------------------------------------
Sara Lee Corp. 2,706,700 59,899,271
- -------------------------------------------------------------------------------------------------
$321,375,710
- -------------------------------------------------------------------------------------------------
Forest & Paper Products - 1.8%
- -------------------------------------------------------------------------------------------------
Bowater, Inc.^ 574,000 $20,623,820
- -------------------------------------------------------------------------------------------------
International Paper Co.^ 2,282,500 91,345,650
- -------------------------------------------------------------------------------------------------
$111,969,470
- -------------------------------------------------------------------------------------------------
Insurance - 6.0%
- -------------------------------------------------------------------------------------------------
AFLAC, Inc. 577,900 $23,173,790
- -------------------------------------------------------------------------------------------------
Allstate Corp. 1,688,590 79,718,334
- -------------------------------------------------------------------------------------------------
Chubb Corp.^ 426,900 29,033,469
- -------------------------------------------------------------------------------------------------
Hartford Financial Services Group, Inc.^ 869,755 53,194,216
- -------------------------------------------------------------------------------------------------
Marsh & McLennan Cos., Inc.^ 319,100 14,260,579
- -------------------------------------------------------------------------------------------------
MetLife, Inc.^ 3,031,210 112,912,573
- -------------------------------------------------------------------------------------------------
St. Paul Travelers Cos., Inc. 1,619,674 56,186,491
- -------------------------------------------------------------------------------------------------
$368,479,452
- -------------------------------------------------------------------------------------------------
Leisure & Toys - 0.3%
- -------------------------------------------------------------------------------------------------
Hasbro, Inc.^ 883,000 $16,361,990
- -------------------------------------------------------------------------------------------------
Machinery & Tools - 0.7%
- -------------------------------------------------------------------------------------------------
Deere & Co. 675,516 $42,739,897
- -------------------------------------------------------------------------------------------------
Medical Equipment - 0.7%
- -------------------------------------------------------------------------------------------------
Baxter International, Inc. 979,300 $29,907,822
- -------------------------------------------------------------------------------------------------
Guidant Corp.^ 213,300 12,755,340
- -------------------------------------------------------------------------------------------------
$42,663,162
- -------------------------------------------------------------------------------------------------
Natural Gas - Distribution - 0.7%
- -------------------------------------------------------------------------------------------------
KeySpan Corp.^ 597,600 $22,768,560
- -------------------------------------------------------------------------------------------------
National Fuel Gas Co.^ 708,232 18,966,453
- -------------------------------------------------------------------------------------------------
$41,735,013
- -------------------------------------------------------------------------------------------------
Oil Services - 1.6%
- -------------------------------------------------------------------------------------------------
GlobalSantaFe Corp. 495,600 $13,817,328
- -------------------------------------------------------------------------------------------------
Noble Corp.* 1,343,150 54,021,493
- -------------------------------------------------------------------------------------------------
Schlumberger Ltd.^ 465,910 28,793,238
- -------------------------------------------------------------------------------------------------
$96,632,059
- -------------------------------------------------------------------------------------------------
Pharmaceuticals - 5.5%
- -------------------------------------------------------------------------------------------------
Abbott Laboratories 1,845,500 $76,938,895
- -------------------------------------------------------------------------------------------------
Eli Lilly & Co. 291,500 18,495,675
- -------------------------------------------------------------------------------------------------
Johnson & Johnson 2,231,900 129,673,390
- -------------------------------------------------------------------------------------------------
Merck & Co., Inc. 462,900 20,816,613
- -------------------------------------------------------------------------------------------------
Pfizer, Inc. 1,656,350 54,112,955
- -------------------------------------------------------------------------------------------------
Wyeth 1,122,400 41,046,168
- -------------------------------------------------------------------------------------------------
$341,083,696
- -------------------------------------------------------------------------------------------------
Printing & Publishing - 1.2%
- -------------------------------------------------------------------------------------------------
Tribune Co.^ 1,757,944 $73,394,162
- -------------------------------------------------------------------------------------------------
Railroad & Shipping - 1.6%
- -------------------------------------------------------------------------------------------------
Burlington Northern Santa Fe Corp. 1,522,300 $54,498,340
- -------------------------------------------------------------------------------------------------
Union Pacific Corp. 770,900 44,026,099
- -------------------------------------------------------------------------------------------------
$98,524,439
- -------------------------------------------------------------------------------------------------
Restaurants - 0.6%
- -------------------------------------------------------------------------------------------------
McDonald's Corp.^ 1,377,600 $37,222,752
- -------------------------------------------------------------------------------------------------
Specialty Stores - 1.7%
- -------------------------------------------------------------------------------------------------
Gap, Inc.^ 3,030,000 $56,782,200
- -------------------------------------------------------------------------------------------------
TJX Cos., Inc.^ 2,307,900 48,835,164
- -------------------------------------------------------------------------------------------------
$105,617,364
- -------------------------------------------------------------------------------------------------
Telephone Services - 4.1%
- -------------------------------------------------------------------------------------------------
SBC Communications, Inc.^ 354,900 $9,152,871
- -------------------------------------------------------------------------------------------------
Sprint FON Group^ 5,557,700 109,375,536
- -------------------------------------------------------------------------------------------------
Verizon Communications, Inc.^ 3,381,200 132,712,100
- -------------------------------------------------------------------------------------------------
$251,240,507
- -------------------------------------------------------------------------------------------------
Tobacco - 2.2%
- -------------------------------------------------------------------------------------------------
Altria Group, Inc.^ 2,717,630 $133,027,989
- -------------------------------------------------------------------------------------------------
Utilities - Electric Power - 5.1%
- -------------------------------------------------------------------------------------------------
Ameren Corp.^ 38,360 $1,794,864
- -------------------------------------------------------------------------------------------------
Cinergy Corp.^ 878,500 35,561,680
- -------------------------------------------------------------------------------------------------
Dominion Resources, Inc.^ 1,233,200 80,022,348
- -------------------------------------------------------------------------------------------------
Energy East Corp.^ 1,339,200 32,636,304
- -------------------------------------------------------------------------------------------------
Entergy Corp.^ 679,900 40,997,970
- -------------------------------------------------------------------------------------------------
Exelon Corp.^ 465,000 17,135,250
- -------------------------------------------------------------------------------------------------
FirstEnergy Corp.^ 395,930 15,932,223
- -------------------------------------------------------------------------------------------------
NSTAR^ 20,940 1,021,872
- -------------------------------------------------------------------------------------------------
PPL Corp.^ 619,070 29,610,118
- -------------------------------------------------------------------------------------------------
TXU Corp.^ 1,345,000 55,992,350
- -------------------------------------------------------------------------------------------------
$310,704,979
- -------------------------------------------------------------------------------------------------
Total U.S. Stocks $5,409,999,460
- -------------------------------------------------------------------------------------------------
Foreign Stocks - 9.3%
- -------------------------------------------------------------------------------------------------
Bermuda - 0.6%
- -------------------------------------------------------------------------------------------------
Accenture Ltd., "A" (Business Services)^* 1,452,300 $37,905,030
- -------------------------------------------------------------------------------------------------
Canada - 0.1%
- -------------------------------------------------------------------------------------------------
Finning International, Inc. (Machinery & Tools) 254,200 $5,993,695
- -------------------------------------------------------------------------------------------------
France - 1.2%
- -------------------------------------------------------------------------------------------------
TOTAL S.A., ADR (Energy - Integrated)^ 744,380 $72,941,796
- -------------------------------------------------------------------------------------------------
Switzerland - 2.7%
- -------------------------------------------------------------------------------------------------
Novartis AG (Pharmaceuticals) 1,084,500 $50,319,685
- -------------------------------------------------------------------------------------------------
Roche Holding AG (Pharmaceuticals) 642,100 62,523,950
- -------------------------------------------------------------------------------------------------
Syngenta AG (Chemicals) 556,840 50,127,383
- -------------------------------------------------------------------------------------------------
$162,971,018
- -------------------------------------------------------------------------------------------------
United Kingdom - 4.7%
- -------------------------------------------------------------------------------------------------
BP PLC, ADR (Energy - Integrated) 2,256,000 $121,147,200
- -------------------------------------------------------------------------------------------------
Diageo PLC (Alcoholic Beverages) 2,217,873 27,385,817
- -------------------------------------------------------------------------------------------------
Reed Elsevier PLC (Printing & Publishing) 7,264,000 64,680,219
- -------------------------------------------------------------------------------------------------
Vodafone Group PLC (Telecommunications - Wireless) 33,818,800 77,134,325
- -------------------------------------------------------------------------------------------------
$290,347,561
- -------------------------------------------------------------------------------------------------
Total Foreign Stocks $570,159,100
- -------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $5,235,398,889) $5,980,158,560
- -------------------------------------------------------------------------------------------------
Short-Term Obligations - 2.4%
- -------------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
- -------------------------------------------------------------------------------------------------
Citibank Credit Card Issuance Trust, due 9/16/04 $15,420,000 $15,410,170
- -------------------------------------------------------------------------------------------------
Citicorp, Inc., due 9/10/04 5,000,000 4,998,187
- -------------------------------------------------------------------------------------------------
General Electric Capital Corp., 1.57%, due 9/01/04 35,159,000 35,159,000
- -------------------------------------------------------------------------------------------------
New Center Asset Trust, 1.58%, due 9/01/04 80,805,000 80,805,000
- -------------------------------------------------------------------------------------------------
Receivables Capital Corp., due 9/15/04 12,320,000 12,312,622
- -------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $148,684,979
- -------------------------------------------------------------------------------------------------
Collateral for Securities Loaned - 5.0%
- -------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio, at Cost and
Net Asset Value 305,444,118 $305,444,118
- -------------------------------------------------------------------------------------------------
Total Investments (+) (Identified Cost, $5,689,527,986) $6,434,287,657
- -------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - (4.9)% (301,187,944)
- -------------------------------------------------------------------------------------------------
Net Assets - 100.0% $6,133,099,713
- -------------------------------------------------------------------------------------------------
* Non-income producing security.
^ All or a portion of this security is on loan.
(+) As of August 31, 2004, six securities representing $332,171,379 and 5.4% of net assets were fair
valued in accordance with the policies adopted by the Board of Trustees.
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------------------------------
This statement represents your fund's balance sheet, which details the assets
and liabilities composing the total value of your fund.
AT 8/31/04
ASSETS
Investments, at value, including $298,678,730 of
securities on loan (identified cost, $5,689,527,986) $6,434,287,657
- -----------------------------------------------------------------------------------------------------
Cash 356
- -----------------------------------------------------------------------------------------------------
Foreign currency, at value (identified cost, $16,393) 16,445
- -----------------------------------------------------------------------------------------------------
Receivable for investments sold 21,134,307
- -----------------------------------------------------------------------------------------------------
Receivable for fund shares sold 9,075,391
- -----------------------------------------------------------------------------------------------------
Interest and dividends receivable 12,991,815
- -----------------------------------------------------------------------------------------------------
Receivable from administrative proceeding settlement 1,390,632
- -----------------------------------------------------------------------------------------------------
Other assets 60
- -----------------------------------------------------------------------------------------------------
Total assets $6,478,896,663
- -----------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased $24,485,302
- -----------------------------------------------------------------------------------------------------
Payable for fund shares reacquired 13,101,147
- -----------------------------------------------------------------------------------------------------
Collateral for securities loaned, at value 305,444,118
- -----------------------------------------------------------------------------------------------------
Payable to affiliates
- -----------------------------------------------------------------------------------------------------
Management fee 100,282
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 163,872
- -----------------------------------------------------------------------------------------------------
Distribution and service fee 87,783
- -----------------------------------------------------------------------------------------------------
Administrative fee 488
- -----------------------------------------------------------------------------------------------------
Program manager fee 18
- -----------------------------------------------------------------------------------------------------
Administrative service fee 3
- -----------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 2,413,937
- -----------------------------------------------------------------------------------------------------
Total liabilities $345,796,950
- -----------------------------------------------------------------------------------------------------
Net assets $6,133,099,713
- -----------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Paid-in capital $5,450,807,753
- -----------------------------------------------------------------------------------------------------
Unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies 744,754,379
- -----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (75,162,704)
- -----------------------------------------------------------------------------------------------------
Accumulated undistributed net investment income 12,700,285
- -----------------------------------------------------------------------------------------------------
Net assets $6,133,099,713
- -----------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 294,201,459
- -----------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued
Class A shares
Net assets $3,527,853,840
- -----------------------------------------------------------------------------------------------------
Shares outstanding 168,983,880
- -----------------------------------------------------------------------------------------------------
Net asset value per share $20.88
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/94.25X$20.88) $22.15
- -----------------------------------------------------------------------------------------------------
Class B shares
Net assets $1,199,074,379
- -----------------------------------------------------------------------------------------------------
Shares outstanding 57,734,355
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $20.77
- -----------------------------------------------------------------------------------------------------
Class C shares
Net assets $761,668,625
- -----------------------------------------------------------------------------------------------------
Shares outstanding 36,705,172
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $20.75
- -----------------------------------------------------------------------------------------------------
Class I shares
Net assets $593,363,781
- -----------------------------------------------------------------------------------------------------
Shares outstanding 28,323,768
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $20.95
- -----------------------------------------------------------------------------------------------------
Class R1 shares
Net assets $47,970,396
- -----------------------------------------------------------------------------------------------------
Shares outstanding 2,301,644
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $20.84
- -----------------------------------------------------------------------------------------------------
Class R2 shares
Net assets $413,965
- -----------------------------------------------------------------------------------------------------
Shares outstanding 19,865
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $20.84
- -----------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued
Class 529A shares
Net assets $1,672,629
- -----------------------------------------------------------------------------------------------------
Shares outstanding 80,404
- -----------------------------------------------------------------------------------------------------
Net asset value per share $20.80
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/94.25X$20.80) $22.07
- -----------------------------------------------------------------------------------------------------
Class 529B shares
Net assets $438,714
- -----------------------------------------------------------------------------------------------------
Shares outstanding 21,225
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $20.67
- -----------------------------------------------------------------------------------------------------
Class 529C shares
Net assets $643,384
- -----------------------------------------------------------------------------------------------------
Shares outstanding 31,146
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $20.66
- -----------------------------------------------------------------------------------------------------
On sales of $50,000 or more, the offering price of Class A and Class 529A shares are reduced. A contingent
deferred sales charge may be imposed on redemptions of Class A, Class B, Class C, Class 529B, and Class
529C shares.
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
This statement describes how much your fund received in investment income and
paid in expenses. It also describes any gains and/or losses generated by fund
operations.
FOR YEAR ENDED 8/31/04
NET INVESTMENT INCOME
Income
- -----------------------------------------------------------------------------------------------------
Dividends $133,503,800
- -----------------------------------------------------------------------------------------------------
Interest 2,110,520
- -----------------------------------------------------------------------------------------------------
Other# 1,390,632
- -----------------------------------------------------------------------------------------------------
Foreign taxes withheld (1,428,535)
- -----------------------------------------------------------------------------------------------------
Total investment income $135,576,417
- -----------------------------------------------------------------------------------------------------
Expenses
v Management fee $35,063,649
- -----------------------------------------------------------------------------------------------------
Trustees' compensation 89,407
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 9,297,618
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class A) 11,991,791
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class B) 11,735,296
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class C) 7,439,997
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class R1) 162,864
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class R2) 156
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529A) 4,252
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529B) 2,988
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529C) 5,566
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529A) 3,037
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529B) 747
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529C) 1,391
- -----------------------------------------------------------------------------------------------------
Administrative service fee (Class R2) 78
- -----------------------------------------------------------------------------------------------------
Administrative fee 315,218
- -----------------------------------------------------------------------------------------------------
Custodian fee 1,327,178
- -----------------------------------------------------------------------------------------------------
Printing 320,631
- -----------------------------------------------------------------------------------------------------
Postage 359,587
- -----------------------------------------------------------------------------------------------------
Auditing fees 35,800
- -----------------------------------------------------------------------------------------------------
Legal fees 42,590
- -----------------------------------------------------------------------------------------------------
Miscellaneous 1,763,801
- -----------------------------------------------------------------------------------------------------
Total expenses $79,963,642
- -----------------------------------------------------------------------------------------------------
Fees paid indirectly (345,596)
- -----------------------------------------------------------------------------------------------------
Reduction of expenses by investment adviser (7,515)
- -----------------------------------------------------------------------------------------------------
Net expenses $79,610,531
- -----------------------------------------------------------------------------------------------------
Net investment income $55,965,886
- -----------------------------------------------------------------------------------------------------
Statement of Operations - continued
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain (identified cost basis)
- -----------------------------------------------------------------------------------------------------
Investment transactions $292,776,624
- -----------------------------------------------------------------------------------------------------
Foreign currency transactions 109,167
- -----------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign
currency transactions $292,885,791
- -----------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
- -----------------------------------------------------------------------------------------------------
Investments $532,776,472
- -----------------------------------------------------------------------------------------------------
Translation of assets and liabilities in foreign
currencies 10,501
- -----------------------------------------------------------------------------------------------------
Net unrealized gain on investments and foreign
currency translation $532,786,973
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency $825,672,764
- -----------------------------------------------------------------------------------------------------
Increase in net assets from operations $881,638,650
- -----------------------------------------------------------------------------------------------------
# A non-recurring accrual recorded as a result of an administrative proceeding regarding
disclosure of brokerage allocation practices in connection with fund sales, as described in the
Legal Proceedings and Transactions with Affiliates footnotes.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------------------------
This statement describes the increases and/or decreases in net assets resulting
from operations, any distributions, and any shareholder transactions.
FOR YEARS ENDED 8/31 2004 2003
INCREASE IN NET ASSETS
OPERATIONS
Net investment income $55,965,886 $46,259,245
- -------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions 292,885,791 (203,589,128)
- -------------------------------------------------------------------------------------------------------
Net unrealized gain on investments and foreign
currency translation 532,786,973 467,908,972
- ----------------------------------------------------------- -------------- --------------
Increase in net assets from operations $881,638,650 $310,579,089
- ----------------------------------------------------------- -------------- --------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income
- -------------------------------------------------------------------------------------------------------
Class A $(38,194,792) $(30,155,170)
- -------------------------------------------------------------------------------------------------------
Class B (5,722,598) (6,842,835)
- -------------------------------------------------------------------------------------------------------
Class C (3,678,255) (3,806,070)
- -------------------------------------------------------------------------------------------------------
Class I (6,552,178) (2,484,936)
- -------------------------------------------------------------------------------------------------------
Class R1 (311,260) (42,804)
- -------------------------------------------------------------------------------------------------------
Class R2 (32) --
- -------------------------------------------------------------------------------------------------------
Class 529A (10,857) (3,973)
- -------------------------------------------------------------------------------------------------------
Class 529B (843) (524)
- -------------------------------------------------------------------------------------------------------
Class 529C (1,583) (1,190)
- ----------------------------------------------------------- -------------- --------------
Total distributions declared to shareholders $(54,472,398) $(43,337,502)
- ----------------------------------------------------------- -------------- --------------
Net increase in net assets from fund share transactions $236,254,134 $1,508,027,355
- ----------------------------------------------------------- -------------- --------------
Redemption fees $4,175 $--
- ----------------------------------------------------------- -------------- --------------
Total increase in net assets $1,063,424,561 $1,775,268,942
- ----------------------------------------------------------- -------------- --------------
NET ASSETS
At beginning of period $5,069,675,152 $3,294,406,210
- -------------------------------------------------------------------------------------------------------
At end of period (including accumulated undistributed
net investment income of $12,700,285 and $11,224,884,
respectively) $6,133,099,713 $5,069,675,152
- -------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the fund's financial performance for the past 5 years (or, if
shorter, the period of the fund's operation). Certain information reflects financial results for a single fund share. The total
returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund (assuming
reinvestment of all distributions) held for the entire period. This information has been audited by the fund's independent
registered public accounting firm, whose report, together with the fund's financial statements, are included in this report.
YEARS ENDED 8/31
------------------------------------------------------------------------------------
CLASS A 2004 2003 2002 2001 2000
Net asset value, beginning of period $18.03 $17.21 $19.28 $19.38 $17.17
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.23 $0.24 $0.20 $0.20 $0.24
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and foreign
currency 2.84 0.81 (2.05) 0.44 2.43
- --------------------------------------------- ------ ------ ------ ------ ------
Total from investment operations $3.07 $1.05 $(1.85) $0.64 $2.67
- --------------------------------------------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.22) $(0.23) $(0.15) $(0.19) $(0.22)
- -----------------------------------------------------------------------------------------------------------------------------
From net realized gain on
investments and foreign currency
transactions -- -- (0.03) (0.55) (0.24)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- (0.04) -- --
- --------------------------------------------- ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.22) $(0.23) $(0.22) $(0.74) $(0.46)
- --------------------------------------------- ------ ------ ------ ------ ------
Redemption fees added to paid-in
capital# $0.00+++ $-- $-- $-- $--
- --------------------------------------------- ------ ------ ------ ------ ------
Net asset value, end of period $20.88 $18.03 $17.21 $19.28 $19.38
- --------------------------------------------- ------ ------ ------ ------ ------
Total return (%)(+) 17.13^^ 6.22 (9.64) 3.19 15.95
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
------------------------------------------------------------------------------------
CLASS A (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.18 1.20 1.25 1.21 1.30
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 1.14 1.41 1.05 1.00 1.38
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 42 55 48 63 83
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $3,527,854 $3,039,085 $1,820,568 $981,373 $165,616
- -----------------------------------------------------------------------------------------------------------------------------
(S) Through June 30, 2000, subject to reimbursement by the fund, the investment adviser agreed to maintain expenses of the
fund, exclusive of management, distribution, and service fees, at not more than 0.40% of average daily net assets. For the
year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share
of Independent Chief Compliance Officer services paid to Tarantino LLC. To the extent actual expenses were over this
limitation and the reimbursement had not been in place, the net investment income per share and the ratios would have been:
Net investment income $0.23* $-- $-- $-- $0.25
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.18* -- -- -- 1.26
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 1.14* -- -- -- 1.42
- -----------------------------------------------------------------------------------------------------------------------------
* The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
+++ Per share amount was less than $0.01.
(+) Total returns do not include the applicable sales charge. If the charge had been included, the results would have been lower.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
----------------------------------------------------------------------------------
CLASS B 2004 2003 2002 2001 2000
Net asset value, beginning of period $17.94 $17.13 $19.19 $19.30 $17.11
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.10 $0.12 $0.07 $0.07 $0.13
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and foreign
currency 2.83 0.81 (2.02) 0.45 2.42
- --------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $2.93 $0.93 $(1.95) $0.52 $2.55
- --------------------------------------------- -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.10) $(0.12) $(0.04) $(0.08) $(0.12)
- -----------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
and foreign currency transactions -- -- (0.03) (0.55) (0.24)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- (0.04) -- --
- --------------------------------------------- -------- ------ ------ ------ ------
Total distributions declared to
shareholders $(0.10) $(0.12) $(0.11) $(0.63) $(0.36)
- --------------------------------------------- -------- ------ ------ ------ ------
Redemption fees added to paid-in
capital# $0.00+++ $-- $-- $-- $--
- --------------------------------------------- -------- ------ ------ ------ ------
Net asset value, end of period $20.77 $17.94 $17.13 $19.19 $19.30
- --------------------------------------------- -------- ------ ------ ------ ------
Total return (%) 16.35^^ 5.50 (10.20) 2.55 15.19
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
----------------------------------------------------------------------------------
CLASS B (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.82 1.85 1.90 1.86 1.95
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.49 0.76 0.40 0.35 0.73
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 42 55 48 63 83
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $1,199,074 $1,069,389 $923,330 $698,338 $125,713
- -----------------------------------------------------------------------------------------------------------------------------
(S) Through June 30, 2000, subject to reimbursement by the fund, the investment adviser agreed to maintain expenses of the
fund, exclusive of management, distribution, and service fees, at not more than 0.40% of average daily net assets. For the
year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share
of Independent Chief Compliance Officer services paid to Tarantino LLC. To the extent actual expenses were over this
limitation and the reimbursement had not been in place, the net investment income per share and the ratios would have been:
Net investment income $0.10* $-- $-- $-- $0.14
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.82* -- -- -- 1.91
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.49* -- -- -- 0.77
- -----------------------------------------------------------------------------------------------------------------------------
* The reimbursement impact per share amount and ratios were less than $0.01
and 0.01%, respectively.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
+++ Per share amount was less than $0.01.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
-----------------------------------------------------------------------------
CLASS C 2004 2003 2002 2001 2000
Net asset value, beginning of period $17.93 $17.12 $19.18 $19.30 $17.10
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.10 $0.12 $0.07 $0.07 $0.13
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 2.82 0.81 (2.02) 0.44 2.43
- ----------------------------------------------- --------- ------ ------ ------ ------
Total from investment operations $2.92 $0.93 $(1.95) $0.51 $2.56
- ----------------------------------------------- --------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.10) $(0.12) $(0.04) $(0.08) $(0.12)
- -----------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments and
foreign currency transactions -- -- (0.03) (0.55) (0.24)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- (0.04) -- --
- ----------------------------------------------- --------- ------ ------ ------ ------
Total distributions declared to shareholders $(0.10) $(0.12) $(0.11) $(0.63) $(0.36)
- ----------------------------------------------- --------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- ----------------------------------------------- --------- ------ ------ ------ ------
Net asset value, end of period $20.75 $17.93 $17.12 $19.18 $19.30
- ----------------------------------------------- --------- ------ ------ ------ ------
Total return (%) ^
16.32^ 5.52 (10.21) 2.52 15.27
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
-----------------------------------------------------------------------------
CLASS C (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.82 1.85 1.90 1.86 1.95
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.49 0.76 0.40 0.35 0.73
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 42 55 48 63 83
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $761,669 $648,318 $473,537 $366,154 $49,887
- -----------------------------------------------------------------------------------------------------------------------------
(S) Through June 30, 2000, subject to reimbursement by the fund, the investment adviser agreed to maintain expenses of the
fund, exclusive of management, distribution, and service fees, at not more than 0.40% of average daily net assets. For the
year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share
of Independent Chief Compliance Officer services paid to Tarantino LLC. To the extent actual expenses were over this
limitation and the reimbursement had not been in place, the net investment income per share and the ratios would have been:
Net investment income $0.10* $-- $-- $-- $0.14
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.82* -- -- -- 1.91
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.49* -- -- -- 0.77
- -----------------------------------------------------------------------------------------------------------------------------
* The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
+++ Per share amount was less than $0.01.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
---------------------------------------------------------------------------
CLASS I 2004 2003 2002 2001 2000
Net asset value, beginning of period $18.10 $17.27 $19.35 $19.47 $17.24
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.30 $0.30 $0.27 $0.28 $0.30
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 2.84 0.82 (2.06) 0.44 2.44
- ----------------------------------------------- ----------- ------ ------ ------ ------
Total from investment operations $3.14 $1.12 $(1.79) $0.72 $2.74
- ----------------------------------------------- ----------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.29) $(0.29) $(0.22) $(0.29) $(0.27)
- -----------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments and
foreign currency transactions -- -- (0.03) (0.55) (0.24)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- (0.04) -- --
- ----------------------------------------------- ----------- ------ ------ ------ ------
Total distributions declared to shareholders $(0.29) $(0.29) $(0.29) $(0.84) $(0.51)
- ----------------------------------------------- ----------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- ----------------------------------------------- ----------- ------ ------ ------ ------
Net asset value, end of period $20.95 $18.10 $17.27 $19.35 $19.47
- ----------------------------------------------- ----------- ------ ------ ------ ------
Total return (%) ^
17.47^ 6.61 (9.35) 3.58 16.36
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
---------------------------------------------------------------------------
CLASS I (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 0.83 0.85 0.90 0.86 0.95
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 1.50 1.76 1.40 1.35 1.65
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 42 55 48 63 83
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $593,364 $296,961 $76,932 $45,849 $34,189
- -----------------------------------------------------------------------------------------------------------------------------
(S) Through June 30, 2000, subject to reimbursement by the fund, the investment adviser agreed to maintain expenses of the
fund, exclusive of management, distribution, and service fees, at not more than 0.40% of average daily net assets. For the
year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share
of Independent Chief Compliance Officer services paid to Tarantino LLC. To the extent actual expenses were over this
limitation and the reimbursement had not been in place, the net investment income per share and the ratios would have been:
Net investment income $0.30* $-- $-- $-- $0.31
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 0.83* -- -- -- 0.91
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 1.50* -- -- -- 1.69
- -----------------------------------------------------------------------------------------------------------------------------
* The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
+++ Per share amount was less than $0.01.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEAR ENDED PERIOD ENDED
CLASS R1*** 8/31/04 8/31/03**
Net asset value, beginning of period $18.01 $16.52
- -------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.21 $0.15
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency 2.82 1.46
- ----------------------------------------------------------------------- ------- ------
Total from investment operations $3.03 $1.61
- ----------------------------------------------------------------------- ------- ------
Less distributions declared to shareholders from net
investment income $(0.20) $(0.12)
- ----------------------------------------------------------------------- ------- ------
Redemption fees added to paid-in capital# $0.00+++ $--
- ----------------------------------------------------------------------- ------- ------
Net asset value, end of period $20.84 $18.01
- ----------------------------------------------------------------------- ------- ------
Total return (%) 16.92^^ 9.82++
- -------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA(S):
Expenses## 1.33 1.42+
- -------------------------------------------------------------------------------------------------------
Net investment income 1.02 1.26+
- -------------------------------------------------------------------------------------------------------
Portfolio turnover 42 55
- -------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $47,970 $14,583
- -------------------------------------------------------------------------------------------------------
(S) For the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the
fund for its proportional share of Independent Chief Compliance Officer services paid to Tarantino
LLC. If this fee had been incurred by the fund, the net investment income per share and the ratios
would have been:
Net investment income $0.21* $--
- -------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.33* --
- -------------------------------------------------------------------------------------------------------
Net investment income 1.02* --
- -------------------------------------------------------------------------------------------------------
* The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
** For the period from the inception of Class R1 shares, December 31, 2002, through August 31, 2003.
*** Effective November 3, 2003, Class R shares have been renamed R1 shares.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as
a result of an administrative proceeding regarding disclosure of brokerage allocation practices in
connection with fund sales, as described in the Legal Proceedings and Transactions with Affiliates
footnotes. The non-recurring accrual did not have a material impact on the net asset value per share
based on shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
PERIOD ENDED
CLASS R2 8/31/04**
Net asset value, beginning of period $18.80
- ------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.11
- ------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency 2.05
- -------------------------------------------------------------------------------- --------
Total from investment operations $2.16
- -------------------------------------------------------------------------------- --------
Less distributions declared to shareholders from net investment income $(0.12)
- -------------------------------------------------------------------------------- --------
Redemption fees added to paid-in capital# $0.00+++
- -------------------------------------------------------------------------------- --------
Net asset value, end of period $20.84
- -------------------------------------------------------------------------------- --------
Total return (%) 11.52++^^
- ------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA(S):
Expenses## 1.59+
- ------------------------------------------------------------------------------------------
Net investment income 0.80+
- ------------------------------------------------------------------------------------------
Portfolio turnover 42
- ------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $414
- ------------------------------------------------------------------------------------------
(S) For the year ended August 31, 2004, the investment adviser has voluntarily agreed to
reimburse the fund for its proportional share of Independent Chief Compliance Officer
services paid to Tarantino LLC. If these fees had been incurred by the fund, the net
investment income per share and the ratios would have been:
Net investment income $0.11*
- ------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.59*+
- ------------------------------------------------------------------------------------------
Net investment income 0.80*+
- ------------------------------------------------------------------------------------------
* The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%,
respectively.
** For the period from the inception of Class R2 shares, October 31, 2003, through August
31, 2004.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
^^ The fund's net asset value and total return calculation include a non-recurring accrual
recorded as a result of an administrative proceeding regarding disclosure of brokerage
allocation practices in connection with fund sales, as described in the Legal
Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did
not have a material impact on the net asset value per share based on shares outstanding
on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
------------------------------ PERIOD ENDED
CLASS 529A 2004 2003 8/31/02**
Net asset value, beginning of period $18.00 $17.21 $17.01
- ----------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.18 $0.20 $0.03
- ----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency 2.80 0.81 0.17
- ------------------------------------------------------------- ----------- ------ ------
Total from investment operations $2.98 $1.01 $0.20
- ------------------------------------------------------------- ----------- ------ ------
Less distributions declared to shareholders from net
investment income $(0.18) $(0.22)(ct) $--
- ------------------------------------------------------------- ----------- ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $--
- ------------------------------------------------------------- ----------- ------ ------
Net asset value, end of period $20.80 $18.00^ $17.21
- ------------------------------------------------------------- ----------- ------ ------
Total return (%)(+) 16.63^^ 5.98^ 1.18++
- ----------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.43 1.48 1.50+
- ----------------------------------------------------------------------------------------------------------------
Net investment income 0.91 1.20 2.23+
- ----------------------------------------------------------------------------------------------------------------
Portfolio turnover 42 55 48
- ----------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $1,673 $806 $10
- ----------------------------------------------------------------------------------------------------------------
(S) For the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for
its proportional share of Independent Chief Compliance Officer services paid to Tarantino LLC. If this fee
had been incurred by the fund, the net investment income per share and the ratios would have been:
Net investment income $0.18* $-- $--
- ----------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.43* -- --
- ----------------------------------------------------------------------------------------------------------------
Net investment income 0.91* -- --
- ----------------------------------------------------------------------------------------------------------------
* The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
** For the period from the inception of Class 529A shares, July 31, 2002, through August 31, 2002.
(+) Total returns do not include the applicable sales charge. If the charge had been included, the results would
have been lower.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
^ Distributions from net investment income have been adjusted to correct an error resulting in an over
distribution in fiscal year 2003. The effect of this correction was a decrease in distributions to
shareholders from net investment income of $0.03, an increase in the net asset value at end of period of
$0.03, and an increase in total return of 0.01%.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result
of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with
fund sales, as described in the Legal Proceedings and Transactions with Affiliates footnotes. The
non-recurring accrual did not have a material impact on the net asset value per share based on shares
outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
------------------------------ PERIOD ENDED
CLASS 529B 2004 2003 8/31/02**
Net asset value, beginning of period $17.87 $17.12 $16.93
- ----------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.05 $0.09 $0.02
- ----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency 2.81 0.80 0.17
- ------------------------------------------------------------- ----------- ------ ------
Total from investment operations $2.86 $0.89 $0.19
- ------------------------------------------------------------- ----------- ------ ------
Less distributions declared to shareholders from net
investment income $(0.06) $(0.14) $--
- ------------------------------------------------------------- ----------- ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $--
- ------------------------------------------------------------- ----------- ------ ------
Net asset value, end of period $20.67 $17.87 $17.12
- ------------------------------------------------------------- ----------- ------ ------
Total return (%) 16.03^^ 5.29 1.12++
- ----------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA(S):
Expenses## 2.07 2.13 2.15+
- ----------------------------------------------------------------------------------------------------------------
Net investment income 0.27 0.52 1.33+
- ----------------------------------------------------------------------------------------------------------------
Portfolio turnover 42 55 48
- ----------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $439 $181 $6
- ----------------------------------------------------------------------------------------------------------------
(S) For the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for
its proportional share of Independent Chief Compliance Officer services paid to Tarantino LLC. If this fee
had been incurred by the fund, the net investment income per share and the ratios would have been:
Net investment income $0.05* $-- $--
- ----------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.07* -- --
- ----------------------------------------------------------------------------------------------------------------
Net investment income 0.27* -- --
- ----------------------------------------------------------------------------------------------------------------
* The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
** For the period from the inception of Class 529B shares, July 31, 2002, through August 31, 2002.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result
of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with
fund sales, as described in the Legal Proceedings and Transactions with Affiliates footnotes. The
non-recurring accrual did not have a material impact on the net asset value per share based on shares
outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
------------------------------ PERIOD ENDED
CLASS 529C 2004 2003 8/31/02**
Net asset value, beginning of period $17.86 $17.11 $16.92
- ----------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.05 $0.09 $0.02
- ----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency 2.81 0.80 0.17
- ---------------------------------------------------------------- -------- ------ ------
Total from investment operations $2.86 $0.89 $0.19
- ---------------------------------------------------------------- -------- ------ ------
Less distributions declared to shareholders from net
investment income $(0.06) $(0.14) $--
- ---------------------------------------------------------------- -------- ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $--
- ---------------------------------------------------------------- -------- ------ ------
Net asset value, end of period $20.66 $17.86 $17.11
- ---------------------------------------------------------------- -------- ------ ------
Total return (%) 16.03^^ 5.31 1.12++
- ----------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA(S):
Expenses## 2.07 2.13 2.15+
- ----------------------------------------------------------------------------------------------------------------
Net investment income 0.26 0.55 1.75+
- ----------------------------------------------------------------------------------------------------------------
Portfolio turnover 42 55 48
- ----------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $643 $352 $21
- ----------------------------------------------------------------------------------------------------------------
(S) For the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for
its proportional share of Independent Chief Compliance Officer services paid to Tarantino LLC. If this fee
had been incurred by the fund, the net investment income per share and the ratios would have been:
Net investment income $0.05* $-- $--
- ----------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.07* -- --
- ----------------------------------------------------------------------------------------------------------------
Net investment income 0.26* -- --
- ----------------------------------------------------------------------------------------------------------------
* The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
** For the period from the inception of Class 529C shares, July 31, 2002, through August 31, 2002.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result
of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with
fund sales, as described in the Legal Proceedings and Transactions with Affiliates footnotes. The
non-recurring accrual did not have a material impact on the net asset value per share based on shares
outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(1) BUSINESS AND ORGANIZATION
MFS Value Fund (the fund) is a diversified series of MFS Series Trust I (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 U.S.
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. The fund can
invest in foreign securities. 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 in the fund's portfolio for which
market quotations are available are valued at the last sale or official closing
price as reported by an independent pricing service on the primary market or
exchange on which they are primarily traded, or at the last quoted bid price for
securities in which there were no sales during the day. Equity securities traded
over the counter are valued at the last sales price traded each day as reported
by an independent pricing service, or to the extent there are no sales reported,
such securities are valued on the basis of quotations obtained from brokers and
dealers. Short-term obligations with a remaining maturity in excess of 60 days
will be valued upon dealer-supplied valuations. All other short-term obligations
in the fund's portfolio are valued at amortized cost, which constitutes market
value as determined by the Board of Trustees. Money market mutual funds are
valued at net asset value. 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. When pricing service information
or market quotations are not readily available, securities are priced at fair
value as determined under the direction of the Board of Trustees. For example,
significant events (such as movement in the U.S. securities market, or other
regional and local developments) may occur between the time that foreign markets
close (where the security is principally traded) and the time that the fund
calculates its net asset value (generally, the close of the NYSE) that may
impact the value of securities traded in these foreign markets. In these cases,
the fund may utilize information from an external vendor or other sources to
adjust closing market quotations of foreign equity securities to reflect what it
believes to be the fair value of the securities as of the fund's valuation time.
Because the frequency of significant events is not predictable, fair valuation
of foreign equity securities may occur on a frequent basis.
REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements with
institutions that the fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The fund requires that the
securities collateral in a repurchase transaction be transferred to the
custodian in a manner sufficient to enable the fund to obtain those securities
in the event of a default under the repurchase agreement. The fund monitors, on
a daily basis, the value of the collateral to ensure that its value, including
accrued interest, is greater than amounts owed to the fund under each such
repurchase agreement. The fund, along with other affiliated entities of
Massachusetts Financial Services Company (MFS), may utilize a joint trading
account for the purpose of entering into one or more repurchase agreements.
FOREIGN CURRENCY TRANSLATION - 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.
SECURITY LOANS - State Street Bank and Trust Company ("State Street"), as
lending agent, may loan the securities of the fund to certain qualified
institutions (the "Borrowers") approved by the fund. The loans are
collateralized at all times by cash and/or U.S. Treasury securities in an amount
at least equal to the market value of the securities loaned. State Street
provides the fund with indemnification against Borrower default. The fund bears
the risk of loss with respect to the investment of cash collateral. On loans
collateralized by cash, the cash collateral is invested in a money market fund
or short-term securities. A portion of the income generated upon investment of
the collateral is remitted to the Borrowers, and the remainder is allocated
between the fund and the lending agent. On loans collateralized by U.S. Treasury
securities, a fee is received from the Borrower, and is allocated between the
fund and the lending agent. Income from securities lending is included in
interest income on the Statement of Operations. The dividend and interest income
earned on the securities loaned is accounted for in the same manner as other
dividend and interest income.
SHORT TERM FEES - For purchases made on or after July 1, 2004, the fund will
charge a 2% redemption fee (which is retained by the fund) on proceeds from
shares redeemed or exchanged within 5 business days following their acquisition
(either by purchase or exchange). The fund may change the redemption fee period
in the future, including changes in connection with pending Securities and
Exchange rules. See the fund's prospectus for details. These fees are accounted
for as an addition to paid-in capital.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
discount is amortized or accreted for financial statement purposes in accordance
with U.S. generally accepted accounting principles. All discount is accreted for
tax reporting purposes as required by federal income tax regulations. Dividends
received in cash are recorded on the ex-dividend date.
FEES PAID INDIRECTLY - The fund's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by the
fund. During the year ended August 31, 2004, the fund's custodian fees were
reduced by $26,141 under this arrangement. The fund has entered into a
commission recapture agreement, under which certain brokers will credit the fund
a portion of the commissions generated, to offset certain expenses of the fund.
For the year ended August 31, 2004, the fund's miscellaneous expenses were
reduced by $319,455 under this agreement. These amounts are shown as a reduction
of total 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 net 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 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. Common
types of book and tax differences that could occur include differences in
accounting for currency transactions and real estate investment trusts.
The tax character of distributions declared for the years ended August 31, 2004
and August 31, 2003 was as follows:
8/31/04 8/31/03
Distributions declared from:
- ------------------------------------------------------------------------------
Ordinary income $54,471,492 $43,338,408
- ------------------------------------------------------------------------------
During the year ended August 31, 2004, accumulated undistributed net investment
income decreased by $18,089 and accumulated net realized loss on investments and
foreign currency transactions decreased by $18,089 due to differences between
book and tax accounting for currency transactions and real estate investment
trusts. This change had no effect on the net assets or net asset value per
share.
As of August 31, 2004, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed ordinary income $12,712,749
----------------------------------------------------------
Capital loss carryforward (50,224,703)
----------------------------------------------------------
Unrealized appreciation 719,816,378
----------------------------------------------------------
Other temporary differences (12,464)
----------------------------------------------------------
For federal income tax purposes, the capital loss carryforward may be applied
against any net taxable realized gains of each succeeding year until the earlier
of its utilization or expiration on August 31, 2011, $(50,224,703).
MULTIPLE CLASSES OF SHARES OF BENEFICIAL INTEREST - The fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the fund based on daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class. Differences in per share dividend rates are
generally due to differences in separate class expenses. Class B and Class 529B
shares will convert to Class A and Class 529A shares, respectively,
approximately eight years after purchase.
(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
the fund's average daily net assets. Effective September 1, 2004, MFS has agreed
to a voluntary reduction in its management fee to an annual rate of 0.55% on net
assets in excess of $7.5 billion. This fee reduction arrangement may only be
changed with approval by the Board of Trustees which oversees the fund.
The fund pays compensation to its Independent Trustees in the form of a
retainer, attendance fees, and additional compensation to Board and Committee
chairpersons, and 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). The fund has an unfunded
defined benefit plan for retired Independent Trustees. Included in Trustees'
compensation is a pension expense of $1,291 for retired Independent Trustees for
the year ended August 31, 2004.
The MFS funds, including this fund, have entered into a services agreement (the
"Agreement") which provides for payment of fees by the MFS funds to Tarantino
LLC in return for the provision of services of an Independent Chief Compliance
Officer (ICCO) for the MFS funds. The ICCO is an officer of the MFS funds and
the sole member of Tarantino LLC. MFS has agreed to reimburse each of the MFS
funds for a proportional share of substantially all of the payments made by the
MFS funds to Tarantino LLC and also to provide office space and other
administrative support and supplies to the ICCO. The MFS funds can terminate the
Agreement with Tarantino LLC at any time under the terms of the Agreement.
The fund's investment adviser, MFS, has been the subject of an administrative
proceeding regarding disclosure of brokerage allocation practices in connection
with fund sales, as described in the Legal Proceedings Footnote. Pursuant to the
SEC Order, MFS, on July 28, 2004, transferred $1.00 in disgorgement and $50
million in penalty to the SEC (the "Payments"). A plan for distribution of these
Payments has been submitted to the SEC. Contemporaneous with the transfer, the
fund accrued an estimate of the amount to be received upon final approval of the
plan of distribution. The non- recurring accrual in the amount of $1,390,632 did
not have a material impact on the net asset value per share based on the shares
outstanding on the day the proceeds were recorded.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment advisor. Under an administrative services
agreement between the funds and MFS, MFS is entitled to partial reimbursement of
the costs MFS incurs to provide these services, subject to review and approval
by the Board of Trustees. Each fund is allocated a portion of these
administrative costs based on its size and relative average net assets. Prior to
April 1, 2004, the fund paid MFS an administrative fee up to the following
annual percentage rates of the fund's average daily net assets:
First $2 billion 0.0175%
----------------------------------------------------------
Next $2.5 billion 0.0130%
----------------------------------------------------------
Next $2.5 billion 0.0005%
----------------------------------------------------------
In excess of $7 billion 0.0000%
----------------------------------------------------------
Effective April 1, 2004, the fund paid MFS an administrative fee up to the
following annual percentage rates of the fund's average daily net assets:
First $2 billion 0.01120%
----------------------------------------------------------
Next $2.5 billion 0.00832%
----------------------------------------------------------
Next $2.5 billion 0.00032%
----------------------------------------------------------
In excess of $7 billion 0.00000%
----------------------------------------------------------
For the year ended August 31, 2004, the fund paid MFS $315,218, equivalent to
0.0054% of average daily net assets, to partially reimburse MFS for the costs of
providing administrative services.
In addition to the administrative services provided by MFS to the fund as
described above, MFS is responsible for providing certain administrative
services with respect to Class R2 shares. These services include various
administrative, recordkeeping, and communication/educational services with
respect to the retirement plans which invest in Class R2 shares, and may be
provided directly by MFS or by a third party. The fund pays an annual 0.25%
administrative service fee solely from the assets of Class R2 shares to MFS for
the provision of these services.
DISTRIBUTOR - MFD, a wholly owned subsidiary of MFS, as distributor, received
$479,971 and $5,235 for the year ended August 31, 2004, as its portion of the
sales charge on sales of Class A and Class 529A shares of the fund,
respectively.
The Trustees have adopted a distribution plan for Class A, Class B, Class C,
Class R1, Class R2, Class 529A, Class 529B, and Class 529C shares pursuant to
Rule 12b-1 of the Investment Company Act of 1940 as follows:
The fund's distribution plan provides that the fund will pay MFD an annual
percentage of its average daily net assets attributable to certain share classes
in order that MFD may pay expenses on behalf of the fund related to the
distribution and servicing of its shares. These expenses include a service fee
paid to each securities dealer that enters into a sales agreement with MFD based
on the average daily net assets of accounts attributable to such dealers. The
fees are calculated based on each class' average daily net assets. The maximum
distribution and service fees for each class of shares are as follows:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Distribution Fee 0.10% 0.75% 0.75% 0.25% 0.25%
- -----------------------------------------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25% 0.25% 0.25%
- -----------------------------------------------------------------------------------------------------------------
Total Distribution Plan 0.35% 1.00% 1.00% 0.50% 0.50%
- -----------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Distribution Fee 0.25% 0.75% 0.75%
- -----------------------------------------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25%
- -----------------------------------------------------------------------------------------------------------------
Total Distribution Plan 0.50% 1.00% 1.00%
- -----------------------------------------------------------------------------------------------------------------
MFD retains the service fee for accounts not attributable to a securities dealer, which for the year ended
August 31, 2004 amounted to:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Service Fee Retained by MFD $656,114 $4,147 $3,836 $4 $7
- -----------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Service Fee Retained by MFD $756 $14 $54
- -----------------------------------------------------------------------------------------------------------------
Payment of the 0.15% per annum portion of the Class 529A distribution fee that is not currently being charged will
be implemented on such date as the Trustees of the Trust may determine.
Fees incurred under the distribution plan during the year ended August 31, 2004 were as follows:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Effective Annual Percentage Rates 0.35% 1.00% 1.00% 0.50% 0.50%
- -----------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Effective Annual Percentage Rates 0.35% 1.00% 1.00%
- -----------------------------------------------------------------------------------------------------------------
Certain Class A, Class C and Class 529C shares are subject to a contingent deferred sales charge in the event of a
shareholder redemption within, for Class A shares, 12 months following the purchase, and, for Class C and Class
529C shares, the first year from the end of the calendar month of purchase. A contingent deferred sales charge is
imposed on shareholder redemptions of Class B and Class 529B shares in the event of a shareholder redemption
within six years from the end of the calendar month of purchase. MFD receives all contingent deferred sales
charges. Contingent deferred sales charges imposed during the year ended August 31, 2004 were as follows:
CLASS A CLASS B CLASS C CLASS 529B CLASS 529C
Contingent Deferred Sales Charges
Imposed $77,873 $2,486,102 $175,027 $60 $--
- -----------------------------------------------------------------------------------------------------------------
The fund has and may from time to time enter into contracts with program
managers and other parties that administer the tuition programs through which an
investment in the fund's 529 share classes is made. The fund has entered into an
agreement with MFD pursuant to which MFD receives an annual fee of up to 0.35%
from the fund based solely upon the value of the fund's 529 share classes
attributable to tuition programs to which MFD, or a third party which contracts
with MFD, provides administrative services. The current fee has been established
at 0.25% annually of average net assets of the fund's 529 share classes
attributable to such programs. The fee may only be increased with the approval
of the board of trustees that oversees the fund. The services provided by MFD,
or a third party with which MFD contracts, include recordkeeping and tax
reporting and account services, as well as services designed to maintain the
program's compliance with the Internal Revenue Code and other regulatory
requirements.
SHAREHOLDER SERVICING AGENT - Included in shareholder servicing costs is a fee
paid to MFSC, a wholly owned subsidiary of MFS, for its services as shareholder
servicing agent. The fee, which is calculated as a percentage of the fund's
average daily net assets is set periodically under the supervision of the fund's
Trustees. Prior to April 1, 2004, the fee was set at 0.11% of the fund's average
daily net assets. For the period April 1, 2004 through June 30, 2004, the fee
was set at 0.10% of the fund's average daily net assets. Effective July 1, 2004,
the fund is charged up to 0.0861% of its average daily net assets. For the year
ended August 31, 2004, the fund paid MFSC a fee of $6,002,713 for shareholder
services which equated to 0.1022% of the fund's average daily net assets. Also
included in shareholder servicing costs are out-of-pocket expenses, paid to
MFSC, which amounted to $846,235 for the year ended August 31, 2004, as well as
other expenses paid to unaffiliated vendors.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$2,698,380,433 and $2,411,866,233, 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 $5,714,465,987
----------------------------------------------------------
Gross unrealized appreciation $799,555,925
----------------------------------------------------------
Gross unrealized depreciation (79,734,255)
----------------------------------------------------------
Net unrealized appreciation $719,821,670
----------------------------------------------------------
(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:
Year ended 8/31/04 Year ended 8/31/03
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares sold 68,232,846 $1,362,862,519 124,630,755 $2,082,051,438
- --------------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 1,607,195 31,479,055 1,432,223 23,884,644
- --------------------------------------------------------------------------------------------------------------
Shares reacquired (69,376,970) (1,396,340,338) (63,302,566) (1,055,785,399)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) 463,071 $(1,998,764) 62,760,412 $1,050,150,683
- --------------------------------------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 10,609,786 $210,964,746 18,732,927 $310,631,777
- --------------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 235,102 4,573,746 331,330 5,479,523
- --------------------------------------------------------------------------------------------------------------
Shares reacquired (12,715,831) (254,097,701) (13,374,299) (218,917,180)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) (1,870,943) $(38,559,209) 5,689,958 $97,194,120
- --------------------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 9,335,624 $184,215,208 15,604,268 $260,250,104
- --------------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 120,898 2,350,259 147,871 2,447,102
- --------------------------------------------------------------------------------------------------------------
Shares reacquired (8,914,773) (179,025,392) (7,256,171) (118,974,937)
- --------------------------------------------------------------------------------------------------------------
Net increase 541,749 $7,540,075 8,495,968 $143,722,269
- --------------------------------------------------------------------------------------------------------------
CLASS I SHARES
Shares sold 14,195,841 $284,193,397 13,752,753 $232,245,954
- --------------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 310,207 6,162,008 124,511 2,096,324
- --------------------------------------------------------------------------------------------------------------
Shares reacquired (2,592,198) (52,439,449) (1,921,607) (32,344,876)
- --------------------------------------------------------------------------------------------------------------
Net increase 11,913,850 $237,915,956 11,955,657 $201,997,402
- --------------------------------------------------------------------------------------------------------------
Year ended 8/31/04 Period ended 8/31/03*
SHARES AMOUNT SHARES AMOUNT
CLASS R1 SHARES
Shares sold 2,778,893 $55,557,730 1,393,305 $23,639,438
- --------------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 14,631 292,053 2,457 41,829
- --------------------------------------------------------------------------------------------------------------
Shares reacquired (1,301,372) (26,054,689) (586,270) (9,912,319)
- --------------------------------------------------------------------------------------------------------------
Net increase 1,492,152 $29,795,094 809,492 $13,768,948
- --------------------------------------------------------------------------------------------------------------
Period ended 8/31/04**
SHARES AMOUNT
CLASS R2 SHARES
Shares sold 37,734 $762,333
- -----------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 2 32
- -----------------------------------------------------------------------
Shares reacquired (17,871) (360,775)
- -----------------------------------------------------------------------
Net increase 19,865 $401,590
- -----------------------------------------------------------------------
Year ended 8/31/04 Year ended 8/31/03
SHARES AMOUNT SHARES AMOUNT
CLASS 529A SHARES
Shares sold 37,997 $768,227 44,772 $739,807
- ------------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 549 10,840 234 3,950
- ------------------------------------------------------------------------------------------------------------
Shares reacquired (2,961) (60,562) (784) (13,279)
- ------------------------------------------------------------------------------------------------------------
Net increase 35,585 $718,505 44,222 $730,478
- ------------------------------------------------------------------------------------------------------------
CLASS 529B SHARES
Shares sold 12,295 $245,830 9,960 $168,230
- ------------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 43 843 149 523
- ------------------------------------------------------------------------------------------------------------
Shares reacquired (1,231) (25,198) (336) (5,451)
- ------------------------------------------------------------------------------------------------------------
Net increase 11,107 $221,475 9,773 $163,302
- ------------------------------------------------------------------------------------------------------------
CLASS 529C SHARES
Shares sold 16,679 $325,595 16,923 $299,704
- ------------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 82 1,583 1,590 1,190
- ------------------------------------------------------------------------------------------------------------
Shares reacquired (5,336) (107,766) (45) (741)
- ------------------------------------------------------------------------------------------------------------
Net increase 11,425 $219,412 18,468 $300,153
- ------------------------------------------------------------------------------------------------------------
* Commencement of operations December 31, 2002.
** Commencement of operations October 31, 2003.
(6) LINE OF CREDIT
The fund and other affiliated funds participate in an $800 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the Federal
Reserve funds rate plus 0.50%. 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 calendar quarter. The commitment fee
allocated to the fund for the year ended August 31, 2004 was $48,340, and is
included in miscellaneous expense. The fund had no significant borrowings during
the year ended August 31, 2004.
(7) LEGAL PROCEEDINGS.
On March 31, 2004, MFS settled an administrative proceeding with the Securities
and Exchange Commission ("SEC") regarding disclosure of brokerage allocation
practices in connection with MFS fund sales (the term "MFS funds" means the
open-end registered management investment companies sponsored by MFS). Under the
terms of the settlement, in which MFS neither admitted nor denied any
wrongdoing, MFS agreed to pay (one dollar) $1.00 in disgorgement and $50 million
in penalty to certain MFS funds, pursuant to a plan developed by an independent
distribution consultant. The brokerage allocation practices which were the
subject of this proceeding were discontinued by MFS in November 2003. The
agreement with the SEC is reflected in an order of the SEC. Pursuant to the SEC
order, on July 28, 2004, MFS transferred these settlement amounts to the SEC,
and those MFS funds entitled to these settlement amounts accrued an estimate of
their pro rata portion of these amounts. Once the final distribution plan is
approved by the SEC, these amounts will be distributed by the SEC to the
affected MFS funds. The SEC settlement order states that MFS failed to
adequately disclose to the Boards of Trustees and to shareholders of the MFS
funds the specifics of its preferred arrangements with certain brokerage firms
selling MFS fund shares. The SEC settlement order states that MFS had in place
policies designed to obtain best execution of all MFS fund trades. As part of
the settlement, MFS retained an independent compliance consultant to review the
completeness of its current policies and practices regarding disclosure to MFS
fund trustees and to MFS fund shareholders of strategic alliances between MFS or
its affiliates and broker-dealers and other financial advisers who support the
sale of MFS fund shares.
In addition, in February, 2004, MFS reached agreement with the SEC, the New York
Attorney General ("NYAG") and the Bureau of Securities Regulation of the State
of New Hampshire ("NH") to settle administrative proceedings alleging false and
misleading information in certain MFS retail fund prospectuses regarding market
timing and related matters (the "February Settlements"). These regulators
alleged that prospectus language for certain MFS retail funds was false and
misleading because, although the prospectuses for those funds in the regulators'
view indicated that the MFS funds prohibited market timing, MFS did not limit
trading activity in 11 domestic large cap stock, high grade bond and money
market funds. MFS' former Chief Executive Officer, John W. Ballen, and former
President, Kevin R. Parke, also reached agreement with the SEC in which they
agreed to, among other terms, monetary fines and temporary suspensions from
association with any investment adviser or registered investment company.
Messrs. Ballen and Parke have resigned their positions with, and will not be
returning to, MFS and the MFS funds. Under the terms of the February
Settlements, MFS and the executives neither admit nor deny wrongdoing.
Under the terms of the February Settlements, a $225 million pool has been
established for distribution to shareholders in certain MFS retail funds, which
has been funded by MFS and of which $50 million is characterized as a penalty.
This pool will be distributed in accordance with a methodology developed by an
independent distribution consultant in consultation with MFS and the Board of
Trustees of the MFS retail funds, and acceptable to the SEC. MFS has further
agreed with NYAG to reduce its management fees in the aggregate amount of
approximately $25 million annually over the next five years, and not to increase
certain management fees during this period. MFS has also paid an administrative
fine to NH in the amount of $1 million, which will be used for investor
education purposes (NH retained $250,000 and $750,000 was contributed to the
North American Securities Administrators Association's Investor Protection
Trust). In addition, under the terms of the February Settlements, MFS is in the
process of adopting certain governance changes and reviewing its policies and
procedures.
Since December 2003, MFS, Sun Life Financial Inc., various MFS funds, the
Trustees of these MFS funds, and certain officers of MFS have been named as
defendants in multiple lawsuits filed in federal and state courts. The lawsuits
variously have been commenced as class actions or individual actions on behalf
of investors who purchased, held or redeemed shares of the MFS funds during
specified periods, as class actions on behalf of participants in certain
retirement plan accounts, or as derivative actions on behalf of the MFS funds.
The lawsuits relating to market timing and related matters have been transferred
to, and consolidated before, the United States District Court for the District
of Maryland, as part of a multi-district litigation of market timing and related
claims involving several other fund complexes (In re Mutual Funds Investment
Litigation (Alger, Columbia, Janus, MFS, One Group, Putnam, PIMCO), No.
1:04-md-15863 (transfer began March 19, 2004)). Four lawsuits alleging improper
brokerage allocation practices and excessive compensation are pending in the
United States District Court for the District of Massachusetts (Forsythe v. Sun
Life Financial Inc., et al., No. 04cv10584 (GAO) (March 25, 2004); Eddings v.
Sun Life Financial Inc., et al., No. 04cv10764 (GAO) (April 15, 2004); Marcus
Dumond, et al. v. Massachusetts Financial Servs. Co., et al., No. 04cv11458
(GAO) (May 4, 2004); and Koslow v. Sun Life Financial Inc., et al., No.
04cv11019 (GAO) (May 20, 2004)). The lawsuits generally allege that some or all
of the defendants (i) permitted or acquiesced in market timing and/or late
trading in some of the MFS funds, inadequately disclosed MFS' internal policies
concerning market timing and such matters, and received excessive compensation
as fiduciaries to the MFS funds, or (ii) permitted or acquiesced in the improper
use of fund assets by MFS to support the distribution of MFS fund shares and
inadequately disclosed MFS' use of fund assets in this manner. The actions
assert that some or all of the defendants violated the federal securities laws,
including the Securities Act of 1933 and the Securities Exchange Act of 1934,
the Investment Company Act of 1940 and the Investment Advisers Act of 1940, the
Employee Retirement Income Security Act of 1974, as well as fiduciary duties and
other violations of common law. The lawsuits seek unspecified damages. Insofar
as any of the actions is appropriately brought derivatively on behalf of any of
the MFS funds, any recovery will inure to the benefit of the MFS funds. The
defendants are reviewing the allegations of the multiple complaints and will
respond appropriately. Additional lawsuits based on similar allegations may be
filed in the future.
Any potential resolution of these matters may include, but not be limited to,
judgments or settlements for damages against MFS, the MFS funds, or any other
named defendant. As noted above, as part of the regulatory settlements, MFS has
established a restitution pool in the amount of $225 million to compensate
certain shareholders of the MFS retail funds for damages that they allegedly
sustained as a result of market timing or late trading in certain of the MFS
retail funds, and transferred $50 million for distribution to affected MFS funds
to compensate those funds based upon the amount of brokerage commissions
allocated in recognition of MFS fund sales. It is not clear whether these
amounts will be sufficient to compensate shareholders for all of the damage they
allegedly sustained, whether certain shareholders or putative class members may
have additional claims to compensation, or whether the damages that may be
awarded in any of the actions will exceed these amounts. In the event the MFS
funds incur any losses, costs or expenses in connection with such lawsuits, the
Boards of Trustees of the affected MFS funds may pursue claims on behalf of such
funds against any party that may have liability to the funds in respect thereof.
Review of these matters by the independent Trustees of the MFS funds and their
counsel is continuing. There can be no assurance that these regulatory actions
and lawsuits, or the adverse publicity associated with these developments, will
not result in increased fund redemptions, reduced sales of fund shares, or other
adverse consequences to the MFS funds.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
To the Trustees of MFS Series Trust I and Shareholders of MFS Value Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Value Fund (the Fund) (one of the portfolios comprising MFS Series Trust I),
including the portfolio of investments, as of August 31, 2004, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the financial
highlights for each of the periods indicated therein. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 and financial highlights. Our procedures
included confirmation of securities owned at August 31, 2004, by correspondence
with the custodian and brokers or by other appropriate auditing procedures where
replies from brokers were not received. 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Value Fund at August 31, 2004, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and its financial highlights for each of the periods indicated
therein, in conformity with U.S. generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
October 8, 2004
- ------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
- ------------------------------------------------------------------------------------------------------
The Trustees and officers of the Trust, as of October 10, 2004, are listed below, together with their
principal occupations during the past five years. (Their titles may have varied during that period.)
The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
PRINCIPAL OCCUPATIONS & OTHER
POSITION(s) HELD TRUSTEE/OFFICER DIRECTORSHIPS(2) DURING
NAME, DATE OF BIRTH WITH FUND SINCE(1) THE PAST FIVE YEARS
- ------------------- ---------------- --------------- -----------------------------
INTERESTED TRUSTEES
Robert J. Manning(3) Trustee and February 2004 Massachusetts Financial
(born 10/20/63) President Services Company, Chief
Executive Officer, President,
Chief Investment Officer and
Director
Robert C. Pozen(3) Trustee February 2004 Massachusetts Financial
(born 08/08/46) Services Company, Chairman
(since February 2004); Harvard Law
School (education), John Olin
Visiting Professor (since July
2002); Secretary of Economic
Affairs, The Commonwealth of
Massachusetts (January 2002 to
December 2002); Fidelity
Investments, Vice Chairman (June
2000 to December 2001); Fidelity
Management & Research Company
(investment adviser), President
(March 1997 to July 2001); The Bank
of New York (financial services),
Director; Bell Canada Enterprises
(telecommunications), Director;
Telesat (satellite communications),
Director
INDEPENDENT TRUSTEES
J. Atwood Ives Trustee and Chair of February 1992 Private investor; Eastern
(born 05/01/36) Trustees Enterprises (diversified
services company), Chairman,
Trustee and Chief Executive
Officer (until November 2000)
Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital,
(born 03/11/37) Chief of Cardiac Surgery;
Harvard Medical School,
Professor of Surgery
David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining
(born 05/30/42) products and service
provider), Vice Chairman/ Director
(since April 2001); Encinitos
Ventures (private investment
company), Principal (1997 to April
2001); Lincoln Electric Holdings,
Inc. (welding equipment
manufacturer), Director; Southwest
Gas Corporation (natural gas
distribution company), Director
William R. Gutow Trustee December 1993 Private investor and real
(born 09/27/41) estate consultant; Capitol
Entertainment Management
Company (video franchise),
Vice Chairman
Amy B. Lane Trustee January 2004 Retired; Merrill Lynch & Co.,
(born 02/08/53) Inc., Managing Director,
Investment Banking Group
(1997 to February 2001);
Borders Group, Inc. (book and
music retailer), Director;
Federal Realty Investment
Trust (real estate investment
trust), Trustee
Lawrence T. Perera Trustee July 1981 Hemenway & Barnes
(born 06/23/35) (attorneys), Partner
William J. Poorvu Trustee August 1982 Private investor; Harvard
(born 04/10/35) University Graduate School of
Business Administration,
Class of 1961 Adjunct
Professor in Entrepreneurship
Emeritus; CBL & Associates
Properties, Inc. (real estate
investment trust), Director
J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 09/23/38) (acquisition planning
specialists), President; Wellfleet
Investments (investor in health
care companies), Managing General
Partner (since 1993); Cambridge
Nutraceuticals (professional
nutritional products), Chief
Executive Officer (until May 2001)
Elaine R. Smith Trustee February 1992 Independent health care
(born 04/25/46) industry consultant
OFFICERS
Robert J. Manning(3) President and February 2004 Massachusetts Financial
(born 10/20/63) Trustee Services Company, Chief
Executive Officer, President,
Chief Investment Officer and
Director
James R. Bordewick, Jr.(3) Assistant Secretary September 1990 Massachusetts Financial
(born 03/06/59) and Assistant Clerk Services Company, Senior Vice
President and Associate
General Counsel
Jeffrey N. Carp(3) Secretary and Clerk September 2004 Massachusetts Financial
(born 12/01/56) Services Company, Senior Vice
President, General Counsel and
Secretary (since April 2004); Hale
and Dorr LLP (law firm) (prior to
April 2004)
James F. DesMarais(3) Assistant Secretary September 2004 Massachusetts Financial
(born 03/09/61) and Assistant Clerk Services Company, Assistant
General Counsel
Stephanie A. DeSisto(3) Assistant Treasurer May 2003 Massachusetts Financial
(born 10/01/53) Services Company, Vice
President (since April 2003);
Brown Brothers Harriman &
Co., Senior Vice President
(November 2002 to April
2003); ING Groep N.V./Aeltus
Investment Management, Senior
Vice President (prior to
November 2002)
Robert R. Flaherty(3) Assistant Treasurer August 2000 Massachusetts Financial
(born 09/18/63) Services Company, Vice
President (since August
2000); UAM Fund Services,
Senior Vice President (prior
to August 2000)
Richard M. Hisey(3) Treasurer August 2002 Massachusetts Financial
(born 08/29/58) Services Company, Senior Vice
President (since July 2002); The
Bank of New York, Senior Vice
President (September 2000 to July
2002); Lexington Global Asset
Managers, Inc., Executive Vice
President and Chief Financial
Officer (prior to September 2000);
Lexington Funds, Chief Financial
Officer (prior to September 2000)
Brian T. Hourihan(3) Assistant Secretary September 2004 Massachusetts Financial
(born 11/11/64) and Assistant Clerk Services Company, Vice
President, Senior Counsel and
Assistant Secretary (since
June 2004); Affiliated
Managers Group, Inc., Chief
Legal Officer/Centralized
Compliance Program (January
to April 2004); Fidelity
Research & Management
Company, Assistant General
Counsel (prior to January
2004)
Ellen Moynihan(3) Assistant Treasurer April 1997 Massachusetts Financial
(born 11/13/57) Services Company, Vice
President
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of
(born 03/07/44) Compliance Officer compliance services),
Principal (since June 2004);
CRA Business Strategies Group
(consulting services),
Executive Vice President
(April 2003 to June 2004);
David L. Babson & Co.
(investment adviser),
Managing Director, Chief
Administrative Officer and
Director (February 1997 to
March 2003)
James O. Yost(3) Assistant Treasurer September 1990 Massachusetts Financial
(born 06/12/60) Services Company, Senior Vice
President
- ----------------
(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously
since appointment unless indicated otherwise.
(2) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission
(i.e., "public companies").
(3) "Interested person" of MFS within the meaning of the Investment Company Act of 1940 (referred to as the
1940 Act), which is the principle federal law governing investment companies like the fund. The address of
MFS is 500 Boylston Street, Boston, Massachusetts 02116.
The Trust does not hold annual shareholder meetings for the purpose of electing Trustees, and Trustees are not
elected for fixed terms. The Trust will hold a shareholders' meeting in 2005 and at least once every five
years thereafter to elect Trustees. Each Trustee and officer holds office until his or her successor is chosen
and qualified or until his or her earlier death, resignation, retirement or removal.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or
a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain
affiliates of MFS. Each Trustee serves as a board member of 109 funds within the MFS Family of Funds.
The Statement of Additional Information contains further information about the Trustees and is available
without charge upon request by calling 1-800-225-2606.
- -------------------------------------------------------------------------------------------------------------
INVESTMENT ADVISER CUSTODIANS
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 02116-3741 225 Franklin Street, Boston, MA 02110
JP Morgan Chase Bank
DISTRIBUTOR One Chase Manhattan Plaza
MFS Fund Distributors, Inc. New York, NY 10081
500 Boylston Street, Boston, MA 02116-3741
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PORTFOLIO MANAGERS Ernst & Young LLP
Edward B. Baldini 200 Clarendon Street, Boston, MA 02116
Steven R. Gorham
QUARTERLY PORTFOLIO DISCLOSURE
Beginning with the fund's first and third fiscal quarters following this report, the fund will file a complete
schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and
third quarters of each fiscal year on Form N-Q. The fund's Form N-Q may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-0102
Information on the operation of the Public Reference Room may be obtained by calling the Commission at
1-800-SEC-0330. The fund's Form N-Q is available on the EDGAR database on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference
Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at www.mfs.com.
- -------------------------------------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS
- -------------------------------------------------------------------------------
YOUR GOALS ARE IMPORTANT
MFS offers a complete range of investments and investment services to address
specific financial needs over time. When your investing goals change, you can
easily stay with MFS for the products you need, when you need them. Whether
you're investing for college or retirement expenses or for tax management or
estate planning, MFS will be there.
Ask your investment professional how MFS can help you move toward the goals
you've set.
MFS FAMILY OF FUNDS(R)
More than 50 portfolios offer domestic and international equity and
fixed-income investments across the full risk spectrum
VARIABLE ANNUITIES
A selection of annuity products with advantages for
building and preserving wealth
MFS 401(k) AND IRA SUITES
Retirement plans for businesses and individuals
MFS COLLEGE SAVINGS PLANS
Investment products to help meet education expenses
MFS PRIVATE PORTFOLIO SERVICES
Investment advisory services that provide custom products
for high-net-worth individuals
Variable annuities are offered through MFS/Sun Life Financial Distributors, Inc.
- ------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED)
In January 2005, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 2004.
For the year ended August 31, 2004, the amount of distributions from income
eligible for the 70% dividends received deduction for corporations is 100%.
The fund hereby designates the maximum amount allowable as qualified dividend
income eligible for a maximum tax rate of 15%, as provided for by the Jobs and
Growth Tax Relief Reconciliation Act of 2003. Complete information will be
reported in conjunction with your 2004 Form 1099-DIV.
The fund has the option to use equalization, which is a tax basis dividends paid
deduction from earnings and profits distributed to shareholders upon redemption
of shares.
- --------------------------------------------------------------------------------
CONTACT INFORMATION
INVESTOR INFORMATION
For information on MFS mutual funds, call your investment professional or, for
an information kit, call toll free: 1-800-225-2606 any business day from 8 a.m.
to 8 p.m. Eastern time.
A general description of the MFS funds' proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the About MFS section of mfs.com or by visiting the SEC's Web site at
http://www.sec. gov.
Information regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is available
without charge by visiting the Proxy Voting section of mfs.com or by visiting
the SEC's Web site at http://www.sec.gov.
INVESTOR SERVICE
Write to us at: MFS Service Center, Inc.
P.O. Box 55824
Boston, MA 02205-5824
Type of Information Phone number Hours, Eastern Time
- --------------------------------------------------------------------------------
General information 1-800-225-2606 8 a.m. to 8 p.m., any
business day
- --------------------------------------------------------------------------------
Speech- or hearing-impaired 1-800-637-6576 9 a.m. to 5 p.m., any
business day
- --------------------------------------------------------------------------------
Share prices, account 1-800-MFS-TALK
balances (1-800-637-8255)
exchanges or stock and touch-tone required 24 hours a day, 365 days a
bond outlooks year
- --------------------------------------------------------------------------------
WORLD WIDE WEB
Go to MFS.COM for a clear view of market events, investor education, account
access, and product and performance insights.
Go paperless with EDELIVERY: Join your fellow shareholders who are already
taking advantage of this great new benefit from MFS. With eDelivery, we send you
prospectuses, reports, and proxies electronically. You get timely information
without mailbox clutter (and help your fund save printing and postage costs).
SIGN-UP instructions: If your account is registered with us, go to mfs.com, log
in to your account via MFS Access, and select the eDelivery sign up options.
If you own your MFS fund shares through a financial institution or through a
retirement plan, MFS TALK, MFS Access, and eDelivery may not be available to
you.
[logo] M F S(R)
INVESTMENT MANAGEMENT
(C) 2004 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc., 500
Boylston Street, Boston, MA 02116.
EIF-ANN-10/04 353M
MFS(R) Mutual Funds
ANNUAL REPORT 8/31/04
MFS(R) RESEARCH INTERNATIONAL FUND
A path for pursuing opportunity
[graphic omitted]
[logo] M F S(R)
INVESTMENT MANAGEMENT
- --------------------------------------------------------------------------------
MFS(R) PRIVACY POLICY: A COMMITMENT TO YOU
- --------------------------------------------------------------------------------
Privacy is a concern for every investor today. At MFS Investment Management(R)
and the MFS funds, we take this concern very seriously. We want you to
understand our policies about every MFS investment product and service that we
offer and how we protect the nonpublic personal information of investors who
have a direct relationship with us and our wholly owned subsidiaries.
Throughout our business relationship, you provide us with personal information;
we maintain information and records about you, your investments, and the
services you use. Examples of the nonpublic personal information we maintain
include
o data from investment applications and other forms
o share balances and transactional history with us, our affiliates, or others
o facts from a consumer reporting agency
We do not disclose any nonpublic personal information about our customers or
former customers to anyone except as permitted by law. We may share information
with companies or financial institutions that perform marketing services on our
behalf or to other financial institutions with which we have joint marketing
arrangements.
Access to your nonpublic personal information is limited to appropriate
personnel who provide products, services, or information to you. We maintain
physical, electronic, and procedural safeguards that comply with applicable
federal regulations.
If you have any questions about MFS' privacy policy, please call 1-800-225-2606
any business day between 8 a.m. and 8 p.m. Eastern time.
Note: If you own MFS products or receive MFS services in the name of a third
party such as a bank or broker-dealer, their privacy policy may apply to you
instead of ours.
- --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK OR CREDIT UNION GUARANTEE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
- --------------------------------------------------------------------------------
MFS(R) STRATEGIC GROWTH FUND
The fund seeks capital appreciation.
- --------------------------------------------------------------------------------
A PROSPECTUS FOR ANY MFS PRODUCT CAN BE OBTAINED FROM YOUR INVESTMENT
PROFESSIONAL. YOU SHOULD READ THE PROSPECTUS CAREFULLY BEFORE INVESTING AS IT
CONTAINS COMPLETE INFORMATION ON THE FUND'S INVESTMENT OBJECTIVE(s), THE RISKS
ASSOCIATED WITH AN INVESTMENT IN THE FUND, AND THE FEES, CHARGES, AND EXPENSES
INVOLVED. THESE ELEMENTS, AS WELL AS OTHER INFORMATION CONTAINED IN THE
PROSPECTUS, SHOULD BE CONSIDERED CAREFULLY BEFORE INVESTING.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- ----------------------------------------------------
MFS PRIVACY POLICY
- ----------------------------------------------------
LETTER FROM THE CEO 1
- ----------------------------------------------------
MFS ORIGINAL RESEARCH(R) 5
- ----------------------------------------------------
MANAGEMENT REVIEW 6
- ----------------------------------------------------
PORTFOLIO COMPOSITION 10
- ----------------------------------------------------
PERFORMANCE SUMMARY 11
- ----------------------------------------------------
EXPENSE TABLE 15
- ----------------------------------------------------
PORTFOLIO OF INVESTMENTS 17
- ----------------------------------------------------
FINANCIAL STATEMENTS 23
- ----------------------------------------------------
NOTES TO FINANCIAL STATEMENTS 42
- ----------------------------------------------------
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 55
- ----------------------------------------------------
TRUSTEES AND OFFICERS 56
- ----------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS 60
- ----------------------------------------------------
FEDERAL TAX INFORMATION 61
- ----------------------------------------------------
ASSET ALLOCATION 62
- ----------------------------------------------------
CONTACT INFORMATION BACK COVER
- --------------------------------------------------------------------------------
LETTER FROM THE CEO
- --------------------------------------------------------------------------------
Dear Shareholders,
[Photo of Robert J. Manning]
Our firm was built on the strength of MFS Original Research(R), our in-depth
analysis of every security we consider for our portfolios. We've been honing
this process since 1932, when we created one of the mutual fund industry's
first research departments. And we continue to fine-tune this process so that
we can provide strong and consistent long-term investment performance to help
you achieve your financial goals.
While we have achieved strong investment performance in many of our portfolios,
our goal is to achieve the same strong results across all asset classes. To
ensure that our portfolio teams are doing the best possible job for our firm's
clients and shareholders, I am focusing the vast majority of my time on the
three key elements that I believe truly differentiate MFS from its competitors:
people, process, and culture.
PEOPLE
Our people have always been our most valuable resource. Our philosophy is to
deliver consistent, repeatable investment results by hiring the most talented
investors in our industry. We recruit from the nation's top business schools
and hire experienced analysts, both domestically and around the globe.
Our analysts are the engine that powers our entire investment team because
their recommendations have a direct impact on the investment performance of our
portfolios. To demonstrate our ongoing commitment in this area, we increased
the number of equity analysts at MFS from less than 40 at the end of 2000 to
about 50 in June 2004. During that same period, we doubled the average
investment experience of our domestic equity analysts, in part by recruiting
more seasoned analysts to the firm. Moreover, our international network of
investment personnel now spans key regions of the world with offices in London,
Mexico City, Singapore, and Tokyo, as well as Boston.
One of the major advantages that MFS has over many of its competitors is that
the position of research analyst is a long-term career for many members of our
team, not simply a steppingstone toward becoming a portfolio manager. We have
worked to elevate the stature of the analyst position to be on par with that of
a portfolio manager. In fact, an exceptional research analyst has the
opportunity to earn more at MFS than some portfolio managers.
At the same time, we look within the firm to promote talented analysts who
choose a path toward becoming a portfolio manager. We rarely hire portfolio
managers from our competitors because we believe the best investors are those
steeped in the MFS process and culture. In the past few months, we have
identified three senior research analysts who will assume roles on the
management teams of several of our larger portfolios. MFS is fortunate to have
a deep bench of talented investment personnel, and we welcome the opportunity
to put their skills to work for our clients.
PROCESS
MFS was built on the strength of its bottom-up approach to researching
securities. We have enhanced the mentoring process for our research analysts by
calling on several of our most seasoned portfolio managers to supplement the
work of Director of Global Equity Research David A. Antonelli. These portfolio
managers are taking a special interest in developing the careers of our
research analysts and strengthening our investment process. Kenneth J. Enright
of our value equity group is working with a team of domestic analysts; David E.
Sette-Ducati of our small- and mid-cap equity team is working with analysts
concentrating on small- and mid-cap companies; and Barnaby Wiener of our
international equity team in London heads the European equity research team.
We have combined the bottom-up approach of our research process with a top-
down approach to risk controls on portfolio composition. We have a very strong
quantitative team under the leadership of industry veteran Deborah H. Miller,
who represents the equity management department on the Management Committee of
the firm. Quantitative analysis helps us generate investment ideas and, more
importantly, assess the appropriate level of risk for each portfolio. The risk
assessment is designed to assure that each portfolio operates within its
investment objectives.
Additionally, we have increased the peripheral vision of our investment
personnel across asset classes through the collaboration of our Equity, Fixed
Income, Quantitative Analysis, and Risk Management teams. We recently codified
this key aspect of our culture by forming an Investment Management Committee,
composed of key members of these teams. This committee will work to ensure that
all teams are sharing information, actively debating investment ideas, and
creating a unified investment team.
CULTURE
Teamwork is at the heart of our ability to deliver consistent and competitive
investment performance over time. At MFS, each member of our team is involved
in our success; we have no superstars. The collaborative nature of our process
works to assure a consistent investment approach across all of our products and
provides a high level of continuity in portfolio management because our
investment performance never depends on the contributions of just a single
individual. Our culture is based on an environment of teamwork that allows our
investment personnel to be successful. In turn, we demand superior investment
results from every member of our team.
We have created a meritocracy at our firm based on investment results. We hold
all of our portfolio managers accountable for the performance of their
portfolios and their contributions to the team. We also track the equity and
fixed-income ratings of our analysts so we can evaluate them based on the
performance of their recommendations. We align bonus compensation to investment
performance by weighting rewards to those who have created the greatest
long-term benefit for our shareholders and who contribute most successfully to
the Original Research(SM) process.
The strength of our culture has resulted in a tremendous amount of stability.
Although we have dismissed members of our team whose performance did not meet
MFS' high standards, only one portfolio manager has voluntarily left the firm
over the past six months, based on a decision to retire from the industry.
In short, we can help you achieve your financial goals by hiring talented
people, following a disciplined process, and maintaining our firm's unique
culture. The enhancements described in this letter reflect the collaborative
spirit and the depth of resources in our investment teams.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R)
September 20, 2004
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
The opinions expressed in this letter are those of MFS, and no forecasts can be
guaranteed.
- --------------------------------------------------------------------------------
MFS ORIGINAL RESEARCH(R)
- --------------------------------------------------------------------------------
THE MFS(R) DIFFERENCE
For 80 years MFS has been offering investors clear paths to pursuing specific
investment objectives. Today, millions of individuals and thousands of
institutions all over the world look to MFS to manage their assets with
insight and care.
Our success, we believe, has to do with the fact that we see investors as
people with plans, not just dollars to invest.
When you invest with MFS, you invest with a company dedicated to helping you
realize your long-term financial goals.
INVESTORS CHOOSE MFS FOR OUR
o global asset management expertise across all asset classes
o time-tested money management process for pursuing consistent results
o full spectrum of investment products backed by MFS Original Research(R)
o resources and services that match real-life needs
TURNING INFORMATION INTO OPPORTUNITY
Sound investments begin with sound information. MFS has been doing its own
research and analyzing findings in-house for decades. The process we use to
uncover opportunity is called MFS Original Research(R).
MFS ORIGINAL RESEARCH INVOLVES
o meeting with the management of 3,000 companies each year to assess their
business plans and the managers' ability to execute those plans
o making onsite visits to more than 2,000 companies annually to gain first-hand
knowledge of their operations and products
o analyzing financial statements and balance sheets
o talking extensively with companies' customers and competitors
o developing our own proprietary estimates of companies' earnings
- --------------------------------------------------------------------------------
MANAGEMENT REVIEW
- --------------------------------------------------------------------------------
MARKET ENVIRONMENT
The recovery in global stock markets that began in the spring of 2003 continued
into the first quarter of 2004. Business capital expenditures, which had been
weak for several years, began to trend upward in the latter half of 2003,
adding support to a recovery that had been fueled largely by consumer spending.
In the spring and summer of 2004, many measures of global economic growth,
including employment, corporate spending, and earnings growth, continued to
improve. But stock prices made only modest gains as investors, in our view,
became increasingly concerned about higher interest rates, rising oil prices, a
slowdown in corporate earnings growth, and continuing unrest in Iraq. The U.S.
Federal Reserve Board raised interest rates in June and again in August, and
set expectations for an ongoing series of modest rate hikes. A pullback in
equity markets near the end of the period was triggered, we believe, by
indications from a number of bellwether companies that earnings growth was
starting to slow.
CONTRIBUTORS TO PERFORMANCE
Stock selection in the financial services sector added significantly to
relative results. Within the sector, key contributors included OTP Bank in
Hungary and German real estate finance company Hypo Real Estate. OTP Bank
benefited, in our view, from exposure to the underpenetrated market for
financial services in Eastern Europe. We believe a more positive German
economic environment and a strong balance sheet drove strong returns from Hypo
Real Estate, a real-estate spinoff from HypoVereinsbank. OTP Bank was not a
position in the fund's benchmark, the Morgan Stanley Capital International
(MSCI) EAFE (Europe, Australasia, Far East) Index.
Stock selection in the basic materials area also aided relative performance.
Within the sector, the strongest contribution came from Brazilian firm
Companhia Vale do Rio Doce (CVRD), the world's largest miner of iron ore. Along
with many other commodities, iron ore rose sharply in price over the period,
partly in response to strong demand from China. CVRD was not a holding in the
fund's benchmark.
In technology, stock selection and an underweighting in the sector had a
positive impact on relative returns. Dramatically underweighting Finnish
cellular equipment maker Nokia and selling our position during the period
helped relative performance as the stock fell sharply in mid-2004. The fund's
holding in Nippon Electric Glass, a Japanese producer of specialty glass for
electronics applications, also aided relative results. Nippon's stock price
received a lift when its liquid crystal display business accelerated in the
latter part of 2003. We sold our position when it reached our price target.
Nippon was not a component of the fund's benchmark.
Relative results were also helped by stockpicking in the consumer staples
sector. Japanese food and chemical firm Kibun Food Chemifa, which was not a
holding in the portfolio's benchmark, was the largest relative contributor in
the sector.
Stocks in other sectors that aided relative returns included Sekisui Chemical,
a Japanese prefabricated home builder and chemical company, and Japanese
technology conglomerate SOFTBANK. Avoiding benchmark component NTT DoCoMo also
helped relative performance as the Japanese cellular provider's stock plummeted
over the period.
DETRACTORS FROM PERFORMANCE
Stock selection in the utilities and communications and the leisure areas hurt
relative returns during the period. Japanese company Vodafone Holdings,
formerly known as Japan Telecom, and Korean firm Hanaro Telecom were the two
largest detractors in the utilities and communications sector. Vodafone
Holdings missed its third-quarter 2003 earnings estimate and announced in
December 2003 that it would again delay its 3G (third generation) wireless
introduction. We sold our position during the period. Hanaro Telecom used the
fourth quarter of 2003 to resolve problems in its balance sheet related to
equipment write-offs and financing costs. In addition, a number of individual
but significant stakeholders in the company sold their shares during the
period, and we believe those sales depressed the company's stock price. Neither
Hanaro nor Vodafone Holdings was a position in the fund's benchmark.
Leisure holdings that detracted significantly from performance included Dutch
market research and media firm VNU, which was sold out of the portfolio, and
Japanese camera lens manufacturer Tamron. Sales to digital camera manufacturers
represented a large portion of Tamron's business, and we believe investor
skepticism about future sales trends for digital cameras hurt Tamron's stock.
Tamron was not a component of the fund's benchmark.
In the transportation sector, the fund's position in British low-cost airline
easyJet was the primary detractor from relative results. We believe the stock
fell sharply because investors were concerned about increasing competition
among no-frills carriers. EasyJet was not held by the fund's benchmark.
Stocks in other sectors that held back relative performance included Kookmin
Bank, a Korean financial services firm that was not represented in the
benchmark, and Honda Motor Co. in Japan. Kookmin stock sank and we sold it out
of the portfolio. While Honda stock performed well for the period as a whole,
we sold our position as the stock was rising and missed some of its subsequent
strong performance.
The portfolio's cash position, while it averaged less than 3% of assets over
the period, also detracted from relative performance. As with nearly all mutual
funds, this portfolio holds some cash to buy new holdings and to provide
liquidity. In a period when equity markets rose sharply, holding any cash hurt
performance against the fund's benchmark, the MSCI EAFE Index, which has no
cash position.
Respectfully,
/s/ David A. Antonelli
David A. Antonelli
Director of Global Equity Research
The fund is managed by a team of global MFS equity research analysts under the
general supervision of Mr. Antonelli.
The views expressed in this report are those of the Director of Global Equity
Research only through the end of the period of the report as stated on the
cover and do not necessarily reflect the views of MFS or any other person in
the MFS organization. These views are subject to change at any time based on
market and other conditions, and MFS disclaims any responsibility to update
such views. These views may not be relied upon as investment advice or as an
indication of trading intent on behalf of any MFS fund. References to specific
securities are not recommendations of such securities and may not be
representative of any MFS fund's current or future investments.
The fund will charge a 2% redemption fee on proceeds from A, B, C, and I shares
redeemed or exchanged within 5 business days of acquiring (either by purchasing
or exchanging) fund shares. See the prospectus for complete details.
- -------------------------------------------------------------------------------
Visit mfs.com for our latest economic and investment outlook.
o Under Updates & Announcements, click Week in Review for a summary of recent
investment-related news.
o From Week in Review, link to MFS Global Perspective for our current view of
the world.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
-------------------------------------------------------
PORTFOLIO STRUCTURE
-------------------------------------------------------
Stocks 97.6%
Cash and Other Net Assets 2.4%
-------------------------------------------------------
TOP 10 HOLDINGS
-------------------------------------------------------
VODAFONE GROUP PLC 2.6%
-------------------------------------------------------
BP PLC 2.6%
-------------------------------------------------------
SOFTBANK CORP. 2.5%
-------------------------------------------------------
ASTRAZENECA PLC 2.2%
-------------------------------------------------------
SEIKO EPSON CORP. 2.2%
-------------------------------------------------------
SEKISUI CHEMICAL CO. LTD. 2.1%
-------------------------------------------------------
TOKYO GAS CO. LTD. 2.0%
-------------------------------------------------------
ROYAL BANK OF SCOTLAND GROUP PLC 2.0%
-------------------------------------------------------
AXA S.A. 1.9%
-------------------------------------------------------
UBS AG 1.8%
-------------------------------------------------------
-------------------------------------------------------
TOP 5 SECTOR WEIGHTINGS
-------------------------------------------------------
Financial Services 25.7%
-------------------------------------------------------
Utilities & Communications 11.8%
-------------------------------------------------------
Autos & Housing 10.0%
-------------------------------------------------------
Health Care 8.6%
-------------------------------------------------------
Energy 8.1%
-------------------------------------------------------
-------------------------------------------------------
TOP 5 COUNTRIES
-------------------------------------------------------
Japan 25.2%
-------------------------------------------------------
United Kingdom 18.9%
-------------------------------------------------------
France 8.5%
-------------------------------------------------------
Switzerland 6.0%
-------------------------------------------------------
Germany 4.4%
-------------------------------------------------------
Percentages are based on total net assets as of 8/31/04.
The portfolio is actively managed, and current holdings may be different.
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY THROUGH 8/31/04
- --------------------------------------------------------------------------------
The following chart illustrates the historical performance of the fund's
original share class in comparison to its benchmark. Performance results
include the deduction of the maximum applicable sales charge and reflect the
percentage change in net asset value, including reinvestment of dividends and
capital gains distributions. Benchmark comparisons are unmanaged and do not
reflect any fees or expenses. The performance of other share classes will be
greater than or less than the line shown. (See Notes to Performance Summary.)
VISIT MFS.COM FOR THE MOST RECENT MONTH-END PERFORMANCE RESULTS. MARKET
VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND CURRENT
PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE
OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. ANY
HIGH SHORT-TERM RETURNS MAY BE AND LIKELY WERE ATTRIBUTABLE TO RECENT FAVORABLE
MARKET CONDITIONS, WHICH MAY NOT BE REPEATED. THE PERFORMANCE SHOWN DOES NOT
REFLECT THE DEDUCTION OF TAXES, IF ANY, THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from the commencement of the fund's investment operations,
January 2, 1997, through August 31, 2004. Index information is from
January 2, 1997.)
MFS Research
International MSCI EAFE
Fund -- Class A Index
1/97 $ 9,425 $10,000
8/98 10,735 10,490
8/00 17,638 14,517
8/02 12,143 9,4030
8/04 16,060 12,683
TOTAL RETURNS
- --------------------
Average annual
without sales charge
- --------------------
Class
Share class inception date 1-yr 3-yr 5-yr Life*
- ------------------------------------------------------------------------------
A 1/2/97 23.65% 5.19% 3.90% 7.21%
- ------------------------------------------------------------------------------
B 1/2/98 22.97% 4.55% 3.26% 6.65%
- ------------------------------------------------------------------------------
C 1/2/98 22.92% 4.53% 3.25% 6.64%
- ------------------------------------------------------------------------------
I 1/2/97 24.05% 5.57% 4.30% 7.56%
- ------------------------------------------------------------------------------
R1 12/31/02 23.50% 5.11% 3.86% 7.18%
- ------------------------------------------------------------------------------
R2 10/31/03 23.32% 5.09% 3.85% 7.17%
- ------------------------------------------------------------------------------
529A 7/31/02 23.39% 5.02% 3.81% 7.14%
- ------------------------------------------------------------------------------
529B 7/31/02 22.47% 4.54% 3.52% 6.95%
- ------------------------------------------------------------------------------
529C 7/31/02 22.62% 4.56% 3.53% 6.95%
- ------------------------------------------------------------------------------
- --------------------
Average annual
- --------------------
Comparative benchmarks
- ------------------------------------------------------------------------------
Average international multi cap core
fund+ 19.80% 3.61% -0.27% 3.38%
- ------------------------------------------------------------------------------
MSCI EAFE Index# 23.09% 4.79% -0.83% 3.15%
- ------------------------------------------------------------------------------
- --------------------
Average annual
with sales charge
- --------------------
Share class
- ------------------------------------------------------------------------------
A 16.54% 3.13% 2.68% 6.38%
- ------------------------------------------------------------------------------
B 18.97% 3.63% 2.90% 6.65%
- ------------------------------------------------------------------------------
C 21.92% 4.53% 3.25% 6.64%
- ------------------------------------------------------------------------------
529A 16.29% 2.97% 2.58% 6.31%
- ------------------------------------------------------------------------------
529B 18.47% 3.62% 3.17% 6.95%
- ------------------------------------------------------------------------------
529C 21.62% 4.56% 3.53% 6.95%
- ------------------------------------------------------------------------------
I, R1, and R2 Class shares do not have a sales charge. Please see Notes to
Performance Summary for more details.
- --------------------
Cumulative
without sales charge
- --------------------
Share class
- ------------------------------------------------------------------------------
A 23.65% 16.38% 21.10% 70.39%
- ------------------------------------------------------------------------------
B 22.97% 14.29% 17.39% 63.77%
- ------------------------------------------------------------------------------
C 22.92% 14.23% 17.35% 63.58%
- ------------------------------------------------------------------------------
I 24.05% 17.65% 23.41% 74.75%
- ------------------------------------------------------------------------------
R1 23.50% 16.14% 20.85% 70.03%
- ------------------------------------------------------------------------------
R2 23.32% 16.07% 20.78% 69.94%
- ------------------------------------------------------------------------------
529A 23.39% 15.83% 20.53% 69.59%
- ------------------------------------------------------------------------------
529B 22.47% 14.25% 18.88% 67.27%
- ------------------------------------------------------------------------------
529C 22.62% 14.30% 18.93% 67.34%
- ------------------------------------------------------------------------------
* For the period from the commencement of the fund's investment operations,
January 1, 1997, through August 31, 2004. Index information is from January
2, 1997.
+ Source: Lipper Inc., an independent firm that reports mutual fund
performance.
# Source: Standard & Poor's Micropal, Inc.
INDEX DEFINITION
MSCI EAFE INDEX - the MSCI Europe, Australasia, Far East Index measuring the
equity market performance of 21 developed market countries excluding the U.S.
and Canada.
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
Class A and 529A results, including sales charge, reflect the deduction of the
maximum 5.75% sales charge. Class B and 529B results, including sales charge,
reflect the deduction of the applicable contingent deferred sales charge
(CDSC), which declines over six years from 4% to 0%. Class C and 529C results
including sales charge (assuming redemption within one year from the end of the
calendar month of purchase), reflect the deduction of the 1% CDSC. Class I
shares have no sales charges and are available only to certain investors. Class
R1 and R2 shares have no sales charges and are available only to certain
retirement plans. Class 529A, 529B, and 529C shares are only available in
conjunction with qualified tuition programs, such as the MFS 529 Savings Plan.
Performance for share classes offered after Class A shares includes the
performance of the fund's Class A shares for periods prior to their offering.
This blended class performance has been adjusted to take into account
differences in sales loads, if any, applicable to these share classes, but has
not been adjusted to take into account differences in class specific operating
expenses (such as Rule 12b-1 fees). Compared to performance these share classes
would have experienced had they been offered for the entire period, the use of
blended performance generally results in higher performance for share classes
with higher operating expenses than the initial share class to which it is
blended, and lower performance for share classes with lower operating expenses
than the initial share class to which it is blended.
Performance results reflect any applicable expense subsidies and waivers in
effect during the periods shown. Without such subsidies and waivers, the fund's
performance results would be less favorable. Please see the prospectus and
financial statements for complete details. There also is an additional annual
fee, which is detailed in the program description, on qualified tuition
programs. If this fee were reflected the performance for Class 529 shares would
have been lower.
KEY RISK CONSIDERATIONS
The portfolio may invest in foreign and/or emerging markets securities, which
are more susceptible to risks relating to interest rates, currency exchange
rates, economic, and political conditions.
The portfolio may invest a substantial amount of its assets in issuers located
in a limited number of countries and therefore is susceptible to adverse
economic, political or regulatory developments affecting those countries.
The portfolio's value will vary daily since its investments will fluctuate in
response to issuer, market, regulatory, economic, or political developments.
Because stocks tend to be more volatile than some other investments, such as
bonds, the more assets a fund dedicates to stocks, generally the more volatile
the portfolio's value will be. Historically, stocks have outperformed bonds
over time. The portfolio's investment risks should be considered prior to
investing. Please see the prospectus for further information on these and other
risk considerations.
- -------------------------------------------------------------------------------
EXPENSE TABLE
- -------------------------------------------------------------------------------
FUND EXPENSES BORNE BY SHAREHOLDERS DURING THE PERIOD FROM
MARCH 1, 2004, THROUGH AUGUST 31, 2004.
As a shareholder of the fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on certain purchase or redemption
payments and redemption fees on certain exchanges and redemptions, and (2)
ongoing costs, including management fees; distribution and service (12b-1)
fees; and other fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of
the period and held for the entire period, March 1, 2004 through August 31,
2004.
ACTUAL EXPENSES
The first line for each share class in the table below provides information
about actual account values and actual expenses. You may use the information in
this line, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the first line under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during
this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line for each share class in the table below provides information
about hypothetical account values and hypothetical expenses based on the fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption fees. Therefore, the second line for each share
class in the table is useful in comparing ongoing costs only, and will not help
you determine the relative total costs of owning different funds. In addition,
if these transactional costs were included, your costs would have been higher.
- --------------
Share Class
- --------------
- -------------------------------------------------------------------------------
Expenses
Paid During
Annualized Beginning Ending Period**
Expense Account Value Account Value* 3/01/04-
Ratio 3/01/04 8/31/04 8/31/04
- -------------------------------------------------------------------------------
Actual 1.63% $1,000 $1,007 $8.25
A -------------------------------------------------------------------------
Hypothetical 1.63% $1,000 $1,017 $8.29
------------------------------------------------------------------------------
Actual 2.27% $1,000 $1,004 $11.47
B -------------------------------------------------------------------------
Hypothetical 2.27% $1,000 $1,014 $11.52
------------------------------------------------------------------------------
Actual 2.27% $1,000 $1,004 $11.47
C -------------------------------------------------------------------------
Hypothetical 2.27% $1,000 $1,014 $11.52
------------------------------------------------------------------------------
Actual 1.28% $1,000 $1,009 $6.48
I -------------------------------------------------------------------------
Hypothetical 1.28% $1,000 $1,019 $6.51
------------------------------------------------------------------------------
Actual 1.78% $1,000 $1,007 $9.01
R1 -------------------------------------------------------------------------
Hypothetical 1.78% $1,000 $1,016 $9.05
------------------------------------------------------------------------------
Actual 2.06% $1,000 $1,006 $10.41
R2 -------------------------------------------------------------------------
Hypothetical 2.06% $1,000 $1,015 $10.46
------------------------------------------------------------------------------
Actual 1.88% $1,000 $1,006 $9.51
529A -------------------------------------------------------------------------
Hypothetical 1.88% $1,000 $1,016 $9.55
------------------------------------------------------------------------------
Actual 2.52% $1,000 $1,003 $12.72
529B -------------------------------------------------------------------------
Hypothetical 2.52% $1,000 $1,012 $12.78
------------------------------------------------------------------------------
Actual 2.52% $1,000 $1,003 $12.72
529C -------------------------------------------------------------------------
Hypothetical 2.52% $1,000 $1,012 $12.78
- -------------------------------------------------------------------------------
* Ending account value reflects each class' ending account value assuming the
actual class return per year before expenses (Actual) and a hypothetical 5%
class return per year before expenses (Hypothetical).
** Expenses paid is equal to each class' annualized expense ratio for the most
recent six month period, as shown above, multiplied by the average account
value over the period, multiplied by the number of days in the period,
divided by the number of days in the year. Expenses paid do not include any
applicable sales charges (loads) or redemption fees. If these transaction
costs had been included, your costs would have been higher.
- -------------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS - 8/31/04
- -------------------------------------------------------------------------------------------------
The Portfolio of Investments is a complete list of all securities owned by your
fund. It is categorized by broad-based asset classes.
Stocks - 97.1%
- -------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
Foreign Stocks - 96.4%
- -------------------------------------------------------------------------------------------------
Australia - 1.7%
- -------------------------------------------------------------------------------------------------
News Corp. Ltd. (Broadcast & Cable TV)^ 1,374,333 $10,710,510
- -------------------------------------------------------------------------------------------------
Westpac Banking Corp. (Banks & Credit Companies) 892,156 10,621,445
- -------------------------------------------------------------------------------------------------
$21,331,955
- -------------------------------------------------------------------------------------------------
Austria - 1.0%
- -------------------------------------------------------------------------------------------------
Erste Bank der Oesterreichischen Sparkassen AG (Banks &
Credit Companies) 349,180 $13,342,346
- -------------------------------------------------------------------------------------------------
Brazil - 3.5%
- -------------------------------------------------------------------------------------------------
Aracruz Celulose S.A., ADR (Forest & Paper Products)^ 483,710 $16,837,945
- -------------------------------------------------------------------------------------------------
Brasil Telecom Participacoes S.A., ADR (Telephone Services) 216,620 7,068,311
- -------------------------------------------------------------------------------------------------
Companhia Vale do Rio Doce, ADR (Metals & Mining) 359,430 20,764,271
- -------------------------------------------------------------------------------------------------
$44,670,527
- -------------------------------------------------------------------------------------------------
Canada - 0.8%
- -------------------------------------------------------------------------------------------------
EnCana Corp. (Energy - Independent) 244,750 $9,995,650
- -------------------------------------------------------------------------------------------------
China - 0.4%
- -------------------------------------------------------------------------------------------------
Huaneng Power International, Inc. (Utilities - Electric
Power) 6,421,000 $4,774,590
- -------------------------------------------------------------------------------------------------
Finland - 0.5%
- -------------------------------------------------------------------------------------------------
Stora Enso Oyj (Forest & Paper Products) 438,080 $5,891,861
- -------------------------------------------------------------------------------------------------
France - 8.5%
- -------------------------------------------------------------------------------------------------
AXA (Insurance)^ 1,152,640 $23,741,755
- -------------------------------------------------------------------------------------------------
Compagnie Generale des Etablissements Michelin (Automotive)^ 174,660 9,250,288
- -------------------------------------------------------------------------------------------------
Credit Agricole S.A. (Banks & Credit Companies)^ 591,401 14,980,373
- -------------------------------------------------------------------------------------------------
Pernod Ricard (Alcoholic Beverages)^ 99,520 12,345,348
- -------------------------------------------------------------------------------------------------
Sanofi-Synthelabo (Pharmaceuticals)^ 254,532 18,144,258
- -------------------------------------------------------------------------------------------------
Suez S.A. (Utilities - Electric Power)^ 943,400 18,405,900
- -------------------------------------------------------------------------------------------------
TOTAL S.A. (Energy - Integrated)^ 58,670 11,484,295
- -------------------------------------------------------------------------------------------------
$108,352,217
- -------------------------------------------------------------------------------------------------
Germany - 4.4%
- -------------------------------------------------------------------------------------------------
Bayerische Motoren Werke AG (Automotive) 306,560 $12,698,182
- -------------------------------------------------------------------------------------------------
Deutsche Telekom AG (Telephone Services) 1,073,700 18,804,096
- -------------------------------------------------------------------------------------------------
Hypo Real Estate Holding AG (Real Estate) 379,140 12,162,729
- -------------------------------------------------------------------------------------------------
Porsche AG (Automotive)^ 20,711 12,650,293
- -------------------------------------------------------------------------------------------------
$56,315,300
- -------------------------------------------------------------------------------------------------
Greece - 0.3%
- -------------------------------------------------------------------------------------------------
Coca-Cola HBC (Food & Non-Alcoholic Beverages) 185,400 $4,406,605
- -------------------------------------------------------------------------------------------------
Hong Kong - 3.3%
- -------------------------------------------------------------------------------------------------
China Mengniu Dairy Co. Ltd. (Food & Non-Alcoholic
Beverages)* 11,150,000 $7,004,487
- -------------------------------------------------------------------------------------------------
China Petroleum & Chemical Corp. (Energy - Independent) 15,002,000 5,866,167
- -------------------------------------------------------------------------------------------------
CNOOC Ltd. (Energy - Independent) 19,311,000 9,098,452
- -------------------------------------------------------------------------------------------------
Denway Motors Ltd. (Automotive) 20,380,000 8,034,423
- -------------------------------------------------------------------------------------------------
Esprit Holdings Ltd. (Specialty Stores) 1,313,000 6,346,167
- -------------------------------------------------------------------------------------------------
Star Cruises Ltd. (Gaming & Lodging) 21,868,000 5,576,340
- -------------------------------------------------------------------------------------------------
$41,926,036
- -------------------------------------------------------------------------------------------------
Hungary - 2.0%
- -------------------------------------------------------------------------------------------------
MOL Magyar Olaj-es Gazipari Rt., GDR (Energy - Integrated) 239,950 $10,401,833
- -------------------------------------------------------------------------------------------------
OTP Bank Ltd., GDR (Banks & Credit Companies) 336,700 14,612,780
- -------------------------------------------------------------------------------------------------
$25,014,613
- -------------------------------------------------------------------------------------------------
India - 0.8%
- -------------------------------------------------------------------------------------------------
Bharti Tele-Ventures Ltd. (Telephone Services) 3,524,990 $10,643,849
- -------------------------------------------------------------------------------------------------
Ireland - 1.7%
- -------------------------------------------------------------------------------------------------
Anglo Irish Bank Corp. PLC (Banks & Credit Companies) 771,420 $12,864,676
- -------------------------------------------------------------------------------------------------
DEPFA BANK PLC (Banks & Credit Companies)^ 658,900 8,730,467
- -------------------------------------------------------------------------------------------------
$21,595,143
- -------------------------------------------------------------------------------------------------
Italy - 1.6%
- -------------------------------------------------------------------------------------------------
Italcementi S.p.A. - Ordinary (Construction)^ 240,070 $3,276,702
- -------------------------------------------------------------------------------------------------
Italcementi S.p.A. (Construction) 383,990 3,423,971
- -------------------------------------------------------------------------------------------------
Riunione Adriatica di Sicurta S.p.A. (Insurance)^ 769,810 13,636,842
- -------------------------------------------------------------------------------------------------
$20,337,515
- -------------------------------------------------------------------------------------------------
Japan - 25.2%
- -------------------------------------------------------------------------------------------------
Aiful Corp. (Banks & Credit Companies) 223,000 $22,384,838
- -------------------------------------------------------------------------------------------------
Aisin Seiki Co. Ltd. (Automotive) 266,400 6,435,019
- -------------------------------------------------------------------------------------------------
CANON, Inc. (Personal Computers & Peripherals) 369,000 17,657,606
- -------------------------------------------------------------------------------------------------
Chugai Pharmaceutical Co. Ltd. (Pharmaceuticals)^ 768,810 11,346,969
- -------------------------------------------------------------------------------------------------
Funai Electric Co. Ltd. (Electronics)^ 88,300 12,376,651
- -------------------------------------------------------------------------------------------------
HUNET, Inc. (Real Estate)^ 1,026,000 2,247,917
- -------------------------------------------------------------------------------------------------
Jaccs Co. Ltd. (Banks & Credit Companies) 472,000 2,539,891
- -------------------------------------------------------------------------------------------------
Kibun Food Chemifa Co. Ltd. (Food & Non-Alcoholic Beverages)^ 485,000 9,692,442
- -------------------------------------------------------------------------------------------------
Lawson, Inc. (Specialty Stores)^ 190,700 6,800,413
- -------------------------------------------------------------------------------------------------
LEOPALACE21 Corp. (Real Estate)^ 925,600 18,158,170
- -------------------------------------------------------------------------------------------------
Mitsui Mining & Smelting Co. Ltd. (Machinery & Tools) 1,782,000 7,253,133
- -------------------------------------------------------------------------------------------------
Nintendo Co. Ltd. (Leisure & Toys) 101,800 11,011,963
- -------------------------------------------------------------------------------------------------
Nissan Motor Co. Ltd. (Automotive) 1,640,100 17,921,797
- -------------------------------------------------------------------------------------------------
Seiko Epson Corp. (Electronics)^ 670,100 27,581,693
- -------------------------------------------------------------------------------------------------
Sekisui Chemical Co. Ltd. (Construction) 3,550,000 26,783,242
- -------------------------------------------------------------------------------------------------
SOFTBANK CORP. (Business Services)^ 728,600 31,258,633
- -------------------------------------------------------------------------------------------------
Sumitomo Bakelite Co. Ltd. (Specialty Chemicals)^ 2,063,000 12,746,592
- -------------------------------------------------------------------------------------------------
Sumitomo Mitsui Financial Group, Inc. (Banks & Credit
Companies)^ 1,428 8,652,959
- -------------------------------------------------------------------------------------------------
Takefuji Corp. (Banks & Credit Companies) 284,460 20,079,223
- -------------------------------------------------------------------------------------------------
Tamron Co. Ltd. (Leisure & Toys)^ 204,000 8,022,735
- -------------------------------------------------------------------------------------------------
Tanabe Seiyaku Co. Ltd. (Pharmaceuticals) 1,035,000 8,937,709
- -------------------------------------------------------------------------------------------------
Tokyo Gas Co. Ltd. (Natural Gas - Distribution)^ 6,845,390 25,226,629
- -------------------------------------------------------------------------------------------------
Toyota Motor Corp. (Automotive) 167,600 6,637,320
- -------------------------------------------------------------------------------------------------
$321,753,544
- -------------------------------------------------------------------------------------------------
Luxembourg - 0.9%
- -------------------------------------------------------------------------------------------------
Tenaris S.A., ADR (Oil Services) 284,200 $10,955,910
- -------------------------------------------------------------------------------------------------
Mexico - 3.5%
- -------------------------------------------------------------------------------------------------
America Movil S.A. de C.V., ADR (Telecommunications -
Wireless) 362,250 $12,407,063
- -------------------------------------------------------------------------------------------------
CEMEX S.A. de C.V., ADR (Construction) 449,223 12,713,011
- -------------------------------------------------------------------------------------------------
Grupo Elektra S.A. de C.V. (Specialty Stores) 852,680 5,623,055
- -------------------------------------------------------------------------------------------------
Grupo Televisa S.A., ADR (Broadcast & Cable TV)^ 227,450 10,947,168
- -------------------------------------------------------------------------------------------------
Wal-Mart de Mexico S.A. de C.V. (General Merchandise) 1,101,300 3,510,255
- -------------------------------------------------------------------------------------------------
$45,200,552
- -------------------------------------------------------------------------------------------------
Netherlands - 1.0%
- -------------------------------------------------------------------------------------------------
Royal KPN N.V. (Telephone Services)^ 1,669,840 $12,866,739
- -------------------------------------------------------------------------------------------------
Norway - 1.3%
- -------------------------------------------------------------------------------------------------
DnB Holding A.S.A. (Banks & Credit Companies)^ 1,168,398 $8,924,639
- -------------------------------------------------------------------------------------------------
Statoil A.S.A (Energy - Integrated)^ 573,370 7,370,183
- -------------------------------------------------------------------------------------------------
$16,294,822
- -------------------------------------------------------------------------------------------------
Singapore - 1.0%
- -------------------------------------------------------------------------------------------------
DBS Group Holdings Ltd. (Banks & Credit Companies) 1,383,000 $12,617,949
- -------------------------------------------------------------------------------------------------
South Korea - 0.5%
- -------------------------------------------------------------------------------------------------
Hanaro Telecom, Inc. (Telephone Services) 2,577,714 $6,704,519
- -------------------------------------------------------------------------------------------------
Spain - 3.4%
- -------------------------------------------------------------------------------------------------
Altadis S.A. (Tobacco) 612,100 $19,124,972
- -------------------------------------------------------------------------------------------------
Banco Bilbao Vizcaya Argentaria S.A. (Banks & Credit
Companies)^ 1,462,590 19,559,983
- -------------------------------------------------------------------------------------------------
Repsol YPF S.A. (Energy - Independent)^ 205,010 4,258,752
- -------------------------------------------------------------------------------------------------
$42,943,707
- -------------------------------------------------------------------------------------------------
Sweden - 4.2%
- -------------------------------------------------------------------------------------------------
Atlas Copco AB, "A" (Machinery & Tools)^ 333,370 $11,866,201
- -------------------------------------------------------------------------------------------------
Autoliv, Inc. (Automotive) 172,140 7,202,058
- -------------------------------------------------------------------------------------------------
Ericsson, Inc., "B" (Telecommunications - Wireline) 5,325,630 14,409,594
- -------------------------------------------------------------------------------------------------
Sandvik AB (Machinery & Tools)^ 575,280 19,747,012
- -------------------------------------------------------------------------------------------------
$53,224,865
- -------------------------------------------------------------------------------------------------
Switzerland - 6.0%
- -------------------------------------------------------------------------------------------------
Novartis AG (Pharmaceuticals) 333,590 $15,478,233
- -------------------------------------------------------------------------------------------------
Roche Holding AG (Pharmaceuticals) 218,580 21,284,045
- -------------------------------------------------------------------------------------------------
Syngenta AG (Chemicals) 111,134 10,004,412
- -------------------------------------------------------------------------------------------------
Synthes, Inc. (Medical Equipment) 64,300 6,899,829
- -------------------------------------------------------------------------------------------------
UBS AG (Banks & Credit Companies) 342,953 23,104,520
- -------------------------------------------------------------------------------------------------
$76,771,039
- -------------------------------------------------------------------------------------------------
United Kingdom - 18.9%
- -------------------------------------------------------------------------------------------------
AstraZeneca PLC (Pharmaceuticals) 607,980 $28,118,079
- -------------------------------------------------------------------------------------------------
Aviva PLC (Insurance) 1,890,601 18,191,171
- -------------------------------------------------------------------------------------------------
Barclays PLC (Banks & Credit Companies) 2,311,990 21,521,957
- -------------------------------------------------------------------------------------------------
BP PLC, ADR (Energy - Integrated) 620,954 33,345,230
- -------------------------------------------------------------------------------------------------
Cadbury Schweppes PLC (Food & Non-Alcoholic Beverages) 1,931,170 15,547,540
- -------------------------------------------------------------------------------------------------
easyJet Airline Co. Ltd. (Airlines) 1,799,440 4,759,244
- -------------------------------------------------------------------------------------------------
Johnston Press PLC (Printing & Publishing) 839,733 7,861,946
- -------------------------------------------------------------------------------------------------
Kingfisher PLC (Specialty Stores) 2,724,690 13,671,333
- -------------------------------------------------------------------------------------------------
Reckitt Benckiser PLC (Consumer Goods & Services) 521,190 13,759,527
- -------------------------------------------------------------------------------------------------
Reed Elsevier PLC (Printing & Publishing) 1,046,000 9,313,809
- -------------------------------------------------------------------------------------------------
Royal Bank of Scotland Group PLC (Banks & Credit Companies) 898,701 25,164,987
- -------------------------------------------------------------------------------------------------
Vodafone Group PLC (Telecommunications - Wireless) 14,675,030 33,470,985
- -------------------------------------------------------------------------------------------------
William Hill Ltd. (Gaming & Lodging) 619,200 6,079,605
- -------------------------------------------------------------------------------------------------
Yell Group PLC (Broadcast & Cable TV) 1,623,030 9,994,590
- -------------------------------------------------------------------------------------------------
$240,800,003
- -------------------------------------------------------------------------------------------------
Total Foreign Stocks $1,228,731,856
- -------------------------------------------------------------------------------------------------
U.S. Stocks - 0.7%
- -------------------------------------------------------------------------------------------------
Business Services - 0.7%
- -------------------------------------------------------------------------------------------------
Manpower, Inc. 213,800 $9,028,774
- -------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $1,147,226,164) $1,237,760,630
- -------------------------------------------------------------------------------------------------
Short-Term Obligations - 2.0%
- -------------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
- -------------------------------------------------------------------------------------------------
Citicorp, Inc., due 9/10/04 $5,000,000 $4,998,188
- -------------------------------------------------------------------------------------------------
General Electric Capital Corp., 1.57%, due 9/01/04 3,766,000 3,766,000
- -------------------------------------------------------------------------------------------------
Royal Bank of Canada, 1.57%, due 9/01/04 16,781,000 16,781,000
- -------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $25,545,188
- -------------------------------------------------------------------------------------------------
Repurchase Agreement - 0.7%
- -------------------------------------------------------------------------------------------------
Morgan Stanley, 1.57%, dated 8/31/04, due 9/01/04, total to
be received $8,653,377 (secured by various U.S. Treasury and
Federal Agency obligations in a jointly traded account),
at Cost $8,653,000 $8,653,000
- -------------------------------------------------------------------------------------------------
Portfolio of Investments - continued
Collateral for Securities Loaned - 22.7%
- -------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio, at Cost and
Net Asset Value 289,279,630 $289,279,630
- -------------------------------------------------------------------------------------------------
Total Investments (+) (Identified Cost, $1,470,703,982) $1,561,238,448
- -------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - (22.5)% (285,989,933)
- -------------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,275,248,515
- -------------------------------------------------------------------------------------------------
* Non-income producing security.
^ All or a portion of this security is on loan.
(+) As of August 31, 2004, 46 securities representing $630,546,644 and approximately 49.5% of net
assets were fair valued in accordance with the policies adopted by the Board of Trustees.
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------------------------------
This statement represents your fund's balance sheet, which details the assets and liabilities
composing the total value of your fund.
AT 8/31/04
ASSETS
Investments, at value, including $275,153,184 of
securities on loan (identified cost, $1,470,703,982) $1,561,238,448
- -----------------------------------------------------------------------------------------------------
Cash 7,067
- -----------------------------------------------------------------------------------------------------
Foreign currency, at value (identified cost, $117,915) 118,655
- -----------------------------------------------------------------------------------------------------
Receivable for investments sold 29,244,326
- -----------------------------------------------------------------------------------------------------
Receivable for fund shares sold 1,976,984
- -----------------------------------------------------------------------------------------------------
Interest and dividends receivable 2,053,917
- -----------------------------------------------------------------------------------------------------
Receivable from administrative proceeding settlement 8,027
- -----------------------------------------------------------------------------------------------------
Total assets $1,594,647,424
- -----------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased $29,058,578
- -----------------------------------------------------------------------------------------------------
Payable for fund shares reacquired 1,004,106
- -----------------------------------------------------------------------------------------------------
Collateral for securities loaned, at value 289,279,630
- -----------------------------------------------------------------------------------------------------
Payable to affiliates
- -----------------------------------------------------------------------------------------------------
Management fee 30,527
- -----------------------------------------------------------------------------------------------------
Reimbursement fee 13,649
- -----------------------------------------------------------------------------------------------------
Distribution and service fee 12,412
- -----------------------------------------------------------------------------------------------------
Program manager fee 4
- -----------------------------------------------------------------------------------------------------
Administrative service fee 3
- -----------------------------------------------------------------------------------------------------
Total liabilities $319,398,909
- -----------------------------------------------------------------------------------------------------
Net assets $1,275,248,515
- -----------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Paid-in capital $1,134,575,736
- -----------------------------------------------------------------------------------------------------
Unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies 90,500,116
- -----------------------------------------------------------------------------------------------------
Accumulated undistributed net realized gain on
investments and foreign currency transactions 41,868,237
- -----------------------------------------------------------------------------------------------------
Accumulated undistributed net investment income 8,304,426
- -----------------------------------------------------------------------------------------------------
Net assets $1,275,248,515
- -----------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 89,320,807
- -----------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued
Class A shares
Net assets $593,574,262
- -----------------------------------------------------------------------------------------------------
Shares outstanding 41,644,650
- -----------------------------------------------------------------------------------------------------
Net asset value per share $14.25
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/94.25X$14.25) $15.12
- -----------------------------------------------------------------------------------------------------
Class B shares
Net assets $116,165,017
- -----------------------------------------------------------------------------------------------------
Shares outstanding 8,445,080
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $13.76
- -----------------------------------------------------------------------------------------------------
Class C shares
Net assets $75,579,575
- -----------------------------------------------------------------------------------------------------
Shares outstanding 5,504,518
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $13.73
- -----------------------------------------------------------------------------------------------------
Class I shares
Net assets $469,180,514
- -----------------------------------------------------------------------------------------------------
Shares outstanding 32,263,683
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $14.54
- -----------------------------------------------------------------------------------------------------
Class R1 shares
Net assets $19,595,952
- -----------------------------------------------------------------------------------------------------
Shares outstanding 1,380,478
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $14.20
- -----------------------------------------------------------------------------------------------------
Class R2 shares
Net assets $431,043
- -----------------------------------------------------------------------------------------------------
Shares outstanding 30,435
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $14.16
- -----------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued
Class 529A shares
Net assets $331,950
- -----------------------------------------------------------------------------------------------------
Shares outstanding 23,408
- -----------------------------------------------------------------------------------------------------
Net asset value and redemption price per share $14.18
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/94.25X$14.18) $15.05
- -----------------------------------------------------------------------------------------------------
Class 529B shares
Net assets $109,958
- -----------------------------------------------------------------------------------------------------
Shares outstanding 8,036
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $13.68
- -----------------------------------------------------------------------------------------------------
Class 529C shares
Net assets $280,244
- -----------------------------------------------------------------------------------------------------
Shares outstanding 20,519
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $13.66
- -----------------------------------------------------------------------------------------------------
On sales of $50,000 or more, the offering price of Class A and Class 529A shares are reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class B, and Class C,
Class 529B and Class 529C shares.
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
This statement describes how much your fund received in investment income and paid in expenses. It
also describes any gains and/or losses generated by fund operations.
FOR YEAR ENDED 8/31/04
NET INVESTMENT INCOME (LOSS)
Income
- -----------------------------------------------------------------------------------------------------
Dividends $28,078,968
- -----------------------------------------------------------------------------------------------------
Interest 1,183,018
- -----------------------------------------------------------------------------------------------------
Foreign taxes withheld (2,590,883)
- -----------------------------------------------------------------------------------------------------
Total investment income $26,671,103
- -----------------------------------------------------------------------------------------------------
Expenses
- -----------------------------------------------------------------------------------------------------
Management fee $9,995,090
- -----------------------------------------------------------------------------------------------------
Trustees' compensation 31,417
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 1,750,575
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class A) 1,871,325
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class B) 1,080,488
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class C) 660,093
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class R1) 54,140
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class R2) 184
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529A) 822
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529B) 824
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529C) 2,037
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529A) 587
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529B) 206
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529C) 509
- -----------------------------------------------------------------------------------------------------
Administrative service fee (Class R2) 92
- -----------------------------------------------------------------------------------------------------
Administrative fee 95,129
- -----------------------------------------------------------------------------------------------------
Custodian fee 1,357,549
- -----------------------------------------------------------------------------------------------------
Printing 131,372
- -----------------------------------------------------------------------------------------------------
Postage 87,350
- -----------------------------------------------------------------------------------------------------
Auditing fees 38,100
- -----------------------------------------------------------------------------------------------------
Legal fees 10,349
- -----------------------------------------------------------------------------------------------------
Miscellaneous 261,339
- -----------------------------------------------------------------------------------------------------
Reimbursement of expenses to investment adviser 643,028
- -----------------------------------------------------------------------------------------------------
Total expenses $18,072,605
- -----------------------------------------------------------------------------------------------------
Fees paid indirectly (81,038)
- -----------------------------------------------------------------------------------------------------
Net expenses $17,991,567
- -----------------------------------------------------------------------------------------------------
Net investment income $8,679,536
- -----------------------------------------------------------------------------------------------------
Statement of Operations - continued
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) (identified cost basis)
- -----------------------------------------------------------------------------------------------------
Investment transactions $154,256,135
- -----------------------------------------------------------------------------------------------------
Foreign currency transactions (290,730)
- -----------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign
currency transactions $153,965,405
- -----------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
- -----------------------------------------------------------------------------------------------------
Investments $40,992,264
- -----------------------------------------------------------------------------------------------------
Translation of assets and liabilities in foreign
currencies (17,603)
- -----------------------------------------------------------------------------------------------------
Net unrealized gain on investments and foreign
currency translation $40,974,661
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency $194,940,066
- -----------------------------------------------------------------------------------------------------
Increase in net assets from operations $203,619,602
- -----------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------------------------
This statement describes the increases and/or decreases in net assets
resulting from operations, any distributions, and any shareholder
transactions.
FOR YEARS ENDED 8/31 2004 2003
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income $8,679,536 $1,824,579
- -------------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency
transactions 153,965,405 7,945,831
- -------------------------------------------------------------------------------------------------------
Net unrealized gain on investments and foreign
currency translation 40,974,661 48,466,221
- ------------------------------------------------------------ --------------- ------------
Increase in net assets from operations $203,619,602 $58,236,631
- ------------------------------------------------------------ --------------- ------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income
- -------------------------------------------------------------------------------------------------------
Class A $(259,483) $--
- -------------------------------------------------------------------------------------------------------
Class I (782,661) --
- -------------------------------------------------------------------------------------------------------
Class R1 (13,715) --
- -------------------------------------------------------------------------------------------------------
Class R2 (13) --
- -------------------------------------------------------------------------------------------------------
Class 529A (122) --
- ------------------------------------------------------------ --------------- ------------
Total distributions declared to shareholders $(1,055,994) $--
- ------------------------------------------------------------ --------------- ------------
Net increase in net assets from fund share transactions $313,361,923 $243,714,815
- ------------------------------------------------------------ --------------- ------------
Redemption fees $19,901 $--
- ------------------------------------------------------------ --------------- ------------
Total increase in net assets $515,945,432 $301,951,446
- ------------------------------------------------------------ --------------- ------------
NET ASSETS
At beginning of period $759,303,083 $457,351,637
- -------------------------------------------------------------------------------------------------------
At end of period (including accumulated undistributed net
investment income of $8,304,426 and $971,614,
respectively) $1,275,248,515 $759,303,083
- -------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the fund's financial performance for the past 5 years (or,
if shorter, the period of the fund's operation). Certain information reflects financial results for a single fund share. The
total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund
(assuming reinvestment of all distributions) held for the entire period. This information has been audited by the fund's
independent registered public accounting firm, whose report, together with the fund's financial statements, are included in
this report.
YEARS ENDED 8/31
---------------------------------------------------------------------------------
CLASS A 2004 2003 2002 2001 2000
Net asset value, beginning of year $11.53 $10.78 $12.25 $16.19 $12.47
- ----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS#
Net investment income (loss)(S) $0.10 $0.04 $(0.00)+++ $(0.00)+++ $0.30
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and foreign
currency 2.63 0.71 (1.47) (3.44) 3.78
- ------------------------------------------ -------- ------ ------ ------ ------
Total from investment operations $2.73 $0.75 $(1.47) $(3.44) $4.08
- ------------------------------------------ -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
From net investment income $(0.01) $-- $-- $(0.09) $(0.02)
- ----------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
and foreign currency transactions -- -- -- (0.34) (0.34)
- ----------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- (0.00)+++ --
- ----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- (0.07) --
- ------------------------------------------ -------- ------ ------ ------ ------
Total distributions declared to
shareholders $(0.01) $-- $-- $(0.50) $(0.36)
- ------------------------------------------ -------- ------ ------ ------ ------
Redemption fees added to paid-in
capital# $0.00+++ $-- $-- $-- $--
- ------------------------------------------ -------- ------ ------ ------ ------
Net asset value, end of year $14.25 $11.53 $10.78 $12.25 $16.19
- ------------------------------------------ -------- ------ ------ ------ ------
Total return (%) 23.65 6.96 (12.00) (21.76) 33.00
- ----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
---------------------------------------------------------------------------------
CLASS A (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.67 1.75 1.77 1.76 1.77
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.75 0.36 (0.02) (0.02) 1.91
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 102 96 153 131 123
- ----------------------------------------------------------------------------------------------------------------------------
Net assets at end of year
(000 Omitted) $593,574 $387,732 $313,418 $240,231 $109,310
- ----------------------------------------------------------------------------------------------------------------------------
(S) MFS has contractually agreed, subject to reimbursement, to bear a portion of the fund's "Other Expenses", which are
defined as the fund's operating expenses, exclusive of management, distribution and service, and certain other fees and
expenses, such that Other Expenses do not exceed 0.40% annually. This arrangement is effected by MFS bearing all of the
fund's Other Expenses during the fund's fiscal year and the fund paying 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 unreimbursed amounts paid by MFS under the current agreement. This agreement will terminate
on the earlier of July 31, 2005 or such date as all expenses previously borne by MFS under the current agreement have
been paid by the fund. In addition, for the year ended August 31, 2004, the investment adviser has voluntarily agreed to
reimburse the fund for its proportional share of Independent Chief Compliance Officer services paid to Tarantino LLC. To
the extent actual expenses were over (under) this limitation, and the reimbursement had not been in place, the net
investment income (loss) per share and the ratios would have been:
Net investment income (loss) $0.11 $0.03 $(0.01) $(0.01) $0.29
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.61 1.80 1.86 1.84 1.84
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.81 0.31 (0.11) (0.10) 1.84
- ----------------------------------------------------------------------------------------------------------------------------
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
-----------------------------------------------------------------------------
CLASS B 2004 2003 2002 2001 2000
Net asset value, beginning of year $11.19 $10.54 $12.04 $15.98 $12.37
- ----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS#
Net investment income (loss)(S) $0.02 $(0.03) $(0.08) $(0.10) $0.18
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency 2.55 0.68 (1.42) (3.39) 3.77
- ----------------------------------------------- ------- ------ ------ ------ ------
Total from investment operations $2.57 $0.65 $(1.50) $(3.49) $3.95
- ----------------------------------------------- ------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
From net investment income $-- $-- $-- $(0.04) $--
- ----------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments and
foreign currency transactions -- -- -- (0.34) (0.34)
- ----------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- (0.00)+++ --
- ----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- (0.07) --
- ----------------------------------------------- ------- ------ ------ ------ ------
Total distributions declared to
shareholders $-- $-- $-- $(0.45) $(0.34)
- ----------------------------------------------- ------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- ----------------------------------------------- ------- ------ ------ ------ ------
Net asset value, end of year $13.76 $11.19 $10.54 $12.04 $15.98
- ----------------------------------------------- ------- ------ ------ ------ ------
Total return (%) 22.97 6.17 (12.46) (22.27) 32.14
- ----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
-----------------------------------------------------------------------------
CLASS B (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.31 2.40 2.42 2.41 2.42
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.12 (0.32) (0.69) (0.71) 1.19
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 102 96 153 131 123
- ----------------------------------------------------------------------------------------------------------------------------
Net assets at end of year
(000 Omitted) $116,165 $88,177 $82,659 $82,135 $60,559
- ----------------------------------------------------------------------------------------------------------------------------
(S) MFS has contractually agreed, subject to reimbursement, to bear a portion of the fund's "Other Expenses", which are
defined as the fund's operating expenses, exclusive of management, distribution and service, and certain other fees and
expenses, such that Other Expenses do not exceed 0.40% annually. This arrangement is effected by MFS bearing all of the
fund's Other Expenses during the fund's fiscal year and the fund paying 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 unreimbursed amounts paid by MFS under the current agreement. This agreement will terminate
on the earlier of July 31, 2005 or such date as all expenses previously borne by MFS under the current agreement have
been paid by the fund. In addition, for the year ended August 31, 2004, the investment adviser has voluntarily agreed to
reimburse the fund for its proportional share of Independent Chief Compliance Officer services paid to Tarantino LLC. To
the extent actual expenses were over (under) this limitation, and the reimbursement had not been in place, the net
investment income (loss) per share and the ratios would have been:
Net investment income (loss) $0.02 $(0.04) $(0.09) $(0.11) $0.17
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.25 2.45 2.51 2.49 2.49
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.18 (0.37) (0.78) (0.79) 1.12
- ----------------------------------------------------------------------------------------------------------------------------
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
-----------------------------------------------------------------------------
CLASS C 2004 2003 2002 2001 2000
Net asset value, beginning of year $11.17 $10.52 $12.02 $15.97 $12.36
- ----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS#
Net investment income (loss)(S) $0.02 $(0.03) $(0.08) $(0.09) $0.19
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency 2.54 0.68 (1.42) (3.40) 3.76
- ----------------------------------------------- ------- ------ ------ ------ ------
Total from investment operations $2.56 $0.65 $(1.50) $(3.49) $3.95
- ----------------------------------------------- ------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
From net investment income $-- $-- $-- $(0.05) $--
- ----------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments and
foreign currency transactions -- -- -- (0.34) (0.34)
- ----------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- (0.00)+++ --
- ----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- (0.07) --
- ----------------------------------------------- ------- ------ ------ ------ ------
Total distributions declared to
shareholders $-- $-- $-- $(0.46) $(0.34)
- ----------------------------------------------- ------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- ----------------------------------------------- ------- ------ ------ ------ ------
Net asset value, end of year $13.73 $11.17 $10.52 $12.02 $15.97
- ----------------------------------------------- ------- ------ ------ ------ ------
Total return (%) 22.92 6.18 (12.48) (22.27) 32.17
- ----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
-----------------------------------------------------------------------------
CLASS C (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.31 2.40 2.42 2.41 2.42
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.15 (0.32) (0.09) (0.10) 1.28
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 102 96 153 131 123
- ----------------------------------------------------------------------------------------------------------------------------
Net assets at end of year
(000 Omitted) $75,580 $46,022 $43,046 $47,375 $31,126
- ----------------------------------------------------------------------------------------------------------------------------
(S) MFS has contractually agreed, subject to reimbursement, to bear a portion of the fund's "Other Expenses", which are
defined as the fund's operating expenses, exclusive of management, distribution and service, and certain other fees and
expenses, such that Other Expenses do not exceed 0.40% annually. This arrangement is effected by MFS bearing all of the
fund's Other Expenses during the fund's fiscal year and the fund paying 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 unreimbursed amounts paid by MFS under the current agreement. This agreement will terminate
on the earlier of July 31, 2005 or such date as all expenses previously borne by MFS under the current agreement have
been paid by the fund. In addition, for the year ended August 31, 2004, the investment adviser has voluntarily agreed to
reimburse the fund for its proportional share of Independent Chief Compliance Officer services paid to Tarantino LLC. To
the extent actual expenses were over (under) this limitation, and the reimbursement had not been in place, the net
investment income (loss) per share and the ratios would have been:
Net investment income (loss) $0.03 $(0.04) $(0.09) $(0.10) $0.18
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.25 2.45 2.51 2.49 2.49
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.21 (0.37) (0.79) (0.78) 1.21
- ----------------------------------------------------------------------------------------------------------------------------
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
-----------------------------------------------------------------------------
CLASS I 2004 2003 2002 2001 2000
Net asset value, beginning of year $11.75 $10.95 $12.39 $16.33 $12.55
- ----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS#
Net investment income(S) $0.16 $0.10 $0.04 $0.03 $0.26
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency 2.66 0.70 (1.48) (3.46) 3.90
- ----------------------------------------------- ------- ------ ------ ------ ------
Total from investment operations $2.82 $0.80 $(1.44) $(3.43) $4.16
- ----------------------------------------------- ------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
From net investment income $(0.03) $-- $-- $(0.10) $(0.04)
- ----------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments and
foreign currency transactions -- -- -- (0.34) (0.34)
- ----------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- (0.00)+++ --
- ----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- (0.07) --
- ----------------------------------------------- ------- ------ ------ ------ ------
Total distributions declared to
shareholders $(0.03) $-- $-- $(0.51) $(0.38)
- ----------------------------------------------- ------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- ----------------------------------------------- ------- ------ ------ ------ ------
Net asset value, end of year $14.54 $11.75 $10.95 $12.39 $16.33
- ----------------------------------------------- ------- ------ ------ ------ ------
Total return (%) 24.05 7.31 (11.62) (21.49) 33.61
- ----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
-----------------------------------------------------------------------------
CLASS I (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.32 1.40 1.42 1.41 1.42
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income 1.18 0.95 0.38 0.25 1.66
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 102 96 153 131 123
- ----------------------------------------------------------------------------------------------------------------------------
Net assets at end of year
(000 Omitted) $469,181 $232,328 $18,207 $10,150 $10,398
- ----------------------------------------------------------------------------------------------------------------------------
(S) MFS has contractually agreed, subject to reimbursement, to bear a portion of the fund's "Other Expenses", which are
defined as the fund's operating expenses, exclusive of management, and certain other fees and expenses, such that Other
Expenses do not exceed 0.40% annually. This arrangement is effected by MFS bearing all of the fund's Other Expenses
during the fund's fiscal year and the fund paying 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 unreimbursed amounts paid by MFS under the current agreement. This agreement will terminate on the earlier of
July 31, 2005 or such date as all expenses previously borne by MFS under the current agreement have been paid by the
fund. In addition, for the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the
fund for its proportional share of Independent Chief Compliance Officer services paid to Tarantino LLC. To the extent
actual expenses were over (under) this limitation, and the reimbursement had not been in place, the net investment income
per share and the ratios would have been:
Net investment income $0.17 $0.10 $0.03 $0.02 $0.25
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.26 1.45 1.51 1.49 1.49
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income 1.24 0.90 0.29 0.17 1.59
- ----------------------------------------------------------------------------------------------------------------------------
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEAR ENDED PERIOD ENDED
CLASS R1 8/31/04 8/31/03*
Net asset value, beginning of period $11.52 $10.38
- -------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income (loss)(S) $0.09 $(0.01)
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency 2.61 1.15
- ----------------------------------------------------------------------- ------- ------
Total from investment operations $2.70 $1.14
- ----------------------------------------------------------------------- ------- ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.02) $--
- ----------------------------------------------------------------------- ------- ------
Redemption fees added to paid-in capital# $0.00+++ $--
- ----------------------------------------------------------------------- ------- ------
Net asset value, end of period $14.20 $11.52
- ----------------------------------------------------------------------- ------- ------
Total return (%) 23.50 10.98++
- -------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.81 1.90+
- -------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.69 (0.09)+
- -------------------------------------------------------------------------------------------------------
Portfolio turnover 102 96
- -------------------------------------------------------------------------------------------------------
Net assets at end of year (000 Omitted) $19,596 $4,810
- -------------------------------------------------------------------------------------------------------
(S) MFS has contractually agreed, subject to reimbursement, to bear a portion of the fund's "Other
Expenses", which are defined as the fund's operating expenses, exclusive of management, distribution
and service, and certain other fees and expenses, such that Other Expenses do not exceed 0.40%
annually. This arrangement is effected by MFS bearing all of the fund's Other Expenses during the
fund's fiscal year and the fund paying 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 unreimbursed amounts paid by MFS under the current
agreement. This agreement will terminate on the earlier of July 31, 2005 or such date as all
expenses previously borne by MFS under the current agreement have been paid by the fund. In
addition, for the year ended August 31, 2004, the investment adviser has voluntarily agreed to
reimburse the fund for its proportional share of Independent Chief Compliance Officer services paid
to Tarantino LLC. To the extent actual expenses were over (under) this limitation, and the
reimbursement had not been in place, the net investment income (loss) per share and the ratios would
have been:
Net investment income (loss) $0.10 $(0.01)
- -------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.75 1.95+
- -------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.75 (0.14)+
- -------------------------------------------------------------------------------------------------------
* For the period from the inception of Class R1 shares, December 31, 2002, through August 31, 2003.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
PERIOD ENDED
CLASS R2 8/31/04*
Net asset value, beginning of period $12.56
- ---------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.02
- ---------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency 1.61
- ---------------------------------------------------------------- ------
Total from investment operations $1.63
- ---------------------------------------------------------------- ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.03)
- ---------------------------------------------------------------- ------
Redemption fees added to paid-in capital# $0.00+++
- ---------------------------------------------------------------- ------
Net asset value, end of period $14.16
- ---------------------------------------------------------------- ------
Total return (%) 13.03++
- ---------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.07+
- ---------------------------------------------------------------------------
Net investment income 0.18+
- ---------------------------------------------------------------------------
Portfolio turnover 102
- ---------------------------------------------------------------------------
Net assets at end of year (000 Omitted) $431
- ---------------------------------------------------------------------------
(S) MFS has contractually agreed, subject to reimbursement, to bear a portion
of the fund's "Other Expenses", which are defined as the fund's operating
expenses, exclusive of management, distribution and service, and certain
other fees and expenses, such that Other Expenses do not exceed 0.65%
annually. This arrangement is effected by MFS bearing all of the fund's
Other Expenses during the fund's fiscal year and the fund paying MFS an
expense reimbursement fee not greater than 0.65% 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 unreimbursed amounts
paid by MFS under the current agreement. This agreement will terminate on
the earlier of July 31, 2005 or such date as all expenses previously borne
by MFS under the current agreement have been paid by the fund. In
addition, for the year ended August 31, 2004, the investment adviser has
voluntarily agreed to reimburse the fund for its proportional share of
Independent Chief Compliance Officer services paid to Tarantino LLC. To
the extent actual expenses were under this limitation, and the
reimbursement had not been in place, the net investment income per share
and the ratios would have been:
Net investment income $0.02
- ---------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.01+
- ---------------------------------------------------------------------------
Net investment income 0.24+
- ---------------------------------------------------------------------------
* For the period from the inception of Class R2 shares, October 31, 2003,
through August
31, 2004.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEAR ENDED
------------------------------ PERIOD ENDED
CLASS 529A 8/31/04 8/31/03 8/31/02*
Net asset value, beginning of period $11.50 $10.78 $10.66
- ------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income (loss)(S) $0.08 $0.03 $(0.00)+++
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency 2.61 0.69 0.12
- ----------------------------------------------------------- --------- ------ ------
Total from investment operations $2.69 $0.72 $0.12
- ----------------------------------------------------------- --------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.01) $-- $--
- ----------------------------------------------------------- --------- ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $--
- ----------------------------------------------------------- --------- ------ ------
Net asset value, end of period $14.18 $11.50 $10.78
- ----------------------------------------------------------- --------- ------ ------
Total return (%) 23.39 6.68 1.13++
- ------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.91 2.00 2.02+
- ------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.62 0.30 (0.20)+
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover 102 96 153
- ------------------------------------------------------------------------------------------------------------------
Net assets at end of year (000 Omitted) $332 $112 $11
- ------------------------------------------------------------------------------------------------------------------
(S) MFS has contractually agreed, subject to reimbursement, to bear a portion of the fund's "Other
Expenses", which are defined as the fund's operating expenses, exclusive of management, distribution
and service, and certain other fees and expenses, such that Other Expenses do not exceed 0.65%
annually. This arrangement is effected by MFS bearing all of the fund's Other Expenses during the
fund's fiscal year and the fund paying MFS an expense reimbursement fee not greater than 0.65% 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 unreimbursed amounts paid by MFS under the current
agreement. This agreement will terminate on the earlier of July 31, 2005 or such date as all
expenses previously borne by MFS under the current agreement have been paid by the fund. In
addition, for the year ended August 31, 2004, the investment adviser has voluntarily agreed to
reimburse the fund for its proportional share of Independent Chief Compliance Officer services paid
to Tarantino LLC. To the extent actual expenses were over (under) this limitation, and the
reimbursement had not been in place, the net investment income (loss) per share and the ratios would
have been:
Net investment income (loss) $0.09 $0.03 $(0.00)+++
- ------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.85 2.05 2.11+
- ------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.68 0.25 (0.29)+
- ------------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529A shares, July 31, 2002, through August 31, 2002.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEAR ENDED
----------------------------- PERIOD ENDED
CLASS 529B 8/31/04 8/31/03 8/31/02*
Net asset value, beginning of period $11.17 $10.54 $10.42
- ------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.00)+++ $(0.05) $(0.00)+++
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency 2.51 0.68 0.12
- ----------------------------------------------------------- --------- ------ ------
Total from investment operations $2.51 $0.63 $0.12
- ----------------------------------------------------------- --------- ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $--
- ----------------------------------------------------------- --------- ------ ------
Net asset value, end of period $13.68 $11.17 $10.54
- ----------------------------------------------------------- --------- ------ ------
Total return (%) 22.47 5.98 1.15++
- ------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA(S):
Expenses## 2.56 2.65 2.67+
- ------------------------------------------------------------------------------------------------------------------
Net investment loss (0.03) (0.43) (0.45)+
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover 102 96 153
- ------------------------------------------------------------------------------------------------------------------
Net assets at end of year (000 Omitted) $110 $41 $5
- ------------------------------------------------------------------------------------------------------------------
(S) MFS has contractually agreed, subject to reimbursement, to bear a portion of the fund's "Other
Expenses", which are defined as the fund's operating expenses, exclusive of management, distribution
and service, and certain other fees and expenses, such that Other Expenses do not exceed 0.65%
annually. This arrangement is effected by MFS bearing all of the fund's Other Expenses during the
fund's fiscal year and the fund paying MFS an expense reimbursement fee not greater than 0.65% 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 unreimbursed amounts paid by MFS under the current
agreement. This agreement will terminate on the earlier of July 31, 2005 or such date as all
expenses previously borne by MFS under the current agreement have been paid by the fund. In
addition, for the year ended August 31, 2004, the investment adviser has voluntarily agreed to
reimburse the fund for its proportional share of Independent Chief Compliance Officer services paid
to Tarantino LLC. To the extent actual expenses were over (under) this limitation, and the
reimbursement had not been in place, the net investment income (loss) per share and the ratios would
have been:
Net investment income (loss) $0.00+++ $(0.05) $(0.00)+++
- ------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.50 2.70 2.76+
- ------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.03 (0.48) (0.54)+
- ------------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529B shares, July 31, 2002, through August 31, 2002.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEAR ENDED
------------------------------- PERIOD ENDED
CLASS 529C 8/31/04 8/31/03 8/31/02*
Net asset value, beginning of period $11.14 $10.52 $10.40
- ------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.00)+++ $(0.04) $(0.00)+++
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency 2.52 0.66 0.12
- ----------------------------------------------------------- --------- ------ ------
Total from investment operations $2.52 $0.62 $0.12
- ----------------------------------------------------------- --------- ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $--
- ----------------------------------------------------------- --------- ------ ------
Net asset value, end of period $13.66 $11.14 $10.52
- ----------------------------------------------------------- --------- ------ ------
Total return (%) 22.62 5.89 1.15++
- ------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.55 2.65 2.67+
- ------------------------------------------------------------------------------------------------------------------
Net investment loss (0.02) (0.36) (0.45)+
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover 102 96 153
- ------------------------------------------------------------------------------------------------------------------
Net assets at end of year (000 Omitted) $280 $81 $5
- ------------------------------------------------------------------------------------------------------------------
(S) MFS has contractually agreed, subject to reimbursement, to bear a portion of the fund's "Other
Expenses", which are defined as the fund's operating expenses, exclusive of management, distribution
and service, and certain other fees and expenses, such that Other Expenses do not exceed 0.65%
annually. This arrangement is effected by MFS bearing all of the fund's Other Expenses during the
fund's fiscal year and the fund paying MFS an expense reimbursement fee not greater than 0.65% 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 unreimbursed amounts paid by MFS under the current
agreement. This agreement will terminate on the earlier of July 31, 2005 or such date as all
expenses previously borne by MFS under the current agreement have been paid by the fund. In
addition, for the year ended August 31, 2004, the investment adviser has voluntarily agreed to
reimburse the fund for its proportional share of Independent Chief Compliance Officer services paid
to Tarantino LLC. To the extent actual expenses were over (under) this limitation, and the
reimbursement had not been in place, the net investment income (loss) per share and the ratios would
have been:
Net investment income (loss) $0.01 $(0.04) $(0.00)+++
- ------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.49 2.70 2.76+
- ------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.04 (0.41) (0.54)+
- ------------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529C shares, July 31, 2002, through August 31, 2002.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(1) BUSINESS AND ORGANIZATION
MFS Research International Fund (the fund) is a diversified series of MFS
Series Trust I (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 U.S.
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.
The fund can invest in foreign securities. 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 in the fund's portfolio for which
market quotations are available are valued at the last sale or official closing
price as reported by an independent pricing service on the primary market or
exchange on which they are primarily traded, or at the last quoted bid price
for securities in which there were no sales during the day. Equity securities
traded over the counter are valued at the last sales price traded each day as
reported by an independent pricing service, or to the extent there are no sales
reported, such securities are valued on the basis of quotations obtained from
brokers and dealers. Short-term obligations with a remaining maturity in excess
of 60 days will be valued upon dealer-supplied valuations. All other short-term
obligations in the fund's portfolio are valued at amortized cost, which
constitutes market value as determined by the Board of Trustees. Money market
mutual funds are valued at net asset value. 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. When
pricing service information or market quotations are not readily available,
securities are priced at fair value as determined under the direction of the
Board of Trustees. For example, significant events (such as movement in the
U.S. securities market, or other regional and local developments) may occur
between the time that foreign markets close (where the security is principally
traded) and the time that the fund calculates its net asset value (generally,
the close of the NYSE) that may impact the value of securities traded in these
foreign markets. In these cases, the fund may utilize information from an
external vendor or other sources to adjust closing market quotations of foreign
equity securities to reflect what it believes to be the fair value of the
securities as of the fund's valuation time. Because the frequency of
significant events is not predictable, fair valuation of foreign equity
securities may occur on a frequent basis.
REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements with
institutions that the fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The fund requires
that the securities collateral in a repurchase transaction be transferred to
the custodian in a manner sufficient to enable the fund to obtain those
securities in the event of a default under the repurchase agreement. The fund
monitors, on a daily basis, the value of the collateral to ensure that its
value, including accrued interest, is greater than amounts owed to the fund
under each such repurchase agreement. The fund, along with other affiliated
entities of Massachusetts Financial Services Company (MFS), may utilize a joint
trading account for the purpose of entering into one or more repurchase
agreements.
FOREIGN CURRENCY TRANSLATION - 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.
SECURITY LOANS - State Street Bank and Trust Company ("State Street"), as
lending agent, may loan the securities of the fund to certain qualified
institutions (the "Borrowers") approved by the fund. The loans are
collateralized at all times by cash and/or U.S. Treasury securities in an
amount at least equal to the market value of the securities loaned. State
Street provides the fund with indemnification against Borrower default. The
fund bears the risk of loss with respect to the investment of cash collateral.
On loans collateralized by cash, the cash collateral is invested in a money
market fund or short-term securities. A portion of the income generated upon
investment of the collateral is remitted to the Borrowers, and the remainder is
allocated between the fund and the lending agent. On loans collateralized by
U.S. Treasury securities, a fee is received from the Borrower, and is allocated
between the fund and the lending agent. Income from securities lending is
included in interest income on the Statement of Operations. The dividend and
interest income earned on the securities loaned is accounted for in the same
manner as other dividend and interest income.
SHORT TERM FEES - The fund charges a 2% redemption fee (which is retained by
the fund) on proceeds from shares redeemed or exchanged within 30 calendar days
following their acquisition (either by purchase or exchange). However, for
purchases made on or after July 1, 2004, the fund will charge a 2% redemption
fee on proceeds from shares redeemed or exchanged within 5 business days
following their acquisition. Due to systems limitations associated with the
transition from applying a 30 calendar day redemption fee to a 5 business day
redemption fee, the fund will not impose redemption fees with respect to
purchases made in June 2004 followed by redemptions made in July 2004. The fund
may determine to reinstitute the 30 calendar day redemption fee period, or
otherwise change the redemption fee period in the future, including changes in
connection with pending Securities and Exchange Commission rules. See the
fund's prospectus for details. These fees are accounted for as an addition to
paid-in capital.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and discount is amortized or accreted for financial statement purposes in
accordance with U.S. generally accepted accounting principles. All discount is
accreted for tax reporting purposes as required by federal income tax
regulations. Dividends received in cash are recorded on the ex-dividend date.
FEES PAID INDIRECTLY - The fund's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by the
fund. During the year ended August 31, 2004, the fund's custodian fees were
reduced by $7,928 under this arrangement. The fund has entered into a
commission recapture agreement, under which certain brokers will credit the
fund a portion of the commissions generated, to offset certain expenses of the
fund. For the year ended August 31, 2004, the fund's miscellaneous expenses
were reduced by $73,110 under this agreement. These amounts are shown as a
reduction of total 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 net 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 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. Common
types of book and tax differences that could occur include differences in
accounting for currency transactions, wash sales and capital losses.
The tax character of distributions declared for the years ended August 31, 2004
and August 31, 2003 was as follows:
8/31/04 8/31/03
Distributions declared from:
- ------------------------------------------------------------------------------
Ordinary income $1,055,994 $--
- ------------------------------------------------------------------------------
During the year ended August 31, 2004, accumulated undistributed net investment
income decreased by $290,730, and accumulated undistributed net realized gain
on investments and foreign currency transactions increased by $290,730 due to
differences between book and tax accounting for currency transactions. This
change had no effect on the net assets or net asset value per share.
As of August 31, 2004, the components of, distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed ordinary income $8,490,880
----------------------------------------------------------
Undistributed long-term capital gain 43,157,446
----------------------------------------------------------
Unrealized appreciation 89,210,907
----------------------------------------------------------
Other temporary differences (186,454)
----------------------------------------------------------
MULTIPLE CLASSES OF SHARES OF BENEFICIAL INTEREST - The fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the fund based on daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class. Differences in per share dividend rates
are generally due to differences in separate class expenses. Class B and Class
529B shares will convert to Class A and Class 529A shares, respectively,
approximately eight years after purchase.
(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.
Effective January 1, 2004, the management fee is computed daily and paid
monthly at the following annual rates:
First $1.0 billion of average net assets 0.90%
----------------------------------------------------------
Next $1.0 billion of average net assets 0.80%
----------------------------------------------------------
Average net assets in excess of $2.0 billion 0.70%
----------------------------------------------------------
Prior to January 1, 2004, the management fee was computed daily and paid
monthly at an annual rate of 1.00% of the fund's average daily net assets.
Management fees incurred for the year ended August 31, 2004, were an effective
rate of 0.91% of average daily net assets on an annualized basis.
MFS has contractually agreed, subject to reimbursement, to bear a portion of
the fund's "Other Expenses", which are defined as the fund's operating
expenses, exclusive of management, distribution and service, and certain other
fees and expenses, such that Other Expenses do not exceed 0.40% annually. This
arrangement is effected by MFS bearing all of the fund's Other Expenses during
the fund's fiscal year, and the fund paying MFS a reimbursement fee not greater
than 0.40% of average daily net assets for Class A, Class B, Class C, Class I,
and Class R1 and not greater than 0.65% of average daily net assets for Class
529A, Class 529B, Class 529C, and Class R2. To the extent that the expense
reimbursement fee exceeds the fund's actual expenses, the excess will be
applied to unreimbursed amounts paid by MFS under the current agreement. This
agreement will terminate on the earlier of July 31, 2005 or such date as all
expenses previously borne by MFS under the current agreement have been paid by
the fund. At August 31, 2004, aggregate unreimbursed expenses amounted to
$579,599.
The fund pays compensation to its Independent Trustees in the form of a
retainer, attendance fees, and additional compensation to Board and Committee
chairpersons, and 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). The fund has an
unfunded defined benefit plan for retired Independent Trustees and an unfunded
retirement benefit deferral plan for current Independent Trustees. Included in
Trustees' compensation is a net increase of $11,429 as a result of the change
in the fund's unfunded retirement benefit deferral plan for certain current
Independent Trustees and a pension expense of $613 for retired Independent
Trustees for the year ended August 31, 2004.
The MFS funds, including this fund, have entered into a services agreement (the
"Agreement") which provides for payment of fees by the MFS funds to Tarantino
LLC in return for the provision of services of an Independent Chief Compliance
Officer (ICCO) for the MFS funds. The ICCO is an officer of the MFS funds and
the sole member of Tarantino LLC. MFS has agreed to reimburse each of the MFS
funds for a proportional share of substantially all of the payments made by the
MFS funds to Tarantino LLC and also to provide office space and other
administrative support and supplies to the ICCO. The MFS funds can terminate
the Agreement with Tarantino LLC at any time under the terms of the Agreement.
The fund's investment adviser, MFS, has been the subject of an administrative
proceeding regarding disclosure of brokerage allocation practices in connection
with fund sales, as described in the Legal Proceedings Footnote. Pursuant to
the SEC Order, MFS, on July 28, 2004, transferred $1.00 in disgorgement and $50
million in penalty to the SEC (the "Payments"). A plan for distribution of
these Payments has been submitted to the SEC. Contemporaneous with the
transfer, the fund accrued an estimate of the amount to be received upon final
approval of the plan of distribution. The non- recurring accrual in the amount
of $8,027 did not have a material impact on the net asset value per share based
on the shares outstanding on the day the proceeds were recorded.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment advisor. Under an administrative services
agreement between the funds and MFS, MFS is entitled to partial reimbursement
of the costs MFS incurs to provide these services, subject to review and
approval by the Board of Trustees. Each fund is allocated a portion of these
administrative costs based on its size and relative average net assets. Prior
to April 1, 2004, the fund paid MFS an administrative fee up to the following
annual percentage rates of the fund's average daily net assets:
First $2 billion 0.0175%
----------------------------------------------------------
Next $2.5 billion 0.0130%
----------------------------------------------------------
Next $2.5 billion 0.0005%
----------------------------------------------------------
In excess of $7 billion 0.0000%
----------------------------------------------------------
Effective April 1, 2004, the fund paid MFS an administrative fee up to the
following annual percentage rates of the fund's average daily net assets:
First $2 billion 0.01120%
----------------------------------------------------------
Next $2.5 billion 0.00832%
----------------------------------------------------------
Next $2.5 billion 0.00032%
----------------------------------------------------------
In excess of $7 billion 0.00000%
----------------------------------------------------------
For the year ended August 31, 2004, the fund paid MFS $95,129, equivalent to
0.0087% of average daily net assets, to partially reimburse MFS for the costs
of providing administrative services.
In addition to the administrative services provided by MFS to the fund as
described above, MFS is responsible for providing certain administrative
services with respect to Class R2 shares. These services include various
administrative, recordkeeping, and communication/educational services with
respect to the retirement plans which invest in Class R2 shares, and may be
provided directly by MFS or by a third party. The fund pays an annual 0.25%
administrative service fee solely from the assets of Class R2 shares to MFS for
the provision of these services.
DISTRIBUTOR - MFD, a wholly owned subsidiary of MFS, as distributor, received
$80,593 and $832 for the year ended August 31, 2004, as its portion of the
sales charge on sales of Class A and Class 529A shares of the fund,
respectively.
The Trustees have adopted a distribution plan for Class A, Class B, Class C,
Class R1, Class R2, Class 529A, Class 529B, and Class 529C shares pursuant to
Rule 12b-1 of the Investment Company Act of 1940 as follows:
The fund's distribution plan provides that the fund will pay MFD an annual
percentage of its average daily net assets attributable to certain share
classes in order that MFD may pay expenses on behalf of the fund related to the
distribution and servicing of its shares. These expenses include a service fee
paid to each securities dealer that enters into a sales agreement with MFD
based on the average daily net assets of accounts attributable to such dealers.
The fees are calculated based on each class' average daily net assets. The
maximum distribution and service fees for each class of shares are as follows:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Distribution Fee 0.10% 0.75% 0.75% 0.25% 0.25%
- ---------------------------------------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25% 0.25% 0.25%
- ---------------------------------------------------------------------------------------------------------------
Total Distribution Plan 0.35% 1.00% 1.00% 0.50% 0.50%
- ---------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Distribution Fee 0.25% 0.75% 0.75%
- ---------------------------------------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25%
- ---------------------------------------------------------------------------------------------------------------
Total Distribution Plan 0.50% 1.00% 1.00%
- ---------------------------------------------------------------------------------------------------------------
MFD retains the service fee for accounts not attributable to a securities
dealer, which for the year ended August 31, 2004 amounted to:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Service Fee Retained by MFD $16,802 $727 $249 $7 $7
- ---------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Service Fee Retained by MFD $133 $14 $56
- ---------------------------------------------------------------------------------------------------------------
Fees incurred under the distribution plan during the year ended August 31,
2004 were as follows:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Effective Annual Percentage Rates 0.35% 1.00% 1.00% 0.50% 0.50%
- ---------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Effective Annual Percentage Rates 0.35% 1.00% 1.00%
- ---------------------------------------------------------------------------------------------------------------
Payment of the 0.15% per annum portion of the Class 529A distribution fee that is not currently being charged will
be implemented on such date as the Trustees of the Trust may determine.
Certain Class A, Class C and 529C shares are subject to a contingent deferred sales charge in the event of a
shareholder redemption within, for Class A shares, 12 months following the purchase, and, for Class C and 529C
shares, the first year from the end of the calendar month of purchase. A contingent deferred sales charge is
imposed on shareholder redemptions of Class B and 529B shares in the event of a shareholder redemption within six
years from the end of the calendar month of purchase. MFD receives all contingent deferred sales charges.
Contingent deferred sales charges imposed during the August 31, 2004, were as follows:
CLASS A CLASS B CLASS C CLASS 529B CLASS 529C
Contingent Deferred Sales Charges
Imposed $16,038 $193,795 $9,132 $-- $--
- ----------------------------------------------------------------------------------------------------------------
The fund has and may from time to time enter into contracts with program
managers and other parties that administer the tuition programs through which
an investment in the fund's 529 share classes is made. The fund has entered
into an agreement with MFD pursuant to which MFD receives an annual fee of up
to 0.35% from the fund based solely upon the value of the fund's 529 share
classes attributable to tuition programs to which MFD, or a third party which
contracts with MFD, provides administrative services. The current fee has been
established at 0.25% annually of average net assets of the fund's 529 share
classes attributable to such programs. The fee may only be increased with the
approval of the board of trustees that oversees the fund. The services provided
by MFD, or a third party with which MFD contracts, include recordkeeping and
tax reporting and account services, as well as services designed to maintain
the program's compliance with the Internal Revenue Code and other regulatory
requirements.
SHAREHOLDER SERVICING AGENT - Included in shareholder servicing costs is a fee
paid to MFSC, a wholly owned subsidiary of MFS, for its services as shareholder
servicing agent. The fee, which is calculated as a percentage of the fund's
average daily net assets is set periodically under the supervision of the
fund's Trustees. Prior to April 1, 2004, the fee was set at 0.11% of the fund's
average daily net assets. For the period April 1, 2004 through June 30, 2004,
the fee was set at 0.10% of the fund's average daily net assets. Effective July
1, 2004, the fund is charged up to 0.0861% of its average daily net assets. For
the year ended August 31, 2004, the fund paid MFSC a fee of $1,109,897 for
shareholder services which equated to 0.1015% of the fund's average daily net
assets. Also included in shareholder servicing costs are out-of-pocket
expenses, paid to MFSC, which amounted to $93,657 for the year ended August 31,
2004, as well as other expenses paid to unaffiliated vendors.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$1,379,132,092 and $1,074,206,510, 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 $1,471,993,191
-----------------------------------------------------
Gross unrealized appreciation $110,756,361
-----------------------------------------------------
Gross unrealized depreciation (21,511,104)
-----------------------------------------------------
Net unrealized appreciation $89,245,257
-----------------------------------------------------
(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:
Year ended 8/31/04 Year ended 8/31/03
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares sold 25,499,429 $340,976,897 30,271,752 $316,573,119
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 14,847 197,567 -- --
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (17,498,280) (239,404,354) (25,705,916) (269,487,051)
- -----------------------------------------------------------------------------------------------------------
Net increase 8,015,996 $101,770,110 4,565,836 $47,086,068
- -----------------------------------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 2,527,350 $33,384,413 2,249,013 $22,954,752
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (1,959,753) (25,909,743) (2,215,900) (22,457,073)
- -----------------------------------------------------------------------------------------------------------
Net increase 567,597 $7,474,670 33,113 $497,679
- -----------------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 2,467,171 $32,082,699 1,582,387 $16,129,234
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (1,081,531) (14,358,259) (1,556,144) (15,741,059)
- -----------------------------------------------------------------------------------------------------------
Net increase 1,385,640 $17,724,440 26,243 $388,175
- -----------------------------------------------------------------------------------------------------------
CLASS I SHARES
Shares sold 14,828,774 $204,201,804 19,092,539 $201,423,230
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 57,562 771,329 -- --
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (2,402,041) (32,740,066) (976,393) (10,403,126)
- -----------------------------------------------------------------------------------------------------------
Net increase 12,484,295 $172,233,067 18,116,146 $191,020,104
- -----------------------------------------------------------------------------------------------------------
Year ended 8/31/04 Year ended 8/31/03
SHARES AMOUNT SHARES AMOUNT
CLASS R1 SHARES
Shares sold 1,482,311 $20,401,641 741,611 $8,002,008
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 1,036 13,608 -- --
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (520,404) (7,092,308) (324,076) (3,470,746)
- -----------------------------------------------------------------------------------------------------------
Net increase 962,943 $13,322,941 417,535 $4,531,262
- -----------------------------------------------------------------------------------------------------------
Period ended 8/31/04**
SHARES AMOUNT
CLASS R2 SHARES
Shares sold 53,628 $745,402
- ------------------------------------------------------------------------
Shares reacquired (23,193) (321,470)
- ------------------------------------------------------------------------
Net increase 30,435 $423,932
- ------------------------------------------------------------------------
Year ended 8/31/04 Year ended 8/31/03
SHARES AMOUNT SHARES AMOUNT
CLASS 529A SHARES
Shares sold 14,375 $195,143 9,258 $96,624
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 9 122 -- --
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (767) (10,500) (501) (5,665)
- -----------------------------------------------------------------------------------------------------------
Net increase 13,617 $184,765 8,757 $90,959
- -----------------------------------------------------------------------------------------------------------
CLASS 529B SHARES
Shares sold 5,351 $69,686 3,318 $34,075
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (988) (13,139) (151) (1,630)
- -----------------------------------------------------------------------------------------------------------
Net increase 4,363 $56,547 3,167 $32,445
- -----------------------------------------------------------------------------------------------------------
CLASS 529C SHARES
Shares sold 14,470 $187,605 6,762 $68,334
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (1,192) (16,154) (21) (211)
- -----------------------------------------------------------------------------------------------------------
Net increase 13,278 $171,451 6,741 $68,123
- -----------------------------------------------------------------------------------------------------------
* For the period from the inception of Class R1 shares, December 31, 2002, through August 31, 2003.
** For the period from the inception of Class R2 shares, October 31, 2003, through August 31, 2004.
(6) LINE OF CREDIT
The fund and other affiliated funds participate in an $800 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the Federal
Reserve funds rate plus 0.50%. 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 calendar quarter. The commitment fee
allocated to the fund for the year ended August 31, 2004 was $5,809, and is
included in miscellaneous expense. The fund had no significant borrowings
during the year ended August 31, 2004.
(7) LEGAL PROCEEDINGS.
On March 31, 2004, MFS settled an administrative proceeding with the Securities
and Exchange Commission ("SEC") regarding disclosure of brokerage allocation
practices in connection with MFS fund sales (the term "MFS funds" means the
open-end registered management investment companies sponsored by MFS). Under
the terms of the settlement, in which MFS neither admitted nor denied any
wrongdoing, MFS agreed to pay (one dollar) $1.00 in disgorgement and $50
million in penalty to certain MFS funds, pursuant to a plan developed by an
independent distribution consultant. The brokerage allocation practices which
were the subject of this proceeding were discontinued by MFS in November 2003.
The agreement with the SEC is reflected in an order of the SEC. Pursuant to the
SEC order, on July 28, 2004, MFS transferred these settlement amounts to the
SEC, and those MFS funds entitled to these settlement amounts accrued an
estimate of their pro rata portion of these amounts. Once the final
distribution plan is approved by the SEC, these amounts will be distributed by
the SEC to the affected MFS funds. The SEC settlement order states that MFS
failed to adequately disclose to the Boards of Trustees and to shareholders of
the MFS funds the specifics of its preferred arrangements with certain
brokerage firms selling MFS fund shares. The SEC settlement order states that
MFS had in place policies designed to obtain best execution of all MFS fund
trades. As part of the settlement, MFS retained an independent compliance
consultant to review the completeness of its current policies and practices
regarding disclosure to MFS fund trustees and to MFS fund shareholders of
strategic alliances between MFS or its affiliates and broker-dealers and other
financial advisers who support the sale of MFS fund shares.
In addition, in February, 2004, MFS reached agreement with the SEC, the New
York Attorney General ("NYAG") and the Bureau of Securities Regulation of the
State of New Hampshire ("NH") to settle administrative proceedings alleging
false and misleading information in certain MFS retail fund prospectuses
regarding market timing and related matters (the "February Settlements"). These
regulators alleged that prospectus language for certain MFS retail funds was
false and misleading because, although the prospectuses for those funds in the
regulators' view indicated that the MFS funds prohibited market timing, MFS did
not limit trading activity in 11 domestic large cap stock, high grade bond and
money market funds. MFS' former Chief Executive Officer, John W. Ballen, and
former President, Kevin R. Parke, also reached agreement with the SEC in which
they agreed to, among other terms, monetary fines and temporary suspensions
from association with any investment adviser or registered investment company.
Messrs. Ballen and Parke have resigned their positions with, and will not be
returning to, MFS and the MFS funds. Under the terms of the February
Settlements, MFS and the executives neither admit nor deny wrongdoing.
Under the terms of the February Settlements, a $225 million pool has been
established for distribution to shareholders in certain MFS retail funds, which
has been funded by MFS and of which $50 million is characterized as a penalty.
This pool will be distributed in accordance with a methodology developed by an
independent distribution consultant in consultation with MFS and the Board of
Trustees of the MFS retail funds, and acceptable to the SEC. MFS has further
agreed with NYAG to reduce its management fees in the aggregate amount of
approximately $25 million annually over the next five years, and not to
increase certain management fees during this period. MFS has also paid an
administrative fine to NH in the amount of $1 million, which will be used for
investor education purposes (NH retained $250,000 and $750,000 was contributed
to the North American Securities Administrators Association's Investor
Protection Trust). In addition, under the terms of the February Settlements,
MFS is in the process of adopting certain governance changes and reviewing its
policies and procedures.
Since December 2003, MFS, Sun Life Financial Inc., various MFS funds, the
Trustees of these MFS funds, and certain officers of MFS have been named as
defendants in multiple lawsuits filed in federal and state courts. The lawsuits
variously have been commenced as class actions or individual actions on behalf
of investors who purchased, held or redeemed shares of the MFS funds during
specified periods, as class actions on behalf of participants in certain
retirement plan accounts, or as derivative actions on behalf of the MFS funds.
The lawsuits relating to market timing and related matters have been
transferred to, and consolidated before, the United States District Court for
the District of Maryland, as part of a multi-district litigation of market
timing and related claims involving several other fund complexes (In re Mutual
Funds Investment Litigation (Alger, Columbia, Janus, MFS, One Group, Putnam,
PIMCO), No. 1:04-md-15863 (transfer began March 19, 2004)). Four lawsuits
alleging improper brokerage allocation practices and excessive compensation are
pending in the United States District Court for the District of Massachusetts
(Forsythe v. Sun Life Financial Inc., et al., No. 04cv10584 (GAO) (March 25,
2004); Eddings v. Sun Life Financial Inc., et al., No. 04cv10764 (GAO) (April
15, 2004); Marcus Dumond, et al. v. Massachusetts Financial Servs. Co., et al.,
No. 04cv11458 (GAO) (May 4, 2004); and Koslow v. Sun Life Financial Inc., et
al., No. 04cv11019 (GAO) (May 20, 2004)). The lawsuits generally allege that
some or all of the defendants (i) permitted or acquiesced in market timing
and/or late trading in some of the MFS funds, inadequately disclosed MFS'
internal policies concerning market timing and such matters, and received
excessive compensation as fiduciaries to the MFS funds, or (ii) permitted or
acquiesced in the improper use of fund assets by MFS to support the
distribution of MFS fund shares and inadequately disclosed MFS' use of fund
assets in this manner. The actions assert that some or all of the defendants
violated the federal securities laws, including the Securities Act of 1933 and
the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the
Investment Advisers Act of 1940, the Employee Retirement Income Security Act of
1974, as well as fiduciary duties and other violations of common law. The
lawsuits seek unspecified damages. Insofar as any of the actions is
appropriately brought derivatively on behalf of any of the MFS funds, any
recovery will inure to the benefit of the MFS funds. The defendants are
reviewing the allegations of the multiple complaints and will respond
appropriately. Additional lawsuits based on similar allegations may be filed in
the future.
Any potential resolution of these matters may include, but not be limited to,
judgments or settlements for damages against MFS, the MFS funds, or any other
named defendant. As noted above, as part of the regulatory settlements, MFS has
established a restitution pool in the amount of $225 million to compensate
certain shareholders of the MFS retail funds for damages that they allegedly
sustained as a result of market timing or late trading in certain of the MFS
retail funds, and transferred $50 million for distribution to affected MFS
funds to compensate those funds based upon the amount of brokerage commissions
allocated in recognition of MFS fund sales. It is not clear whether these
amounts will be sufficient to compensate shareholders for all of the damage
they allegedly sustained, whether certain shareholders or putative class
members may have additional claims to compensation, or whether the damages that
may be awarded in any of the actions will exceed these amounts. In the event
the MFS funds incur any losses, costs or expenses in connection with such
lawsuits, the Boards of Trustees of the affected MFS funds may pursue claims on
behalf of such funds against any party that may have liability to the funds in
respect thereof.
Review of these matters by the independent Trustees of the MFS funds and their
counsel is continuing. There can be no assurance that these regulatory actions
and lawsuits, or the adverse publicity associated with these developments, will
not result in increased fund redemptions, reduced sales of fund shares, or
other adverse consequences to the MFS funds.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
To the Trustees of MFS Series Trust I and Shareholders of
MFS Research International Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Research International Fund (the Fund) (one of the portfolios comprising MFS
Series Trust I), including the portfolio of investments, as of August 31, 2004,
and the related statement of operations for the year then ended, the statements
of changes in net assets for each of the two years in the period then ended,
and the financial highlights for each of the periods indicated therein. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 and financial
highlights. Our procedures included confirmation of securities owned at August
31, 2004, by correspondence with the custodian and brokers or by other
appropriate auditing procedures where replies from brokers were not received.
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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Research International Fund at August 31, 2004, the results of its operations
for the year then ended, the changes in its net assets for each of the two
years in the period then ended, and its financial highlights for the each of
the periods indicated therein, in conformity with U.S. generally accepted
accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
October 8, 2004
- ------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
- ------------------------------------------------------------------------------------------------------
The Trustees and officers of the Trust, as of October 10, 2004, are listed below, together with their
principal occupations during the past five years. (Their titles may have varied during that period.)
The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
PRINCIPAL OCCUPATIONS & OTHER
POSITION(s) HELD TRUSTEE/OFFICER DIRECTORSHIPS(2) DURING
NAME, DATE OF BIRTH WITH FUND SINCE(1) THE PAST FIVE YEARS
- ------------------- ---------------- --------------- -----------------------------
INTERESTED TRUSTEES
Robert J. Manning(3) Trustee and February 2004 Massachusetts Financial
(born 10/20/63) President Services Company, Chief
Executive Officer, President,
Chief Investment Officer and
Director
Robert C. Pozen(3) Trustee February 2004 Massachusetts Financial
(born 08/08/46) Services Company, Chairman
(since February 2004);
Harvard Law School
(education), John Olin
Visiting Professor (since
July 2002); Secretary of
Economic Affairs, The
Commonwealth of Massachusetts
(January 2002 to December
2002); Fidelity Investments,
Vice Chairman (June 2000 to
December 2001); Fidelity
Management & Research Company
(investment adviser),
President (March 1997 to July
2001); The Bank of New York
(financial services),
Director; Bell Canada
Enterprises
(telecommunications),
Director; Telesat (satellite
communications), Director
INDEPENDENT TRUSTEES
J. Atwood Ives Trustee and Chair of February 1992 Private investor; Eastern
(born 05/01/36) Trustees Enterprises (diversified
services company), Chairman,
Trustee and Chief Executive
Officer (until November 2000)
Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital,
(born 03/11/37) Chief of Cardiac Surgery;
Harvard Medical School,
Professor of Surgery
David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining
(born 05/30/42) products and service
provider), Vice Chairman/
Director (since April 2001);
Encinitos Ventures (private
investment company),
Principal (1997 to April
2001); Lincoln Electric
Holdings, Inc. (welding
equipment manufacturer),
Director; Southwest Gas
Corporation (natural gas
distribution company),
Director
William R. Gutow Trustee December 1993 Private investor and real
(born 09/27/41) estate consultant; Capitol
Entertainment Management
Company (video franchise),
Vice Chairman
Amy B. Lane Trustee January 2004 Retired; Merrill Lynch & Co.,
(born 02/08/53) Inc., Managing Director,
Investment Banking Group
(1997 to February 2001);
Borders Group, Inc. (book and
music retailer), Director;
Federal Realty Investment
Trust (real estate investment
trust), Trustee
Lawrence T. Perera Trustee July 1981 Hemenway & Barnes
(born 06/23/35) (attorneys), Partner
William J. Poorvu Trustee August 1982 Private investor; Harvard
(born 04/10/35) University Graduate School of
Business Administration,
Class of 1961 Adjunct
Professor in Entrepreneurship
Emeritus; CBL & Associates
Properties, Inc. (real estate
investment trust), Director
J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 09/23/38) (acquisition planning
specialists), President;
Wellfleet Investments
(investor in health care
companies), Managing General
Partner (since 1993);
Cambridge Nutraceuticals
(professional nutritional
products), Chief Executive
Officer (until May 2001)
Elaine R. Smith Trustee February 1992 Independent health care
(born 04/25/46) industry consultant
OFFICERS
Robert J. Manning(3) President and February 2004 Massachusetts Financial
(born 10/20/63) Trustee Services Company, Chief
Executive Officer, President,
Chief Investment Officer and
Director
James R. Bordewick, Jr.(3) Assistant Secretary September 1990 Massachusetts Financial
(born 03/06/59) and Assistant Clerk Services Company, Senior Vice
President and Associate
General Counsel
Jeffrey N. Carp(3) Secretary and Clerk September 2004 Massachusetts Financial
(born 12/01/56) Services Company, Senior Vice
President, General Counsel
and Secretary (since April
2004); Hale and Dorr LLP (law
firm) (prior to April 2004)
James F. DesMarais(3) Assistant Secretary September 2004 Massachusetts Financial
(born 03/09/61) and Assistant Clerk Services Company, Assistant
General Counsel
Stephanie A. DeSisto(3) Assistant Treasurer May 2003 Massachusetts Financial
(born 10/01/53) Services Company, Vice
President (since April 2003);
Brown Brothers Harriman &
Co., Senior Vice President
(November 2002 to April
2003); ING Groep N.V./Aeltus
Investment Management, Senior
Vice President (prior to
November 2002)
Robert R. Flaherty(3) Assistant Treasurer August 2000 Massachusetts Financial
(born 09/18/63) Services Company, Vice
President (since August
2000); UAM Fund Services,
Senior Vice President (prior
to August 2000)
Richard M. Hisey(3) Treasurer August 2002 Massachusetts Financial
(born 08/29/58) Services Company, Senior Vice
President (since July 2002);
The Bank of New York, Senior
Vice President (September
2000 to July 2002); Lexington
Global Asset Managers, Inc.,
Executive Vice President and
Chief Financial Officer
(prior to September 2000);
Lexington Funds, Chief
Financial Officer (prior to
September 2000)
Brian T. Hourihan(3) Assistant Secretary September 2004 Massachusetts Financial
(born 11/11/64) and Assistant Clerk Services Company, Vice
President, Senior Counsel and
Assistant Secretary (since
June 2004); Affiliated
Managers Group, Inc., Chief
Legal Officer/Centralized
Compliance Program (January
to April 2004); Fidelity
Research & Management
Company, Assistant General
Counsel (prior to January
2004)
Ellen Moynihan(3) Assistant Treasurer April 1997 Massachusetts Financial
(born 11/13/57) Services Company, Vice
President
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of
(born 03/07/44) Compliance Officer compliance services),
Principal (since June 2004);
CRA Business Strategies Group
(consulting services),
Executive Vice President
(April 2003 to June 2004);
David L. Babson & Co.
(investment adviser),
Managing Director, Chief
Administrative Officer and
Director (February 1997 to
March 2003)
James O. Yost(3) Assistant Treasurer September 1990 Massachusetts Financial
(born 06/12/60) Services Company, Senior Vice
President
- ----------------
(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously
since appointment unless indicated otherwise.
(2) Directorships or trusteeships of companies required to report to the Securities and Exchange
Commission (i.e., "public companies").
(3) "Interested person" of MFS within the meaning of the Investment Company Act of 1940 (referred to as
the 1940 Act), which is the principle federal law governing investment companies like the fund. The
address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
The Trust does not hold annual shareholder meetings for the purpose of electing Trustees, and Trustees are not
elected for fixed terms. The Trust will hold a shareholders' meeting in 2005 and at least once every five
years thereafter to elect Trustees. Each Trustee and officer holds office until his or her successor is chosen
and qualified or until his or her earlier death, resignation, retirement or removal.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or
a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain
affiliates of MFS. Each Trustee serves as a board member of 109 funds within the MFS Family of Funds.
The Statement of Additional Information contains further information about the Trustees and is available
without charge upon request by calling 1-800-225-2606.
- -----------------------------------------------------------------------------------------------------
INVESTMENT ADVISER CUSTODIAN
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 02116-3741 225 Franklin Street, Boston, MA 02110
DISTRIBUTOR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
MFS Fund Distributors, Inc. Ernst & Young LLP
500 Boylston Street, Boston, MA 02116-3741 200 Clarendon Street, Boston, MA 02116
PORTFOLIO MANAGERS
David A. Antonelli
Jose Luis Garcia
Thomas Melendez
QUARTERLY PORTFOLIO DISCLOSURE
Beginning with the fund's first and third fiscal quarters following this report, the fund will file a complete
schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and
third quarters of each fiscal year on Form N-Q. The fund's Form N-Q may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-0102
Information on the operation of the Public Reference Room may be obtained by calling the Commission at
1-800-SEC-0330. The fund's Form N-Q is available on the EDGAR database on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference
Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at www.mfs.com.
- -------------------------------------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS
- -------------------------------------------------------------------------------
YOUR GOALS ARE IMPORTANT
MFS offers a complete range of investments and investment services to address
specific financial needs over time. When your investing goals change, you can
easily stay with MFS for the products you need, when you need them. Whether
you're investing for college or retirement expenses or for tax management or
estate planning, MFS will be there.
Ask your investment professional how MFS can help you move toward the goals
you've set.
MFS FAMILY OF FUNDS(R)
More than 50 portfolios offer domestic and international
equity and fixed-income investments across the full risk
spectrum
VARIABLE ANNUITIES
A selection of annuity products with advantages for
building and preserving wealth
MFS 401(k) AND IRA SUITES
Retirement plans for businesses and individuals
MFS COLLEGE SAVINGS PLANS
Investment products to help meet education expenses
MFS PRIVATE PORTFOLIO SERVICES
Investment advisory services that provide custom products
for high-net-worth individuals
Variable annuities are offered through MFS/Sun Life Financial Distributors,
Inc.
- ------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED)
In January 2005, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 2004.
For the year ended August 31, 2004, the amount of distributions from income
eligible for the 70% dividends received deduction for corporations is 0.70%.
The fund hereby designates the maximum amount allowable as qualified dividend
income eligible for a maximum tax rate of 15%, as provided for by the Jobs and
Growth Tax Relief Reconciliation Act of 2003. Complete information will be
reported in conjunction with your 2004 Form 1099-DIV.
For the year ended August 31, 2004, income from foreign sources was
$27,965,797, and the fund designated a foreign tax credit of $2,477,974.
The fund has the option to use equalization, which is a tax basis dividends
paid deduction from earnings and profits distributed to shareholders upon
redemption of shares.
- --------------------------------------------------------------------------------
CONTACT INFORMATION
INVESTOR INFORMATION
For information on MFS mutual funds, call your investment professional or, for
an information kit, call toll free: 1-800-225-2606 any business day from 8 a.m.
to 8 p.m. Eastern time.
A general description of the MFS funds' proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the About MFS section of mfs.com or by visiting the SEC's Web site at
http://www.sec. gov.
Information regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is
available without charge by visiting the Proxy Voting section of mfs.com or by
visiting the SEC's Web site at http://www.sec.gov.
INVESTOR SERVICE
Write to us at: MFS Service Center, Inc.
P.O. Box 55824
Boston, MA 02205-5824
Type of Information Phone number Hours, Eastern Time
- --------------------------------------------------------------------------------
General information 1-800-225-2606 8 a.m. to 8 p.m., any
business day
- --------------------------------------------------------------------------------
Speech- or hearing-impaired 1-800-637-6576 9 a.m. to 5 p.m., any
business day
- --------------------------------------------------------------------------------
Shares prices, account 1-800-MFS-TALK
balances exchanges (1-800-637-8255) 24 hours a day, 365 days a
or stock and bond outlooks touch-tone required year
- --------------------------------------------------------------------------------
WORLD WIDE WEB
Go to MFS.COM for a clear view of market events, investor education, account
access, and product and performance insights.
Go paperless with EDELIVERY: Join your fellow shareholders who are already
taking advantage of this great new benefit from MFS. With eDelivery, we send
you prospectuses, reports, and proxies electronically. You get timely
information without mailbox clutter (and help your fund save printing and
postage costs).
SIGN-UP instructions: If your account is registered with us, go to mfs.com, log
in to your account via MFS Access, and select the eDelivery sign up options.
If you own your MFS fund shares through a financial institution or through a
retirement plan, MFS TALK, MFS Access, and eDelivery may not be available to
you.
[logo] M F S(R)
INVESTMENT MANAGEMENT
(C) 2004 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc., 500
Boylston Street, Boston, MA 02116.
RIF-ANN-10/04 91M
MFS(R) Mutual Funds
ANNUAL REPORT 8/31/04
MFS(R) TECHNOLOGY FUND
A path for pursuing opportunity
[graphic omitted]
[logo] M F S(R)
INVESTMENT MANAGEMENT
- -------------------------------------------------------------------------------
MFS(R) PRIVACY POLICY: A COMMITMENT TO YOU
- -------------------------------------------------------------------------------
Privacy is a concern for every investor today. At MFS Investment Management(R)
and the MFS funds, we take this concern very seriously. We want you to
understand our policies about every MFS investment product and service that we
offer and how we protect the nonpublic personal information of investors who
have a direct relationship with us and our wholly owned subsidiaries.
Throughout our business relationship, you provide us with personal information;
we maintain information and records about you, your investments, and the
services you use. Examples of the nonpublic personal information we maintain
include
o data from investment applications and other forms
o share balances and transactional history with us, our affiliates, or others
o facts from a consumer reporting agency
We do not disclose any nonpublic personal information about our customers or
former customers to anyone except as permitted by law. We may share information
with companies or financial institutions that perform marketing services on our
behalf or to other financial institutions with which we have joint marketing
arrangements.
Access to your nonpublic personal information is limited to appropriate
personnel who provide products, services, or information to you. We maintain
physical, electronic, and procedural safeguards that comply with applicable
federal regulations.
If you have any questions about MFS' privacy policy, please call 1-800-225-2606
any business day between 8 a.m. and 8 p.m. Eastern time.
Note: If you own MFS products or receive MFS services in the name of a third
party such as a bank or broker-dealer, their privacy policy may apply to you
instead of ours.
- --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUIF
- --------------------------------------------------------------------------------
MFS(R) TECHNOLOGY FUND
The fund seeks capital appreciation.
- -------------------------------------------------------------------------------
A PROSPECTUS FOR ANY MFS PRODUCT CAN BE OBTAINED FROM YOUR INVESTMENT
PROFESSIONAL. YOU SHOULD READ THE PROSPECTUS CAREFULLY BEFORE INVESTING AS IT
CONTAINS COMPLETE INFORMATION ON THE FUND'S INVESTMENT OBJECTIVE(s), THE RISKS
ASSOCIATED WITH AN INVESTMENT IN THE FUND, AND THE FEES, CHARGES, AND EXPENSES
INVOLVED. THESE ELEMENTS, AS WELL AS OTHER INFORMATION CONTAINED IN THE
PROSPECTUS, SHOULD BE CONSIDERED CAREFULLY BEFORE INVESTING.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- ----------------------------------------------------
MFS PRIVACY POLICY
- ----------------------------------------------------
LETTER FROM THE CEO 1
- ----------------------------------------------------
MFS ORIGINAL RESEARCH(R) 5
- ----------------------------------------------------
MANAGEMENT REVIEW 6
- ----------------------------------------------------
PORTFOLIO COMPOSITION 9
- ----------------------------------------------------
PERFORMANCE SUMMARY 10
- ----------------------------------------------------
EXPENSE TABLE 14
- ----------------------------------------------------
PORTFOLIO OF INVESTMENTS 16
- ----------------------------------------------------
FINANCIAL STATEMENTS 20
- ----------------------------------------------------
NOTES TO FINANCIAL STATEMENTS 35
- ----------------------------------------------------
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 48
- ----------------------------------------------------
TRUSTEES AND OFFICERS 49
- ----------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS 53
- ----------------------------------------------------
FEDERAL TAX INFORMATION 54
- ----------------------------------------------------
ASSET ALLOCATION 55
- ----------------------------------------------------
CONTACT INFORMATION BACK COVER
- --------------------------------------------------------------------------------
LETTER FROM THE CEO
- --------------------------------------------------------------------------------
Dear Shareholders,
[Photo of Robert J. Manning]
Our firm was built on the strength of MFS Original Research(R), our in-depth
analysis of every security we consider for our portfolios. We've been honing
this process since 1932, when we created one of the mutual fund industry's
first research departments. And we continue to fine-tune this process so that
we can provide strong and consistent long-term investment performance to help
you achieve your financial goals.
While we have achieved strong investment performance in many of our portfolios,
our goal is to achieve the same strong results across all asset classes. To
ensure that our portfolio teams are doing the best possible job for our firm's
clients and shareholders, I am focusing the vast majority of my time on the
three key elements that I believe truly differentiate MFS from its competitors:
people, process, and culture.
PEOPLE
Our people have always been our most valuable resource. Our philosophy is to
deliver consistent, repeatable investment results by hiring the most talented
investors in our industry. We recruit from the nation's top business schools
and hire experienced analysts, both domestically and around the globe.
Our analysts are the engine that powers our entire investment team because
their recommendations have a direct impact on the investment performance of our
portfolios. To demonstrate our ongoing commitment in this area, we increased
the number of equity analysts at MFS from less than 40 at the end of 2000 to
about 50 in June 2004. During that same period, we doubled the average
investment experience of our domestic equity analysts, in part by recruiting
more seasoned analysts to the firm. Moreover, our international network of
investment personnel now spans key regions of the world with offices in London,
Mexico City, Singapore, and Tokyo, as well as Boston.
One of the major advantages that MFS has over many of its competitors is that
the position of research analyst is a long-term career for many members of our
team, not simply a steppingstone toward becoming a portfolio manager. We have
worked to elevate the stature of the analyst position to be on par with that of
a portfolio manager. In fact, an exceptional research analyst has the
opportunity to earn more at MFS than some portfolio managers.
At the same time, we look within the firm to promote talented analysts who
choose a path toward becoming a portfolio manager. We rarely hire portfolio
managers from our competitors because we believe the best investors are those
steeped in the MFS process and culture. In the past few months, we have
identified three senior research analysts who will assume roles on the
management teams of several of our larger portfolios. MFS is fortunate to have
a deep bench of talented investment personnel, and we welcome the opportunity
to put their skills to work for our clients.
PROCESS
MFS was built on the strength of its bottom-up approach to researching
securities. We have enhanced the mentoring process for our research analysts by
calling on several of our most seasoned portfolio managers to supplement the
work of Director of Global Equity Research David A. Antonelli. These portfolio
managers are taking a special interest in developing the careers of our
research analysts and strengthening our investment process. Kenneth J. Enright
of our value equity group is working with a team of domestic analysts; David E.
Sette-Ducati of our small- and mid-cap equity team is working with analysts
concentrating on small- and mid-cap companies; and Barnaby Wiener of our
international equity team in London heads the European equity research team.
We have combined the bottom-up approach of our research process with a top-
down approach to risk controls on portfolio composition. We have a very strong
quantitative team under the leadership of industry veteran Deborah H. Miller,
who represents the equity management department on the Management Committee of
the firm. Quantitative analysis helps us generate investment ideas and, more
importantly, assess the appropriate level of risk for each portfolio. The risk
assessment is designed to assure that each portfolio operates within its
investment objectives.
Additionally, we have increased the peripheral vision of our investment
personnel across asset classes through the collaboration of our Equity, Fixed
Income, Quantitative Analysis, and Risk Management teams. We recently codified
this key aspect of our culture by forming an Investment Management Committee,
composed of key members of these teams. This committee will work to ensure that
all teams are sharing information, actively debating investment ideas, and
creating a unified investment team.
CULTURE
Teamwork is at the heart of our ability to deliver consistent and competitive
investment performance over time. At MFS, each member of our team is involved
in our success; we have no superstars. The collaborative nature of our process
works to assure a consistent investment approach across all of our products and
provides a high level of continuity in portfolio management because our
investment performance never depends on the contributions of just a single
individual. Our culture is based on an environment of teamwork that allows our
investment personnel to be successful. In turn, we demand superior investment
results from every member of our team.
We have created a meritocracy at our firm based on investment results. We hold
all of our portfolio managers accountable for the performance of their
portfolios and their contributions to the team. We also track the equity and
fixed-income ratings of our analysts so we can evaluate them based on the
performance of their recommendations. We align bonus compensation to investment
performance by weighting rewards to those who have created the greatest
long-term benefit for our shareholders and who contribute most successfully to
the Original Research(SM) process.
The strength of our culture has resulted in a tremendous amount of stability.
Although we have dismissed members of our team whose performance did not meet
MFS" high standards, only one portfolio manager has voluntarily left the firm
over the past six months, based on a decision to retire from the industry.
In short, we can help you achieve your financial goals by hiring talented
people, following a disciplined process, and maintaining our firm's unique
culture. The enhancements described in this letter reflect the collaborative
spirit and the depth of resources in our investment teams.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R)
September 20, 2004
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed.
- -------------------------------------------------------------------------------
MFS ORIGINAL RESEARCH(R)
- -------------------------------------------------------------------------------
THE MFS(R) DIFFERENCE
For 80 years MFS has been offering investors clear paths to pursuing specific
investment objectives. Today, millions of individuals and thousands of
institutions all over the world look to MFS to manage their assets with insight
and care.
Our success, we believe, has to do with the fact that we see investors as
people with plans, not just dollars to invest.
When you invest with MFS, you invest with a company dedicated to helping you
realize your long-term financial goals.
INVESTORS CHOOSE MFS FOR OUR
o global asset management expertise across all asset classes
o time-tested money management process for pursuing consistent results
o full spectrum of investment products backed by MFS Original Research(R)
o resources and services that match real-life needs
TURNING INFORMATION INTO OPPORTUNITY
Sound investments begin with sound information. MFS has been doing its own
research and analyzing findings in-house for decades. The process we use to
uncover opportunity is called MFS Original Research(R).
MFS ORIGINAL RESEARCH INVOLVES
o meeting with the management of 3,000 companies each year to assess their
business plans and the managers" ability to execute those plans
o making onsite visits to more than 2,000 companies annually to gain first-hand
knowledge of their operations and products
o analyzing financial statements and balance sheets
o talking extensively with companies" customers and competitors
o developing our own proprietary estimates of companies" earnings
- -------------------------------------------------------------------------------
MANAGEMENT REVIEW
- -------------------------------------------------------------------------------
MARKET ENVIRONMENT
The recovery in global stock markets that began in the spring of 2003 continued
into the first quarter of 2004. Business capital expenditures, which had been
weak for several years, began to trend upward in the latter half of 2003,
adding support to a recovery that had been fueled largely by consumer spending.
In the spring and summer of 2004, many measures of global economic growth -
including employment, corporate spending, and earnings growth - continued to
improve. But stock prices made only modest gains as investors, in our view,
became increasingly concerned about higher interest rates, rising oil prices, a
slowdown in corporate earnings growth, and continuing unrest in Iraq. The U.S.
Federal Reserve Board raised interest rates in June and again in August, and
set expectations for an ongoing series of modest rate hikes. A pullback in
equity markets near the end of the period was triggered, we believe, by
indications from a number of bellwether companies that earnings growth was
starting to slow.
DETRACTORS FROM PERFORMANCE
Our stock selection in the network and telecommunications, computer software,
and leisure and toys industries were the primary detractors from performance
during the period.
Among our network and telecommunications holdings, we missed the run-up in the
value of Nortel Networks, a manufacturer of telecommunications equipment. We
had sold our position in Nortel by period-end. We also missed the substantial
gains made by Research in Motion Ltd., which produces the popular handheld
BlackBerry device for sending and receive e-mail messages.
In the computer software industry, VERITAS Software, which provides data
storage systems, experienced a steep price decline. Red Hat, Inc., the company
that markets the Linux operating system for computers, posted a strong gain for
the year, but we were not positioned in the stock during the period when it
experienced its greatest gains.
In the leisure and toys sector, Tamron Co., Ltd., of Japan, which manufactures
optical equipment including camera lenses, declined during the period, although
it was not among the top 10 individual detractors for the fund. By the end of
the period, we had sold our position in the stock.
Other individual holdings that had a negative impact on fund performance
included Agere Systems, which manufactures communications chips, and Vishay
Intertechnology, Inc., which provides components used in the manufacture of
semiconductors. We had sold our positions in both Agere and Vishay by period-
end. Our underweighted position in the Internet portal company Yahoo, which
gained during the period, also acted as a drag on performance.
CONTRIBUTORS TO PERFORMANCE
Our stock selections in the wireless communications, electronics, and business
services industries made the biggest contributions to the fund's performance.
In the wireless communications industry, our investment in a stock outside the
benchmark, the Latin American mobile phone company America Movil S.A. de C.V.,
did well for the fund.
In the electronics industry, we benefited from being underweighted in
semiconductor manufacturer Intel, whose stock declined during the year.
Among business services companies, both Alliance Data Systems, a provider of
private-label credit card services, and Accenture, a management and technology
consulting firm, made key contributions to portfolio performance. We also
participated in a strong run-up in the value of stock photography house Getty
Images.
Other individual stocks that made a positive contribution to performance were
Akamai Technologies, a provider of Web application software, and Netscreen
Technologies, Inc., which provides computer security systems. By period-end, we
had sold our position in Netscreen. We also benefited from underweighting
IAC/InterActiveCorp, the media and Internet company that owns the Home Shopping
Network, U.S. ticket retailer Ticketmaster, and the Expedia and Citysearch Web
sites. The stock experienced a sharp decline during the year, and by the end of
the period we did not own any shares of the stock.
Respectfully,
/s/ Daniel G. Scherman
Daniel G. Scherman
Portfolio Manager
Note to Shareholders: Effective May 1, 2004, Daniel G. Scherman became
portfolio manager of the fund.
The views expressed in this report are those of the portfolio manager only
through the end of the period of the report as stated on the cover and do not
necessarily reflect the views of MFS or any other person in the MFS
organization. These views are subject to change at any time based on market and
other conditions, and MFS disclaims any responsibility to update such views.
These views may not be relied upon as investment advice or as an indication of
trading intent on behalf of any MFS fund. References to specific securities are
not recommendations of such securities and may not be representative of any MFS
fund's current or future investments.
The fund may charge a 2% redemption fee on proceeds from A, B, C and I shares
redeemed or exchanged within 5 business days of acquiring (either by
purchasing or exchanging) fund shares. See the prospectus for complete
details.
- -------------------------------------------------------------------------------
Visit mfs.com for our latest economic and investment outlook.
o Under Updates & Announcements, click Week in Review for a summary of recent
investment- related news.
o From Week in Review, link to MFS Global Perspective for our current view of
the world.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
---------------------------------------------
PORTFOLIO STRUCTURE
---------------------------------------------
Stocks 98.9%
Convertible Bonds 0.4%
Cash & Other Net Assets 0.7%
---------------------------------------------
TOP SECTOR WEIGHTINGS
---------------------------------------------
Technology 85.9%
---------------------------------------------
Special Products and Services 10.5%
---------------------------------------------
Utilities & Communications 2.2%
---------------------------------------------
Industrial Goods & Services 0.5%
---------------------------------------------
---------------------------------------------
TOP TEN HOLDINGS
---------------------------------------------
CISCO SYSTEMS INC. 5.1%
---------------------------------------------
DELL INC. 5.0%
---------------------------------------------
MICROSOFT CORP. 4.8%
---------------------------------------------
INTERNATIONAL BUSINESS
MACHINES CORP. 4.5%
---------------------------------------------
EBAY INC. 4.1%
---------------------------------------------
QUALCOMM INC. 3.9%
---------------------------------------------
INTEL CORP. 3.2%
---------------------------------------------
HEWLETT-PACKARD CO. 3.1%
---------------------------------------------
YAHOO! INC. 2.9%
---------------------------------------------
ORACLE CORP. 2.7%
---------------------------------------------
Percentages are based on total net assets as of 8/31/04.
The portfolio is actively managed, and current holdings may be different.
- -------------------------------------------------------------------------------
PERFORMANCE SUMMARY THROUGH 8/31/04
- -------------------------------------------------------------------------------
The following chart illustrates the historical performance of the fund's
original share class in comparison to its benchmark. Performance results
include the deduction of the maximum applicable sales charge and reflect the
percentage change in net asset value, including reinvestment of dividends and
capital gains distributions. Benchmark comparisons are unmanaged and do not
reflect any fees or expenses. The performance of other share classes will be
greater than or less than the line shown. (See Notes to Performance Summary.)
VISIT MFS.COM FOR THE MOST RECENT MONTH-END PERFORMANCE RESULTS. MARKET
VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND CURRENT
PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE
OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. ANY
HIGH SHORT-TERM RETURNS MAY BE AND LIKELY WERE ATTRIBUTABLE TO RECENT
FAVORABLE MARKET CONDITIONS, WHICH MAY NOT BE REPEATED. THE PERFORMANCE SHOWN
DOES NOT REFLECT THE DEDUCTION OF TAXES, IF ANY, THAT A SHAREHOLDER WOULD PAY
ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from the commencement of the fund's investment operations,
January 2, 1997, through August 31, 2004. Index information is from January 2,
1997.)
Goldman Sachs
MFS Technology Technology
Fund -- Class A Index
1/97 $ 9,425 $10,000
8/97 11,810 13,559
8/98 11,738 13,114
8/00 36,453 44,919
8/02 8,3090 10,420
8/04 10,236 13,989
TOTAL RETURNS
- -------------------------
Average annual
without sales charge
- -------------------------
Class
Share class inception date 1-yr 3-yr 5-yr Life*
- ------------------------------------------------------------------------------
A 1/02/97 -7.23% -10.36% -12.00% 1.08%
- ------------------------------------------------------------------------------
B 4/14/00 -7.75% -10.92% -12.50% 0.71%
- ------------------------------------------------------------------------------
C 4/14/00 -7.88% -11.00% -12.54% 0.68%
- ------------------------------------------------------------------------------
I 1/02/97 -6.88% -10.06% -11.64% 1.35%
- ------------------------------------------------------------------------------
R1 12/31/02 -7.37% -10.48% -12.07% 1.03%
- ------------------------------------------------------------------------------
R2 10/31/03 -7.39% -10.41% -12.03% 1.06%
- ------------------------------------------------------------------------------
- -------------------------
Average annual
- -------------------------
Comparative benchmarks
- ------------------------------------------------------------------------------
Average science and technology
fund+ -6.20% -7.47% -11.55% 3.62%
- ------------------------------------------------------------------------------
Goldman Sachs Technology Index# -3.00% -5.29% -12.66% 4.48%
- ------------------------------------------------------------------------------
- -------------------------
Average annual
with sales charge
- -------------------------
Share class
- ------------------------------------------------------------------------------
A -12.56% -12.11% -13.04% 0.31%
- ------------------------------------------------------------------------------
B -11.44% -11.82% -12.78% 0.71%
- ------------------------------------------------------------------------------
C -8.80% -11.00% -12.54% 0.68%
- ------------------------------------------------------------------------------
I, R1, and R2 Class shares do not have a sales charge. Please see Notes to
Performance Summary for more details.
- -------------------------
Cumulative without
sales charge
- -------------------------
Share class 1-yr 3-yr 5-yr Life*
- ------------------------------------------------------------------------------
A -7.23% -27.97% -47.23% 8.61%
- ------------------------------------------------------------------------------
B -7.75% -29.31% -48.71% 5.56%
- ------------------------------------------------------------------------------
C -7.88% -29.50% -48.83% 5.31%
- ------------------------------------------------------------------------------
I -6.88% -27.25% -46.15% 10.83%
- ------------------------------------------------------------------------------
R1 -7.37% -28.25% -47.43% 8.18%
- ------------------------------------------------------------------------------
R2 -7.39% -28.10% -47.32% 8.41%
- ------------------------------------------------------------------------------
* For the period from the commencement of the fund's investment operations,
January 2, 1997, through August 31, 2004. Index information is from
January 2, 1997.
+ Source: Lipper Inc., an independent firm that reports mutual fund performance.
# Source: Bloomberg L.P.
INDEX DEFINITION
GOLDMAN SACHS TECHNOLOGY INDEX - commonly used measure of technology stock
performance.
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
The performance shown reflects a non-recurring accrual made to the fund on July
28, 2004 relating to MFS" revenue sharing settlement with the Securities and
Exchange Commission without which the performance would have been lower.
Class A results, including sales charge, reflect the deduction of the maximum
5.75% sales charge. Class B results, including sales charge, reflect the
deduction of the applicable contingent deferred sales charge (CDSC), which
declines over six years from 4% to 0%. Class C results, including sales charge,
(assuming redemption within one year from the end of the calendar month of
purchase), reflect the deduction of the 1% CDSC. Class I shares have no sales
charges and are available only to certain investors. Class R1 and R2 shares
have no sales charges and are available only to certain retirement plans.
Performance for share classes offered after Class A shares includes the
performance of the fund's Class A shares for periods prior to their offering.
This blended class performance has been adjusted to take into account
differences in sales loads, if any, applicable to these share classes, but has
not been adjusted to take into account differences in class specific operating
expenses (such as Rule 12b-1 fees). Compared to performance these share classes
would have experienced had they been offered for the entire period, the use of
blended performance generally results in higher performance for share classes
with higher operating expenses than the initial share class to which it is
blended, and lower performance for share classes with lower operating expenses
than the initial share class to which it is blended.
Performance results reflect any applicable expense subsidies and waivers in
effect during the periods shown. Without such subsidies and waivers the fund's
performance results would be less favorable. Please see the prospectus and
financial statements for complete details.
KEY RISK CONSIDERATIONS
The portfolio may invest in foreign and/or emerging markets securities, which
are more susceptible to risks relating to interest rates, currency exchange
rates, economic, and political conditions.
The portfolio may invest in small-, mid-sized, or emerging companies, which are
susceptible to greater risk than is customarily associated with investing in
more established companies.
The portfolio focuses on companies in a limited number of sectors or industries
making it more susceptible to adverse economic, political, or regulatory
developments affecting those sectors or industries than a portfolio that
invests more broadly.
The portfolio may invest a relatively high percentage of its assets in a small
number of issuers or even in a single issuer. This makes the fund's value more
sensitive to developments associated with the issuer and the overall market.
The portfolio's value will vary daily since its investments will fluctuate in
response to issuer, market, regulatory, economic, or political developments.
Because stocks tend to be more volatile than some other investments, such as
bonds, the more assets a fund dedicates to stocks, generally the more volatile
the portfolio's value will be. Historically, stocks have outperformed bonds
over time. The portfolio's investment risks should be considered prior to
investing.
Please see the prospectus for further information on these and other risk
considerations.
- -------------------------------------------------------------------------------
EXPENSE TABLE
- -------------------------------------------------------------------------------
FUND EXPENSES BORNE BY SHAREHOLDERS DURING THE PERIOD FROM
MARCH 1, 2004, THROUGH AUGUST 31, 2004.
As a shareholder of the fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on certain purchase or redemption
payments and redemption fees on certain exchanges and redemptions, and; (2)
ongoing costs, including management fees, distribution and service (12b-1)
fees, and other fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of
the period and held for the entire period, March 1, 2004 through August 31,
2004.
ACTUAL EXPENSES
The first line for each share class in the table below provides information
about actual account values and actual expenses. You may use the information in
this line, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the first line under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during
this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line for each share class in the table below provides information
about hypothetical account values and hypothetical expenses based on the fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption fees. Therefore, the second line for each share
class in the table is useful in comparing ongoing costs only, and will not help
you determine the relative total costs of owning different funds. In addition,
if these transactional costs were included, your costs would have been higher.
- --------------
Share Class
- --------------
- -------------------------------------------------------------------------------
Expenses
Paid During
Annualized Beginning Ending Period**
Expense Account Value Account Value* 3/01/04-
Ratio 3/01/04 8/31/04 8/31/04
- --------------------------------------------------------------------------------
Actual 1.49% $1,000 $ 826 $6.86
A -----------------------------------------------------------------------
Hypothetical 1.49% $1,000 $1,017 $7.58
- -------------------------------------------------------------------------------
Actual 2.14% $1,000 $ 823 $9.83
B ------------------------------------------------------------------------
Hypothetical 2.14% $1,000 $1,014 $10.86
- -------------------------------------------------------------------------------
Actual 2.14% $1,000 $ 823 $9.83
C -----------------------------------------------------------------------
Hypothetical 2.14% $1,000 $1,014 $10.86
- -------------------------------------------------------------------------------
Actual 1.16% $1,000 $ 827 $5.34
I -----------------------------------------------------------------------
Hypothetical 1.16% $1,000 $1,019 $5.90
- -------------------------------------------------------------------------------
Actual 1.65% $1,000 $ 826 $7.59
R1 -----------------------------------------------------------------------
Hypothetical 1.65% $1,000 $1,017 $8.39
- -------------------------------------------------------------------------------
Actual 1.89% $1,000 $ 825 $8.69
R2 -----------------------------------------------------------------------
Hypothetical 1.89% $1,000 $1,015 $9.60
- -------------------------------------------------------------------------------
* Ending account value reflects each class" ending account value assuming the
actual class return per year before expenses (Actual) and a hypothetical 5%
class return per year before expenses (Hypothetical).
** Expenses paid is equal to each class" annualized expense ratio for the most
recent six month period, as shown above, multiplied by the average account
value over the period, multiplied by the number of days in the period,
divided by the number of days in the year. Expenses paid do not include any
applicable sales charges (loads) or redemption fees. If these transaction
costs had been included, your costs would have been higher.
- ----------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS - 8/31/04
- ----------------------------------------------------------------------------------------------
The Portfolio of Investments is a complete list of all securities owned by your fund. It is
categorized by broad-based asset classes.
Stocks - 98.9%
- ----------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- ----------------------------------------------------------------------------------------------
U.S. Stocks - 83.4%
- ----------------------------------------------------------------------------------------------
Business Services - 7.5%
- ----------------------------------------------------------------------------------------------
Alliance Data Systems Corp.* 64,910 $2,479,562
- ----------------------------------------------------------------------------------------------
Ceridian Corp.* 53,100 981,819
- ----------------------------------------------------------------------------------------------
Digitas, Inc.*^ 234,570 1,677,176
- ----------------------------------------------------------------------------------------------
DST Systems, Inc.* 72,610 3,284,876
- ----------------------------------------------------------------------------------------------
Fiserv, Inc.* 34,010 1,182,868
- ----------------------------------------------------------------------------------------------
Getty Images, Inc.*^ 20,890 1,158,351
- ----------------------------------------------------------------------------------------------
Perot Systems Corp., "A"*^ 78,260 1,041,641
- ----------------------------------------------------------------------------------------------
$11,806,293
- ----------------------------------------------------------------------------------------------
Computer Software - 16.7%
- ----------------------------------------------------------------------------------------------
Akamai Technologies, Inc.*^ 108,440 $1,458,518
- ----------------------------------------------------------------------------------------------
Kronos, Inc.* 23,000 983,940
- ----------------------------------------------------------------------------------------------
Magma Design Automation, Inc.*^ 36,480 601,920
- ----------------------------------------------------------------------------------------------
Manhattan Associates, Inc.* 32,880 767,419
- ----------------------------------------------------------------------------------------------
Microsoft Corp. 274,510 7,494,123
- ----------------------------------------------------------------------------------------------
MicroStrategy, Inc., "A"* 46,700 1,616,287
- ----------------------------------------------------------------------------------------------
Open Solutions, Inc.* 41,600 959,296
- ----------------------------------------------------------------------------------------------
Oracle Corp.* 428,908 4,276,213
- ----------------------------------------------------------------------------------------------
Red Hat, Inc.*^ 108,010 1,324,203
- ----------------------------------------------------------------------------------------------
SERENA Software, Inc.*^ 130,040 2,035,126
- ----------------------------------------------------------------------------------------------
Symantec Corp.* 65,400 3,136,584
- ----------------------------------------------------------------------------------------------
VERITAS Software Corp.* 91,350 1,527,372
- ----------------------------------------------------------------------------------------------
$26,181,001
- ----------------------------------------------------------------------------------------------
Computer Software - Systems - 11.3%
- ----------------------------------------------------------------------------------------------
Avnet, Inc.* 59,350 $942,478
- ----------------------------------------------------------------------------------------------
Black Box Corp. 22,910 830,258
- ----------------------------------------------------------------------------------------------
CDW Corp. 15,700 918,450
- ----------------------------------------------------------------------------------------------
Hewlett-Packard Co. 273,173 4,887,065
- ----------------------------------------------------------------------------------------------
International Business Machines Corp. 83,831 7,099,647
- ----------------------------------------------------------------------------------------------
SS&C Technologies, Inc. 75,700 1,242,994
- ----------------------------------------------------------------------------------------------
Tech Data Corp.* 30,140 1,135,072
- ----------------------------------------------------------------------------------------------
Xerox Corp.* 45,600 612,408
- ----------------------------------------------------------------------------------------------
$17,668,372
- ----------------------------------------------------------------------------------------------
Electronics - 13.4%
- ----------------------------------------------------------------------------------------------
Amphenol Corp., "A"* 58,080 $1,745,885
- ----------------------------------------------------------------------------------------------
Analog Devices, Inc. 36,650 1,272,488
- ----------------------------------------------------------------------------------------------
Applied Materials, Inc.* 76,920 1,222,259
- ----------------------------------------------------------------------------------------------
Arrow Electronics, Inc.* 65,220 1,411,361
- ----------------------------------------------------------------------------------------------
Coherent, Inc.* 25,500 648,465
- ----------------------------------------------------------------------------------------------
Cree, Inc.* 29,000 725,290
- ----------------------------------------------------------------------------------------------
Cymer, Inc.*^ 39,160 1,046,355
- ----------------------------------------------------------------------------------------------
DSP Group, Inc.* 35,740 679,417
- ----------------------------------------------------------------------------------------------
Integrated Circuit Systems, Inc.* 122,520 2,692,990
- ----------------------------------------------------------------------------------------------
Intel Corp. 237,063 5,047,071
- ----------------------------------------------------------------------------------------------
National Semiconductor Corp.* 42,170 562,126
- ----------------------------------------------------------------------------------------------
PerkinElmer, Inc. 26,380 461,122
- ----------------------------------------------------------------------------------------------
PMC-Sierra, Inc.* 54,050 504,827
- ----------------------------------------------------------------------------------------------
Texas Instruments, Inc. 155,150 3,031,631
- ----------------------------------------------------------------------------------------------
$21,051,287
- ----------------------------------------------------------------------------------------------
Internet - 8.6%
- ----------------------------------------------------------------------------------------------
Digital River, Inc.*^ 40,880 $983,982
- ----------------------------------------------------------------------------------------------
EarthLink, Inc.* 90,510 906,005
- ----------------------------------------------------------------------------------------------
eBay, Inc.* 75,160 6,504,346
- ----------------------------------------------------------------------------------------------
InfoSpace, Inc.* 12,400 471,200
- ----------------------------------------------------------------------------------------------
Yahoo!, Inc.* 160,700 4,581,557
- ----------------------------------------------------------------------------------------------
$13,447,090
- ----------------------------------------------------------------------------------------------
Personal Computers & Peripherals - 9.4%
- ----------------------------------------------------------------------------------------------
Apple Computer, Inc.* 71,900 $2,479,831
- ----------------------------------------------------------------------------------------------
Dell, Inc.* 226,743 7,899,726
- ----------------------------------------------------------------------------------------------
Lexmark International, Inc., "A"* 35,620 3,150,589
- ----------------------------------------------------------------------------------------------
Network Appliance, Inc.* 31,700 636,219
- ----------------------------------------------------------------------------------------------
Zebra Technologies Corp., "A"* 11,850 677,228
- ----------------------------------------------------------------------------------------------
$14,843,593
- ----------------------------------------------------------------------------------------------
Telecommunications - Wireless - 1.1%
- ----------------------------------------------------------------------------------------------
Andrew Corp.* 152,470 $1,690,892
- ----------------------------------------------------------------------------------------------
Telecommunications - Wireline - 15.4%
- ----------------------------------------------------------------------------------------------
ADTRAN, Inc. 41,600 $1,114,048
- ----------------------------------------------------------------------------------------------
Cisco Systems, Inc.* 423,613 7,946,980
- ----------------------------------------------------------------------------------------------
F5 Networks, Inc.*^ 53,550 1,315,724
- ----------------------------------------------------------------------------------------------
InterDigital Communications Corp.*^ 58,100 905,779
- ----------------------------------------------------------------------------------------------
Juniper Networks, Inc.* 79,180 1,812,430
- ----------------------------------------------------------------------------------------------
Lucent Technologies, Inc.*^ 627,700 1,964,701
- ----------------------------------------------------------------------------------------------
Motorola, Inc. 185,215 2,991,222
- ----------------------------------------------------------------------------------------------
QUALCOMM, Inc. 160,140 6,093,327
- ----------------------------------------------------------------------------------------------
$24,144,211
- ----------------------------------------------------------------------------------------------
Total U.S. Stocks $130,832,739
- ----------------------------------------------------------------------------------------------
Foreign Stocks - 15.5%
- ----------------------------------------------------------------------------------------------
Bermuda - 4.5%
- ----------------------------------------------------------------------------------------------
Accenture Ltd., "A" (Business Services)* 142,270 $3,713,247
- ----------------------------------------------------------------------------------------------
Marvell Technology Group Ltd. (Electronics)* 144,640 3,344,077
- ----------------------------------------------------------------------------------------------
$7,057,324
- ----------------------------------------------------------------------------------------------
Canada - 1.0%
- ----------------------------------------------------------------------------------------------
Research In Motion Ltd. (Telecommunications - Wireline)* 26,800 $1,613,896
- ----------------------------------------------------------------------------------------------
Germany - 1.3%
- ----------------------------------------------------------------------------------------------
SAP AG, ADR (Computer Software) 55,700 $2,030,822
- ----------------------------------------------------------------------------------------------
Israel - 0.9%
- ----------------------------------------------------------------------------------------------
PowerDsine Ltd. (Electronics)* 74,500 $761,390
- ----------------------------------------------------------------------------------------------
Retalix Ltd. (Computer Software)*^ 36,300 678,810
- ----------------------------------------------------------------------------------------------
$1,440,200
- ----------------------------------------------------------------------------------------------
Japan - 2.4%
- ----------------------------------------------------------------------------------------------
Canon, Inc., ADR (Personal Computers & Peripherals) 20,000 $959,400
- ----------------------------------------------------------------------------------------------
Seiko Epson Corp. (Electronics) 42,200 1,736,976
- ----------------------------------------------------------------------------------------------
SOFTBANK CORP. (Business Services)^ 22,700 973,883
- ----------------------------------------------------------------------------------------------
$3,670,259
- ----------------------------------------------------------------------------------------------
Mexico - 1.1%
- ----------------------------------------------------------------------------------------------
America Movil S.A. de C.V., ADR (Telecommunications -
Wireless) 51,780 $1,773,465
- ----------------------------------------------------------------------------------------------
South Korea - 1.2%
- ----------------------------------------------------------------------------------------------
Samsung Electronics Co. Ltd., GDR (Electronics) 5,245 $1,016,219
- ----------------------------------------------------------------------------------------------
Samsung SDI Co. Ltd., GDR (Electrical Equipment) 32,640 840,480
- ----------------------------------------------------------------------------------------------
$1,856,699
- ----------------------------------------------------------------------------------------------
Sweden - 1.3%
- ----------------------------------------------------------------------------------------------
Ericsson, Inc., "B" (Telecommunications - Wireline) 730,340 $1,976,086
- ----------------------------------------------------------------------------------------------
United Kingdom - 1.8%
- ----------------------------------------------------------------------------------------------
Amdocs Ltd. (Computer Software)* 140,870 $2,831,485
- ----------------------------------------------------------------------------------------------
Total Foreign Stocks $24,250,236
- ----------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $148,187,665) $155,082,975
- ----------------------------------------------------------------------------------------------
Convertible Bond - 0.4%
- ----------------------------------------------------------------------------------------------
PAR AMOUNT
- ----------------------------------------------------------------------------------------------
Computer Software - Systems - 0.4%
- ----------------------------------------------------------------------------------------------
Brocade Communications Systems, Inc., 2%, 2007
(Identified Cost, $737,316) $738,000 $679,883
- ----------------------------------------------------------------------------------------------
Short-Term Obligation - 0.2%
- ----------------------------------------------------------------------------------------------
General Electric Capital Corp., 1.57%, due 9/01/04,
at Amortized Cost $381,000 $381,000
- ----------------------------------------------------------------------------------------------
Collateral for Securities Loaned - 10.1%
- ----------------------------------------------------------------------------------------------
SHARES
- ----------------------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio, at Cost and
Net Asset Value 15,777,563 $15,777,563
- ----------------------------------------------------------------------------------------------
Repurchase Agreement - 0.6%
- ----------------------------------------------------------------------------------------------
PAR AMOUNT
- ----------------------------------------------------------------------------------------------
Morgan Stanley, 1.57%, dated 8/31/04, due 9/01/04, total to
be received $874,038 (secured by various U.S. Treasury and
Federal Agency obligations in a jointly traded account), at
Cost $874,000 $874,000
- ----------------------------------------------------------------------------------------------
Total Investments(S) (Identified Cost, $165,957,544) $172,795,421
- ----------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - (10.2)% (15,944,740)
- ----------------------------------------------------------------------------------------------
Net Assets - 100.0% $156,850,681
- ----------------------------------------------------------------------------------------------
* Non-income producing security.
^ All or a portion of this security is on loan.
(S) As of August 31, 2004, one security, representing $1,976,086 and 1.3% of net assets,
was fair valued in accordance with the policies adopted by the Board of Trustees.
SEE NOTES TO FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
- ---------------------------------------------------------------------------------------------------
This statement represents your fund's balance sheet, which details the assets and liabilities
composing the total value of your fund.
AT 8/31/04
ASSETS
Investments, at value, including $15,297,728 of securities
on loan (identified cost, $165,957,544) $172,795,421
- --------------------------------------------------------------------------------------------------
Cash 684
- --------------------------------------------------------------------------------------------------
Receivable for investments sold 1,497,209
- --------------------------------------------------------------------------------------------------
Receivable for fund shares sold 36,197
- --------------------------------------------------------------------------------------------------
Interest and dividends receivable 70,912
- --------------------------------------------------------------------------------------------------
Receivable from administrative proceeding settlement 102,085
- --------------------------------------------------------------------------------------------------
Other assets 16
- --------------------------------------------------------------------------------------------------
Total assets $174,502,524
- --------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased $1,552,519
- --------------------------------------------------------------------------------------------------
Payable for fund shares reacquired 311,191
- --------------------------------------------------------------------------------------------------
Collateral for securities loaned, at value 15,777,563
- --------------------------------------------------------------------------------------------------
Payable to affiliates
- --------------------------------------------------------------------------------------------------
Management fee 3,235
- --------------------------------------------------------------------------------------------------
Reimbursement fee 4,762
- --------------------------------------------------------------------------------------------------
Distribution and service fee 2,572
- --------------------------------------------------------------------------------------------------
Administrative service fee 1
- --------------------------------------------------------------------------------------------------
Total liabilities $17,651,843
- --------------------------------------------------------------------------------------------------
Net assets $156,850,681
- --------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Paid-in capital $518,523,349
- --------------------------------------------------------------------------------------------------
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 6,837,899
- --------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (368,510,567)
- --------------------------------------------------------------------------------------------------
Net assets $156,850,681
- --------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 20,574,125
- --------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued
Class A shares
Net assets $75,786,229
- --------------------------------------------------------------------------------------------------
Shares outstanding 9,841,461
- --------------------------------------------------------------------------------------------------
Net asset value per share $7.70
- --------------------------------------------------------------------------------------------------
Offering price per share (100/94.25X$7.70) $8.17
- --------------------------------------------------------------------------------------------------
Class B shares
Net assets $50,895,529
- --------------------------------------------------------------------------------------------------
Shares outstanding 6,789,793
- --------------------------------------------------------------------------------------------------
Net asset value and offering price per share $7.50
- --------------------------------------------------------------------------------------------------
Class C shares
Net assets $15,366,566
- --------------------------------------------------------------------------------------------------
Shares outstanding 2,053,259
- --------------------------------------------------------------------------------------------------
Net asset value and offering price per share $7.48
- --------------------------------------------------------------------------------------------------
Class I shares
Net assets $13,404,426
- --------------------------------------------------------------------------------------------------
Shares outstanding 1,707,276
- --------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $7.85
- --------------------------------------------------------------------------------------------------
Class R1 shares
Net assets $1,265,591
- --------------------------------------------------------------------------------------------------
Shares outstanding 165,053
- --------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $7.67
- --------------------------------------------------------------------------------------------------
Class R2 shares
Net assets $132,340
- --------------------------------------------------------------------------------------------------
Shares outstanding 17,283
- --------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $7.66
- --------------------------------------------------------------------------------------------------
On sales of $50,000 or more, the offering price of Class A shares is reduced. A contingent
deferred sales charge may be imposed on redemptions of Class A, Class B, and Class C shares.
SEE NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------------------------
This statement describes how much your fund received in investment income and paid in expenses. It
also describes any gains and/or losses generated by fund operations.
FOR YEAR ENDED 8/31/04
NET INVESTMENT INCOME (LOSS)
Income
- ---------------------------------------------------------------------------------------------------
Dividends $605,409
- ---------------------------------------------------------------------------------------------------
Interest 69,582
- ---------------------------------------------------------------------------------------------------
Other# 102,085
- ---------------------------------------------------------------------------------------------------
Income on securities loaned 41,345
- ---------------------------------------------------------------------------------------------------
Foreign taxes withheld (25,092)
- ---------------------------------------------------------------------------------------------------
Total investment income $793,329
- ---------------------------------------------------------------------------------------------------
Expenses
- ---------------------------------------------------------------------------------------------------
Management fee $1,495,183
- ---------------------------------------------------------------------------------------------------
Trustees' compensation 6,358
- ---------------------------------------------------------------------------------------------------
Shareholder servicing costs 514,455
- ---------------------------------------------------------------------------------------------------
Distribution and service fee (Class A) 375,534
- ---------------------------------------------------------------------------------------------------
Distribution and service fee (Class B) 637,600
- ---------------------------------------------------------------------------------------------------
Distribution and service fee (Class C) 209,805
- ---------------------------------------------------------------------------------------------------
Distribution and service fee (Class R1) 4,030
- ---------------------------------------------------------------------------------------------------
Distribution and service fee (Class R2) 262
- ---------------------------------------------------------------------------------------------------
Administrative service fee (Class R2) 131
- ---------------------------------------------------------------------------------------------------
Administrative fee 16,713
- ---------------------------------------------------------------------------------------------------
Custodian fee 92,911
- ---------------------------------------------------------------------------------------------------
Printing 100,975
- ---------------------------------------------------------------------------------------------------
Postage 31,431
- ---------------------------------------------------------------------------------------------------
Auditing fees 35,000
- ---------------------------------------------------------------------------------------------------
Legal fees 9,390
- ---------------------------------------------------------------------------------------------------
Registration fees 102,968
- ---------------------------------------------------------------------------------------------------
Miscellaneous 111,308
- ---------------------------------------------------------------------------------------------------
Total expenses $3,744,054
- ---------------------------------------------------------------------------------------------------
Fees paid indirectly (16,255)
- ---------------------------------------------------------------------------------------------------
Reduction of expenses by investment adviser (209,513)
- ---------------------------------------------------------------------------------------------------
Net expenses $3,518,286
- ---------------------------------------------------------------------------------------------------
Net investment loss $(2,724,957)
- ---------------------------------------------------------------------------------------------------
Statement of Operations - continued
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) (identified cost basis)
- ---------------------------------------------------------------------------------------------------
Investment transactions $13,619,430
- ---------------------------------------------------------------------------------------------------
Written options transactions 57,911
- ---------------------------------------------------------------------------------------------------
Foreign currency transactions (13,144)
- ---------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign
currency transactions $13,664,197
- ---------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
- ---------------------------------------------------------------------------------------------------
Investments $(23,012,712)
- ---------------------------------------------------------------------------------------------------
Translation of assets and liabilities in foreign
currencies 2,578
- ---------------------------------------------------------------------------------------------------
Net unrealized loss on investments and foreign
currency translation $(23,010,134)
- ---------------------------------------------------------------------------------------------------
Net realized and unrealized loss on investments and
foreign currency $(9,345,937)
- ---------------------------------------------------------------------------------------------------
Decrease in net assets from operations $(12,070,894)
- ---------------------------------------------------------------------------------------------------
# A non-recurring accrual recorded as a result of an administrative proceeding regarding
disclosure of brokerage allocation practices in connection with fund sales, as described in
the Legal Proceedings and Transactions with Affiliates footnotes.
SEE NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------------------------
This statement describes the increases and/or decreases in net assets resulting from operations,
any distributions, and any shareholder transactions.
FOR YEARS ENDED 8/31 2004 2003
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment loss $(2,724,957) $(1,360,190)
- --------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions 13,664,197 (11,939,491)
- --------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation (23,010,134) 46,886,316
- ------------------------------------------------------- ------------- ------------
Increase (decrease) in net assets from operations $(12,070,894) $33,586,635
- ------------------------------------------------------- ------------- ------------
Net increase (decrease) in net assets from fund
share transactions $(18,052,412) $60,726,943
- ------------------------------------------------------- ------------- ------------
Redemption fees $44 $--
- ------------------------------------------------------- ------------- ------------
Total increase (decrease) in net assets $(30,123,262) $94,313,578
- ------------------------------------------------------- ------------- ------------
NET ASSETS
At beginning of period $186,973,943 $92,660,365
- --------------------------------------------------------------------------------------------------
At end of period (including accumulated net investment
income of $0 and $0, respectively) $156,850,681 $186,973,943
- --------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the fund's financial performance for the past 5 years (or,
if shorter, the period of the fund's operation). Certain information reflects financial results for a single fund share. The
total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund
(assuming reinvestment of all distributions). This information has been audited by the fund's independent registered public
accounting firm, whose report, together with the fund's financial statements, are included in this report.
YEARS ENDED 8/31
-------------------------------------------------------------------------------
CLASS A 2004 2003 2002 2001 2000
Net asset value, beginning of period $8.30 $6.25 $10.70 $28.03 $18.34
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.10) $(0.07) $(0.11) $(0.14) $(0.17)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency (0.50) 2.12 (4.34) (16.69) 14.44
- -------------------------------------------- ------ ------ ------ ------ ------
Total from investment operations $(0.60) $2.05 $(4.45) $(16.83) $14.27
- -------------------------------------------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments and
foreign currency transactions $-- $-- $-- $(0.18) $(4.58)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- (0.32) --
- -----------------------------------------------------------------------------------------------------------------------------
From paid-in capital -- -- -- (0.00)+++ --
- -------------------------------------------- ------ ------ ------ ------ ------
Total distributions declared to
shareholders $-- $-- $-- $(0.50) $(4.58)
- -------------------------------------------- ------ ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- -------------------------------------------- ------ ------ ------ ------ ------
Net asset value, end of period $7.70 $8.30 $6.25 $10.70 $28.03
- -------------------------------------------- ------ ------ ------ ------ ------
Total return (%)(+) (7.23)^^ 32.80 (41.53) (61.02) 87.93
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
-------------------------------------------------------------------------------
CLASS A (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.50 1.52 1.51 1.52 1.40
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.10) (1.05) (1.22) (0.87) (0.81)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 141 162 210 413 294
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $75,786 $101,059 $53,142 $66,358 $57,382
- -----------------------------------------------------------------------------------------------------------------------------
(S) Effective April 14, 2000, MFS has contractually agreed, subject to reimbursement, to bear a portion of the fund's "Other
Expenses" which are defined as the fund's operating expenses exclusive of management, distribution and service, and
certain other fees and expenses such that Other Expenses do not exceed 0.40% annually. This arrangement is effected by
MFS bearing all of the fund's Other Expenses during the fund's fiscal year and the fund paying 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 unreimbursed amounts paid by MFS under the current
agreement. This agreement will terminate on the earlier of December 31, 2004 or such date as all expenses previously
borne by MFS under the current agreement have been paid by the fund. For the year ended August 31, 2004, the investment
adviser has voluntarily agreed to reimburse the fund for its proportional share of Independent Chief Compliance Officer
services paid to Tarantino LLC. Prior to April 14, 2000, the investment adviser and the distributor waived their fees.
To the extent actual expenses were over this limitation and the reimbursement had not been in place, the net investment
loss per share and the ratios would have been:
Net investment loss $(0.11) $(0.09) $(0.13) $(0.14) $(0.27)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.60 1.76 1.74 1.55 1.84
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.20) (1.29) (1.45) (0.90) (1.25)
- -----------------------------------------------------------------------------------------------------------------------------
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on the shares outstanding on the day the proceeds were recorded.
(+) Total returns do not include the applicable sales charge. If the charge had been included, the results would have been
lower.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31 PERIOD
----------------------------------------------------------- ENDED
CLASS B 2004 2003 2002 2001 8/31/00*
Net asset value, beginning of period $8.13 $6.16 $10.61 $27.95 $17.86
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.15) $(0.11) $(0.17) $(0.25) $(0.14)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency (0.48) 2.08 (4.28) (16.64) 10.23
- -------------------------------------------- ------ ------ ------ ------ ------
Total from investment operations $(0.63) $1.97 $(4.45) $(16.89) $10.09
- -------------------------------------------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments and
foreign currency transactions $-- $-- $-- $(0.17) $--
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- (0.28) --
- -----------------------------------------------------------------------------------------------------------------------------
From paid-in capital -- -- -- (0.00)+++ --
- -------------------------------------------- ------ ------ ------ ------ ------
Total distributions declared to shareholders $-- $-- $-- $(0.45) $--
- -------------------------------------------- ------ ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- -------------------------------------------- ------ ------ ------ ------ ------
Net asset value, end of period $7.50 $8.13 $6.16 $10.61 $27.95
- -------------------------------------------- ------ ------ ------ ------ ------
Total return (%) (7.75)^^ 31.98 (41.94) (61.28) 56.49++
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31 PERIOD
----------------------------------------------------------- ENDED
CLASS B (CONTINUED) 2004 2003 2002 2001 8/31/00*
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.15 2.18 2.16 2.17 2.14+
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.74) (1.71) (1.87) (1.52) (1.52)+
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 141 162 210 413 294
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $50,896 $61,353 $25,997 $44,369 $48,845
- -----------------------------------------------------------------------------------------------------------------------------
(S) MFS has contractually agreed, subject to reimbursement, to bear a portion of the fund's "Other Expenses" which are
defined as the fund's operating expenses exclusive of management, distribution and service, and certain other fees and
expenses such that Other Expenses do not exceed 0.40% annually. This arrangement is effected by MFS bearing all of the
fund's Other Expenses during the fund's fiscal year and the fund paying 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 unreimbursed amounts paid by MFS under the current agreement. This agreement
will terminate on the earlier of December 31, 2004 or such date as all expenses previously borne by MFS under the
current agreement have been paid by the fund. For the year ended August 31, 2004, the investment adviser has voluntarily
agreed to reimburse the fund for its proportional share of Independent Chief Compliance Officer services paid to
Tarantino LLC. To the extent actual expenses were over this limitation and the reimbursement had not been in place, the
net investment loss per share and the ratios would have been:
Net investment loss $(0.16) $(0.12) $(0.19) $(0.25) $(0.18)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.25 2.42 2.39 2.20 2.58+
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.84) (1.95) (2.10) (1.55) (1.96)+
- -----------------------------------------------------------------------------------------------------------------------------
* For the period from the commencement of Class B shares, April 14, 2000, through August 31, 2000.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on the shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31 PERIOD
----------------------------------------------------------- ENDED
CLASS C 2004 2003 2002 2001 8/31/00*
Net asset value, beginning of period $8.12 $6.16 $10.61 $27.95 $17.86
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.15) $(0.11) $(0.17) $(0.25) $(0.15)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency (0.49) 2.07 (4.28) (16.64) 10.24
- -------------------------------------------- ------ ------ ------ ------ ------
Total from investment operations $(0.64) $1.96 $(4.45) $(16.89) $10.09
- -------------------------------------------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments and
foreign currency transactions $-- $-- $-- $(0.17) $--
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- (0.28) --
- -----------------------------------------------------------------------------------------------------------------------------
From paid-in capital -- -- -- (0.00)+++ --
- -------------------------------------------- ------ ------ ------ ------ ------
Total distributions declared to shareholders $-- $-- $-- $(0.45) $--
- -------------------------------------------- ------ ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- -------------------------------------------- ------ ------ ------ ------ ------
Net asset value, end of period $7.48 $8.12 $6.16 $10.61 $27.95
- -------------------------------------------- ------ ------ ------ ------ ------
Total return (%) (7.88)^^ 31.82 (41.94) (61.27) 56.49++
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31 PERIOD
----------------------------------------------------------- ENDED
CLASS C (CONTINUED) 2004 2003 2002 2001 8/31/00*
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.15 2.18 2.16 2.17 2.14+
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.74) (1.71) (1.87) (1.52) (1.52)+
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 141 162 210 413 294
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $15,367 $20,210 $10,476 $17,298 $17,410
- -----------------------------------------------------------------------------------------------------------------------------
(S) MFS has contractually agreed, subject to reimbursement, to bear a portion of the fund's "Other Expenses" which are
defined as the fund's operating expenses exclusive of management, distribution and service, and certain other fees and
expenses such that Other Expenses do not exceed 0.40% annually. This arrangement is effected by MFS bearing all of the
fund's Other Expenses during the fund's fiscal year and the fund paying 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 unreimbursed amounts paid by MFS under the current agreement. This agreement
will terminate on the earlier of December 31, 2004 or such date as all expenses previously borne by MFS under the
current agreement have been paid by the fund. For the year ended August 31, 2004, the investment adviser has voluntarily
agreed to reimburse the fund for its proportional share of Independent Chief Compliance Officer services paid to
Tarantino LLC. To the extent actual expenses were over this limitation and the reimbursement had not been in place, the
net investment loss per share and the ratios would have been:
Net investment loss $(0.16) $(0.12) $(0.19) $(0.25) $(0.19)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.25 2.42 2.39 2.20 2.58+
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.84) (1.95) (2.10) (1.55) (1.96)+
- -----------------------------------------------------------------------------------------------------------------------------
* For the period from the commencement of Class C shares, April 14, 2000, through August 31, 2000.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on the shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
----------------------------------------------------------------------------
CLASS I 2004 2003 2002 2001 2000
Net asset value, beginning of period $8.43 $6.33 $10.79 $28.08 $18.34
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.06) $(0.05) $(0.08) $(0.09) $(0.12)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency (0.52) 2.15 (4.38) (16.68) 14.44
- -------------------------------------------- ------ ------ ------ ------ ------
Total from investment operations $(0.58) $2.10 $(4.46) $(16.77) $14.32
- -------------------------------------------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments and
foreign currency transactions $-- $-- $-- $(0.19) $(4.58)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- (0.33) --
- -----------------------------------------------------------------------------------------------------------------------------
From paid-in capital -- -- -- (0.00)+++ --
- -------------------------------------------- ------ ------ ------ ------ ------
Total distributions declared to shareholders $-- $-- $-- $(0.52) $(4.58)
- -------------------------------------------- ------ ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- -------------------------------------------- ------ ------ ------ ------ ------
Net asset value, end of period $7.85 $8.43 $6.33 $10.79 $28.08
- -------------------------------------------- ------ ------ ------ ------ ------
Total return (%) (6.88)^^ 33.18 (41.33) (60.69) 88.31
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
----------------------------------------------------------------------------
CLASS I (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.16 1.17 1.16 1.17 1.09
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.70) (0.71) (0.87) (0.53) (0.57)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 141 162 210 413 294
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $13,404 $4,179 $3,045 $5,357 $11,216
- -----------------------------------------------------------------------------------------------------------------------------
(S) MFS has contractually agreed, subject to reimbursement, to bear a portion of the fund's "Other Expenses" which are
defined as the fund's operating expenses exclusive of management, and certain other fees and expenses such that Other
Expenses do not exceed 0.40% annually. This arrangement is effected by MFS bearing all of the fund's Other Expenses
during the fund's fiscal year and the fund paying 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 unreimbursed amounts paid by MFS under the current agreement. This agreement will terminate on the earlier
of December 31, 2004 or such date as all expenses previously borne by MFS under the current agreement have been paid by
the fund. For the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for
its proportional share of Independent Chief Compliance Officer services paid to Tarantino LLC. To the extent actual
expenses were over this limitation and the reimbursement had not been in place, the net investment loss per share and
the ratios would have been:
Net investment loss $(0.07) $(0.06) $(0.10) $(0.10) $(0.21)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.26 1.41 1.39 1.20 1.53
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.80) (0.95) (1.10) (0.56) (1.01)
- -----------------------------------------------------------------------------------------------------------------------------
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on the shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEAR ENDED PERIOD ENDED
CLASS R1 8/31/04 8/31/03*
Net asset value, beginning of period $8.28 $6.17
- ------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.10) $(0.08)
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
foreign currency (0.51) 2.19
- ---------------------------------------------------------------- ------- -------
Total from investment operations $(0.61) $2.11
- ---------------------------------------------------------------- ------- -------
Redemption fees added to paid-in capital# $0.00+++ $--
- ---------------------------------------------------------------- ------- -------
Net asset value, end of period $7.67 $8.28
- ---------------------------------------------------------------- ------- -------
Total return (%) (7.37)^^ 34.20++
- ------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA(S):
Expenses## 1.66 1.64+
- ------------------------------------------------------------------------------------------------------
Net investment loss (1.21) (1.22)+
- ------------------------------------------------------------------------------------------------------
Portfolio turnover 141 162
- ------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $1,266 $173
- ------------------------------------------------------------------------------------------------------
(S) MFS has contractually agreed, subject to reimbursement, to bear a portion of the fund's "Other
Expenses" which are defined as the fund's operating expenses exclusive of management,
distribution and service, and certain other fees and expenses such that Other Expenses do not
exceed 0.40% annually. This arrangement is effected by MFS bearing all of the fund's Other
Expenses during the fund's fiscal year and the fund paying 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 unreimbursed amounts paid by
MFS under the current agreement. This agreement will terminate on the earlier of December 31,
2004 or such date as all expenses previously borne by MFS under the current agreement have been
paid by the fund. For the year ended August 31, 2004, the investment adviser has voluntarily
agreed to reimburse the fund for its proportional share of Independent Chief Compliance Officer
services paid to Tarantino LLC. To the extent actual expenses were over this limitation and the
reimbursement had not been in place, the net investment loss per share and the ratios would have
been:
Net investment loss $(0.11) $(0.10)
- ------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.76 1.88+
- ------------------------------------------------------------------------------------------------------
Net investment loss (1.31) (1.46)+
- ------------------------------------------------------------------------------------------------------
* For the period from the inception of Class R1 shares, December 31, 2002, through August 31, 2003.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded
as a result of an administrative proceeding regarding disclosure of brokerage allocation
practices in connection with fund sales, as described in the Legal Proceedings and Transactions
with Affiliates footnotes. The non-recurring accrual did not have a material impact on the net
asset value per share based on the shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
PERIOD ENDED
CLASS R2 8/31/04*
Net asset value, beginning of period $8.74
- ------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.09)
- ------------------------------------------------------------------------------
Net realized and unrealized loss on investments and
foreign currency (0.99)
- ---------------------------------------------------------------------------
Total from investment operations $(1.08)
- ---------------------------------------------------------------------------
Redemption fees added to paid-in capital# $0.00+++
- ---------------------------------------------------------------------------
Net asset value, end of period $7.66
- ---------------------------------------------------------------------------
Total return (%) (12.36)++^^
- ------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.91+
- ------------------------------------------------------------------------------
Net investment loss (1.47)+
- ------------------------------------------------------------------------------
Portfolio turnover 141
- ------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $132
- ------------------------------------------------------------------------------
(S) MFS has contractually agreed, subject to reimbursement, to bear a portion
of the fund's "Other Expenses" which are defined as the fund's operating
expenses exclusive of management, distribution and service, and certain
other fees and expenses such that Other Expenses do not exceed 0.40%
annually. This arrangement is effected by MFS bearing all of the fund's
Other Expenses during the fund's fiscal year and the fund paying MFS an
expense reimbursement fee not greater than 0.65% 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 unreimbursed amounts paid by
MFS under the current agreement. This agreement will terminate on the
earlier of December 31, 2004 or such date as all expenses previously borne
by MFS under the current agreement have been paid by the fund. For the year
ended August 31, 2004, the investment adviser has voluntarily agreed to
reimburse the fund for its proportional share of Independent Chief
Compliance Officer services paid to Tarantino LLC. To the extent actual
expenses were over this limitation and the reimbursement had not been in
place, the net investment loss per share and the ratios would have been:
Net investment loss $(0.10)
- ------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.01+
- ------------------------------------------------------------------------------
Net investment loss (1.57)+
- ------------------------------------------------------------------------------
* For the period from the inception of Class R2 shares, October 31, 2003,
through August 31, 2004.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
^^ The fund's net asset value and total return calculation include a
non-recurring accrual recorded as a result of an administrative proceeding
regarding disclosure of brokerage allocation practices in connection with
fund sales, as described in the Legal Proceedings and Transactions with
Affiliates footnotes. The non-recurring accrual did not have a material
impact on the net asset value per share based on the shares outstanding on
the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(1) BUSINESS AND ORGANIZATION
MFS Technology Fund (the fund) is a diversified series of MFS Series Trust I
(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 U.S.
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. The fund
can invest in foreign securities. 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 in the fund's portfolio for which
market quotations are available are valued at the last sale or official closing
price as reported by an independent pricing service on the primary market or
exchange on which they are primarily traded, or at the last quoted bid price
for securities in which there were no sales during the day. Equity securities
traded over the counter are valued at the last sales price traded each day as
reported by an independent pricing service, or to the extent there are no sales
reported, such securities are valued on the basis of quotations obtained from
brokers and dealers. Short-term obligations with a remaining maturity in excess
of 60 days will be valued upon dealer-supplied valuations. All other short-term
obligations in the fund's portfolio are valued at amortized cost, which
constitutes market value as determined by the Board of Trustees. 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. When pricing service information or market quotations are not
readily available, securities are priced at fair value as determined under the
direction of the Board of Trustees. For example, significant events (such as
movement in the U.S. securities market, or other regional and local
developments) may occur between the time that foreign markets close (where the
security is principally traded) and the time that the fund calculates its net
asset value (generally, the close of the NYSE) that may impact the value of
securities traded in these foreign markets. In these cases, the fund may
utilize information from an external vendor or other sources to adjust closing
market quotations of foreign equity securities to reflect what it believes to
be the fair value of the securities as of the fund's valuation time. Because
the frequency of significant events is not predictable, fair valuation of
foreign equity securities may occur on a frequent basis.
REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements with
institutions that the fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The fund requires
that the securities collateral in a repurchase transaction be transferred to
the custodian in a manner sufficient to enable the fund to obtain those
securities in the event of a default under the repurchase agreement. The fund
monitors, on a daily basis, the value of the collateral to ensure that its
value, including accrued interest, is greater than amounts owed to the fund
under each such repurchase agreement. The fund, along with other affiliated
entities of Massachusetts Financial Services Company (MFS), may utilize a joint
trading account for the purpose of entering into one or more repurchase
agreements.
FOREIGN CURRENCY TRANSLATION - 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.
WRITTEN OPTIONS - The fund may write call or put options in exchange for a
premium. The premium is initially recorded as a liability, which is
subsequently adjusted to the current value of the option contract. When a
written option expires, the fund realizes a gain equal to the amount of the
premium received. When a written call option is exercised or closed, the
premium received is offset against the proceeds to determine the realized gain
or loss. When a written put option is exercised, the premium reduces the cost
basis of the security purchased by the fund. The fund, as writer of an option,
may have no control over whether the underlying securities may be sold (call)
or purchased (put) and, as a result, bears the market risk of an unfavorable
change in the price of the securities underlying the written option. In
general, written call options may serve as a partial hedge against decreases in
value in the underlying securities to the extent of the premium received.
Written options may also be used as part of an income producing strategy
reflecting the view of the fund's management on the direction of interest
rates.
SECURITY LOANS - State Street Bank and Trust Company ("State Street"), as
lending agent, may loan the securities of the fund to certain qualified
institutions (the "Borrowers") approved by the fund. The loans are
collateralized at all times by cash and/or U.S. Treasury securities in an
amount at least equal to the market value of the securities loaned. State
Street provides the fund with indemnification against Borrower default. The
fund bears the risk of loss with respect to the investment of cash collateral.
On loans collateralized by cash, the cash collateral is invested in a money
market fund or short-term securities. A portion of the income generated upon
investment of the collateral is remitted to the Borrowers, and the remainder is
allocated between the fund and the lending agent. On loans collateralized by
U.S. Treasury securities, a fee is received from the Borrower, and is allocated
between the fund and the lending agent. The dividend and interest income earned
on the securities loaned is accounted for in the same manner as other dividend
and interest income.
SHORT TERM FEES - For purchases made on or after July 1, 2004, the fund will
charge a 2% redemption fee (which is retained by the fund) on proceeds from
shares redeemed or exchanged within 5 business days following their acquisition
(either by purchase or exchange). The fund may change the redemption fee period
in the future, including changes in connection with pending Securities and
Exchange rules. See the fund's prospectus for details. These fees are accounted
for as an addition to paid-in-capital.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and discount is amortized or accreted for financial statement purposes in
accordance with U.S. generally accepted accounting principles. All discount is
accreted for tax reporting purposes as required by federal income tax
regulations. Dividends received in cash are recorded on the ex-dividend date.
Dividend and interest payments received in additional securities are recorded
on the ex-dividend or ex-interest date in an amount equal to the value of the
security on such date.
FEES PAID INDIRECTLY - The fund's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by the
fund. During the year ended August 31, 2004, the fund's custodian fees were
reduced by $1,049 under this arrangement. The fund has entered into a
commission recapture agreement, under which certain brokers will credit the
fund a portion of the commissions generated, to offset certain expenses of the
fund. For the year ended August 31, 2004, the fund's miscellaneous expenses
were reduced by $15,206 under this agreement. These amounts are shown as a
reduction of total 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 net 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 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. Common
types of book and tax differences that could occur include differences in
accounting for currency transactions, wash sales and capital losses.
The fund paid no distributions for the years ended August 31, 2004 and August
31, 2003.
During the year ended August 31, 2004, accumulated net investment loss
decreased by $2,724,957, accumulated net realized loss on investments and
foreign currency transactions decreased by $13,144, and paid-in capital
decreased by $2,738,101 due to differences between book and tax accounting for
currency transactions and net operating losses. This change had no effect on
the net assets or net asset value per share.
As of August 31, 2004, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Capital loss carryforward $(365,528,681)
----------------------------------------------------------
Unrealized appreciation 3,856,013
----------------------------------------------------------
For federal income tax purposes, the capital loss carryforward may be applied
against any net taxable realized gains of each succeeding year until the
earlier of its utilization or expiration as follows:
EXPIRATION DATE
August 31, 2007 $(1,836,344)
----------------------------------------------------------
August 31, 2008 (7,671,099)
----------------------------------------------------------
August 31, 2009 (114,220,557)
----------------------------------------------------------
August 31, 2010 (162,445,817)
----------------------------------------------------------
August 31, 2011 (74,891,618)
----------------------------------------------------------
August 31, 2012 (4,463,246)
----------------------------------------------------------
Total $(365,528,681)
----------------------------------------------------------
The availability of a portion of these respective capital loss carryforwards,
which were acquired on August 22, 2003, in connection with the MFS Global
Telecommunications Fund acquisition, may be limited in a given year.
MULTIPLE CLASSES OF SHARES OF BENEFICIAL INTEREST - The fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the fund based on daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class. Differences in per share dividend rates are
generally due to differences in separate class expenses. Class B shares will
convert to Class A shares approximately eight years after purchase.
(3) TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISER - The fund has an investment advisory agreement with MFS to
provide overall investment advisory and administrative services, and general
office facilities. The management fee is computed daily and paid monthly at an
annual rate of 0.75% of the fund's average daily net assets.
MFS has contractually agreed, subject to reimbursement, to bear a portion of
the fund's "Other Expenses", which are defined as the fund's operating
expenses, exclusive of management, distribution and service, and certain other
fees and expenses, such that Other Expenses do not exceed 0.40% annually. This
arrangement is effected by MFS bearing all of the fund's other expenses during
the fund's fiscal year, and the fund paying MFS a reimbursement fee not greater
than 0.40% of average daily net assets for Class A, Class B, Class C, Class I,
and Class R1 and not greater than 0.65% of average daily net assets for Class
R2. To the extent that the expense reimbursement fee exceeds the fund's actual
expenses, the excess will be applied to unreimbursed amounts paid by MFS under
the current agreement. This agreement will terminate on the earlier of December
31, 2004 or such date as all expenses previously borne by MFS under the current
agreement have been paid by the fund. At August 31, 2004, aggregate
unreimbursed expenses amounted to $59,954. The fund will not be required to
reimburse MFS the $307,920 for expenses borne under a previous agreement that
expired on December 31, 2003.
The fund pays compensation to its Independent Trustees in the form of a
retainer, attendance fees, and additional compensation to Board and Committee
chairpersons, and 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). The fund has an
unfunded defined benefit plan for retired Independent Trustees and an unfunded
retirement benefit deferral plan for current Independent Trustees. Included in
Trustees' compensation is a net decrease of $2,415 as a result of the change in
the fund's unfunded retirement benefit deferral plan for certain current
Independent Trustees and a pension expense of $609 for retired Independent
Trustees for the year ended August 31, 2004.
The MFS funds, including this fund, have entered into a services agreement (the
"Agreement") which provides for payment of fees by the MFS funds to Tarantino
LLC in return for the provision of services of an Independent Chief Compliance
Officer (ICCO) for the MFS funds. The ICCO is an officer of the MFS funds and
the sole member of Tarantino LLC. MFS has agreed to reimburse each of the MFS
funds for a proportional share of substantially all of the payments made by the
MFS funds to Tarantino LLC and also to provide office space and other
administrative support and supplies to the ICCO. The MFS funds can terminate
the Agreement with Tarantino LLC at any time under the terms of the Agreement.
The fund's investment adviser, MFS, has been the subject of an administrative
proceeding regarding disclosure of brokerage allocation practices in connection
with fund sales, as described in the Legal Proceedings Footnote. Pursuant to
the SEC Order, on July 28, 2004, MFS transferred $1.00 in disgorgement and $50
million in penalty to the SEC (the "Payments"). A plan for distribution of
these Payments has been submitted to the SEC. Contemporaneous with the
transfer, the fund accrued an estimate of the amount to be received upon final
approval of the plan of distribution. The non- recurring accrual in the amount
of $102,085 did not have a material impact on the net asset value per share
based on the shares outstanding on the day the proceeds were recorded.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment advisor. Under an administrative services
agreement between the funds and MFS, MFS is entitled to partial reimbursement
of the costs MFS incurs to provide these services, subject to review and
approval by the Board of Trustees. Each fund is allocated a portion of these
administrative costs based on its size and relative average net assets. Prior
to April 1, 2004, the fund paid MFS an administrative fee up to the following
annual percentage rates of the fund's average daily net assets:
First $2 billion 0.0175%
----------------------------------------------------------
Next $2.5 billion 0.0130%
----------------------------------------------------------
Next $2.5 billion 0.0005%
----------------------------------------------------------
In excess of $7 billion 0.0000%
----------------------------------------------------------
Effective April 1, 2004, the fund paid MFS an administrative fee up to the
following annual percentage rates of the fund's average daily net assets:
First $2 billion 0.01120%
----------------------------------------------------------
Next $2.5 billion 0.00832%
----------------------------------------------------------
Next $2.5 billion 0.00032%
----------------------------------------------------------
In excess of $7 billion 0.00000%
----------------------------------------------------------
For the year ended August 31, 2004, the fund paid MFS $16,713, equivalent to
0.0083% of average daily net assets, to partially reimburse MFS for the costs
of providing administrative services.
In addition to the administrative services provided by MFS to the fund as
described above, MFS is responsible for providing certain administrative
services with respect to Class R2 shares. These services include various
administrative, recordkeeping, and communication/educational services with
respect to the retirement plans which invest in Class R2 shares, and may be
provided directly by MFS or by a third party. The fund pays an annual 0.25%
administrative service fee solely from the assets of Class R2 shares to MFS for
the provision of these services.
DISTRIBUTOR - MFD, a wholly owned subsidiary of MFS, as distributor, received
$18,970 for the year ended August 31, 2004, as its portion of the sales charge
on sales of Class A shares of the fund.
The Trustees have adopted a distribution plan for Class A, Class B, Class C,
Class R1, and Class R2 shares pursuant to rule 12b-1 of the Investment Company
Act of 1940 as follows:
The fund's distribution plan provides that the fund will pay MFD an annual
percentage of its average daily net assets attributable to certain share
classes in order that MFD may pay expenses on behalf of the fund related to the
distribution and servicing of its shares. These expenses include a service fee
paid to each securities dealer that enters into a sales agreement with MFD
based on the average daily net assets of accounts attributable to such dealers.
The fees are calculated based on each class' average daily net assets. The
maximum distribution and service fees for each class of shares are as follows:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Distribution Fee 0.10% 0.75% 0.75% 0.25% 0.25%
- ---------------------------------------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25% 0.25% 0.25%
- ---------------------------------------------------------------------------------------------------------------
Total Distribution Plan 0.35% 1.00% 1.00% 0.50% 0.50%
- ---------------------------------------------------------------------------------------------------------------
MFD retains the service fee for accounts not attributable to a securities dealer, which for the year ended
August 31, 2004 amounted to:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Service Fee Retained by MFD $34,002 $1,296 $279 $-- $--
- ---------------------------------------------------------------------------------------------------------------
Fees incurred under the distribution plan during the year ended August 31, 2004 were as follows:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Effective Annual Percentage Rates 0.35% 1.00% 1.00% 0.50% 0.50%
- ---------------------------------------------------------------------------------------------------------------
Certain Class A and Class C shares are subject to a contingent deferred sales
charge in the event of a shareholder redemption within, for Class A shares, 12
months following the purchase, and, for Class C shares, the first year from
the end of the calendar month of purchase. A contingent deferred sales charge
is imposed on shareholder redemptions of Class B shares in the event of a
shareholder redemption within six years from the end of the calendar month of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended August 31, 2004 were
as follows:
CLASS A CLASS B CLASS C
Contingent Deferred Sales Charges
Imposed $2,521 $217,941 $4,103
- -------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT - Included in shareholder servicing costs is a fee
paid to MFSC, a wholly owned subsidiary of MFS, for its services as shareholder
servicing agent. The fee, which is calculated as a percentage of the fund's
average daily net assets is set periodically under the supervision of the
fund's Trustees. Prior to April 1, 2004, the fee was set at 0.11% of the fund's
average daily net assets. For the period April 1, 2004 through June 30, 2004,
the fee was set at 0.10% of the fund's average daily net assets. Effective July
1, 2004, the fund is charged up to 0.0861% of its average daily net assets. For
the year ended August 31, 2004, the fund paid MFSC a fee of $206,850 for
shareholder services which equated to 0.1032% of the fund's average daily net
assets. Also included in shareholder servicing costs are out-of-pocket
expenses, paid to MFSC, which amounted to $88,465 for the year ended August 31,
2004, as well as other expenses paid to unaffiliated vendors.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$272,951,615 and $287,952,445, 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 $168,939,430
----------------------------------------------------------
Gross unrealized appreciation $13,257,231
----------------------------------------------------------
Gross unrealized depreciation (9,401,240)
----------------------------------------------------------
Net unrealized appreciation $3,855,991
----------------------------------------------------------
(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:
Year ended 8/31/04 Year ended 8/31/03
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares sold 7,992,949 $70,472,191 9,448,114 $63,395,440
- -----------------------------------------------------------------------------------------------------------
Shares issued in connection with
acquisition of MFS Global
Telecommunications Fund -- -- 1,839,638 14,901,068
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (10,325,346) (90,616,338) (7,616,011) (50,311,511)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) (2,332,397) $(20,144,147) 3,671,741 $27,984,997
- -----------------------------------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 1,756,482 $15,095,885 3,032,467 $19,714,861
- -----------------------------------------------------------------------------------------------------------
Shares issued in connection with
acquisition of MFS Global
Telecommunications Fund -- -- 2,762,550 21,934,645
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (2,510,934) (21,488,750) (2,469,022) (15,806,043)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) (754,452) $(6,392,865) 3,325,995 $25,843,463
- -----------------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 583,813 $5,022,408 849,500 $5,510,207
- -----------------------------------------------------------------------------------------------------------
Shares issued in connection with
acquisition of MFS Global
Telecommunications Fund -- -- 968,256 7,678,267
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (1,018,503) (8,740,462) (1,031,392) (6,564,065)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) (434,690) $(3,718,054) 786,364 $6,624,409
- -----------------------------------------------------------------------------------------------------------
CLASS I SHARES
Shares sold 1,423,278 $12,599,165 329,752 $2,279,072
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (211,528) (1,856,276) (315,329) (2,147,421)
- -----------------------------------------------------------------------------------------------------------
Net increase 1,211,750 $10,742,889 14,423 $131,651
- -----------------------------------------------------------------------------------------------------------
Year ended 8/31/04 Period ended 8/31/03*
SHARES AMOUNT SHARES AMOUNT
CLASS R1 SHARES
Shares sold 173,130 $1,566,350 95,762 $713,389
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (28,965) (259,610) (74,874) (570,966)
- -----------------------------------------------------------------------------------------------------------
Net increase 144,165 $1,306,740 20,888 $142,423
- -----------------------------------------------------------------------------------------------------------
Period ended 8/31/04**
SHARES AMOUNT
CLASS R2 SHARES
Shares sold 25,552 $219,603
- -----------------------------------------------------------------------
Shares reacquired (8,269) (66,578)
- -----------------------------------------------------------------------
Net increase 17,283 $153,025
- -----------------------------------------------------------------------
* For the period from the inception of Class R1 shares, December 31, 2002, through August 31, 2003.
** For the period from the inception of Class R2 shares, October 31, 2003, through August 31, 2004.
(6) LINE OF CREDIT
The fund and other affiliated funds participate in an $800 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the Federal
Reserve funds rate plus 0.50%. 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 calendar quarter. The commitment fee
allocated to the fund for the year ended August 31, 2004 was $1,018, and is
included in miscellaneous expense. The fund had no significant borrowings
during the year ended August 31, 2004.
(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 written options. 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.
Written Option Transactions
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
Outstanding, beginning of period -- $--
- -------------------------------------------------------------------------------
Options written 3 91,127
- -------------------------------------------------------------------------------
Options terminated in closing transactions (3) (91,127)
- -------------------------------------------------------------------------------
Outstanding, end of period -- --
- -------------------------------------------------------------------------------
At August 31, 2004, the fund had sufficient cash and/or securities at least
equal to the value of the written options.
(8) ACQUISITIONS
At close of business on August 22, 2003, the fund acquired all of the assets
and liabilities of the MFS Global Telecommunications Fund. The acquisition was
accomplished by a tax-free exchange of 1,839,638, 2,762,550, and 968,256 shares
of Class A, Class B and Class C of the fund valued at $14,901,068, $21,934,645,
and $7,678,267, respectively, for all of the assets and liabilities of MFS
Global Telecommunications Fund. The Global Telecommunications Fund then
converted all of its outstanding shares of the fund and distributed those
shares to its shareholders. The Global Telecommunication Fund's net assets on
that date amounting to $44,513,980, included $2,654,484 of unrealized
appreciation, $0 of accumulated net investment income and $(201,803,373) of
accumulated net realized loss in investments and foreign currency transactions.
These assets were combined with those of the fund. The aggregate net assets of
the fund after the acquisition were $181,944,611.
(9) LEGAL PROCEEDINGS
On March 31, 2004, MFS settled an administrative proceeding with the Securities
and Exchange Commission ("SEC") regarding disclosure of brokerage allocation
practices in connection with MFS fund sales (the term "MFS funds" means the
open-end registered management investment companies sponsored by MFS). Under
the terms of the settlement, in which MFS neither admitted nor denied any
wrongdoing, MFS agreed to pay (one dollar) $1.00 in disgorgement and $50
million in penalty to certain MFS funds, pursuant to a plan developed by an
independent distribution consultant. The brokerage allocation practices which
were the subject of this proceeding were discontinued by MFS in November 2003.
The agreement with the SEC is reflected in an order of the SEC. Pursuant to the
SEC order, on July 28, 2004, MFS transferred these settlement amounts to the
SEC, and those MFS funds entitled to these settlement amounts accrued an
estimate of their pro rata portion of these amounts. Once the final
distribution plan is approved by the SEC, these amounts will be distributed by
the SEC to the affected MFS funds. The SEC settlement order states that MFS
failed to adequately disclose to the Boards of Trustees and to shareholders of
the MFS funds the specifics of its preferred arrangements with certain
brokerage firms selling MFS fund shares. The SEC settlement order states that
MFS had in place policies designed to obtain best execution of all MFS fund
trades. As part of the settlement, MFS retained an independent compliance
consultant to review the completeness of its current policies and practices
regarding disclosure to MFS fund trustees and to MFS fund shareholders of
strategic alliances between MFS or its affiliates and broker-dealers and other
financial advisers who support the sale of MFS fund shares.
In addition, in February, 2004, MFS reached agreement with the SEC, the New
York Attorney General ("NYAG") and the Bureau of Securities Regulation of the
State of New Hampshire ("NH") to settle administrative proceedings alleging
false and misleading information in certain MFS retail fund prospectuses
regarding market timing and related matters (the "February Settlements"). These
regulators alleged that prospectus language for certain MFS retail funds was
false and misleading because, although the prospectuses for those funds in the
regulators' view indicated that the MFS funds prohibited market timing, MFS did
not limit trading activity in 11 domestic large cap stock, high grade bond and
money market funds. MFS' former Chief Executive Officer, John W. Ballen, and
former President, Kevin R. Parke, also reached agreement with the SEC in which
they agreed to, among other terms, monetary fines and temporary suspensions
from association with any investment adviser or registered investment company.
Messrs. Ballen and Parke have resigned their positions with, and will not be
returning to, MFS and the MFS funds. Under the terms of the February
Settlements, MFS and the executives neither admit nor deny wrongdoing.
Under the terms of the February Settlements, a $225 million pool has been
established for distribution to shareholders in certain MFS retail funds, which
has been funded by MFS and of which $50 million is characterized as a penalty.
This pool will be distributed in accordance with a methodology developed by an
independent distribution consultant in consultation with MFS and the Board of
Trustees of the MFS retail funds, and acceptable to the SEC. MFS has further
agreed with NYAG to reduce its management fees in the aggregate amount of
approximately $25 million annually over the next five years, and not to
increase certain management fees during this period. MFS has also paid an
administrative fine to NH in the amount of $1 million, which will be used for
investor education purposes (NH retained $250,000 and $750,000 was contributed
to the North American Securities Administrators Association's Investor
Protection Trust). In addition, under the terms of the February Settlements,
MFS is in the process of adopting certain governance changes and reviewing its
policies and procedures.
Since December 2003, MFS, Sun Life Financial Inc., various MFS funds, the
Trustees of these MFS funds, and certain officers of MFS have been named as
defendants in multiple lawsuits filed in federal and state courts. The lawsuits
variously have been commenced as class actions or individual actions on behalf
of investors who purchased, held or redeemed shares of the MFS funds during
specified periods, as class actions on behalf of participants in certain
retirement plan accounts, or as derivative actions on behalf of the MFS funds.
The lawsuits relating to market timing and related matters have been
transferred to, and consolidated before, the United States District Court for
the District of Maryland, as part of a multi-district litigation of market
timing and related claims involving several other fund complexes (In re Mutual
Funds Investment Litigation (Alger, Columbia, Janus, MFS, One Group, Putnam,
PIMCO), No. 1:04-md-15863 (transfer began March 19, 2004)). Four lawsuits
alleging improper brokerage allocation practices and excessive compensation are
pending in the United States District Court for the District of Massachusetts
(Forsythe v. Sun Life Financial Inc., et al., No. 04cv10584 (GAO) (March 25,
2004); Eddings v. Sun Life Financial Inc., et al., No. 04cv10764 (GAO) (April
15, 2004); Marcus Dumond, et al. v. Massachusetts Financial Servs. Co., et al.,
No. 04cv11458 (GAO) (May 4, 2004); and Koslow v. Sun Life Financial Inc., et
al., No. 04cv11019 (GAO) (May 20, 2004)). The lawsuits generally allege that
some or all of the defendants (i) permitted or acquiesced in market timing
and/or late trading in some of the MFS funds, inadequately disclosed MFS'
internal policies concerning market timing and such matters, and received
excessive compensation as fiduciaries to the MFS funds, or (ii) permitted or
acquiesced in the improper use of fund assets by MFS to support the
distribution of MFS fund shares and inadequately disclosed MFS' use of fund
assets in this manner. The actions assert that some or all of the defendants
violated the federal securities laws, including the Securities Act of 1933 and
the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the
Investment Advisers Act of 1940, the Employee Retirement Income Security Act of
1974, as well as fiduciary duties and other violations of common law. The
lawsuits seek unspecified damages. Insofar as any of the actions is
appropriately brought derivatively on behalf of any of the MFS funds, any
recovery will inure to the benefit of the MFS funds. The defendants are
reviewing the allegations of the multiple complaints and will respond
appropriately. Additional lawsuits based on similar allegations may be filed in
the future.
Any potential resolution of these matters may include, but not be limited to,
judgments or settlements for damages against MFS, the MFS funds, or any other
named defendant. As noted above, as part of the regulatory settlements, MFS has
established a restitution pool in the amount of $225 million to compensate
certain shareholders of the MFS retail funds for damages that they allegedly
sustained as a result of market timing or late trading in certain of the MFS
retail funds, and transferred $50 million for distribution to affected MFS
funds to compensate those funds based upon the amount of brokerage commissions
allocated in recognition of MFS fund sales. It is not clear whether these
amounts will be sufficient to compensate shareholders for all of the damage
they allegedly sustained, whether certain shareholders or putative class
members may have additional claims to compensation, or whether the damages that
may be awarded in any of the actions will exceed these amounts. In the event
the MFS funds incur any losses, costs or expenses in connection with such
lawsuits, the Boards of Trustees of the affected MFS funds may pursue claims on
behalf of such funds against any party that may have liability to the funds in
respect thereof.
Review of these matters by the independent Trustees of the MFS funds and their
counsel is continuing. There can be no assurance that these regulatory actions
and lawsuits, or the adverse publicity associated with these developments, will
not result in increased fund redemptions, reduced sales of fund shares, or
other adverse consequences to the MFS funds.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------------------------------
To the Trustees of MFS Series Trust I and Shareholders of
MFS Technology Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Technology Fund (the Fund) (one of the portfolios comprising MFS Series Trust
I), including the portfolio of investments, as of August 31, 2004, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the periods indicated therein. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 and financial
highlights. Our procedures included confirmation of securities owned at August
31, 2004, by correspondence with the custodian and brokers or by other
appropriate auditing procedures where replies from brokers were not received.
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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Technology Fund at August 31, 2004, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended, and its financial highlights for each of the periods
indicated therein, in conformity with U.S generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
October 8, 2004
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TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
- --------------------------------------------------------------------------------------------------------
The Trustees and officers of the Trust, as of October 10, 2004, are listed below, together with
their principal occupations during the past five years. (Their titles may have varied during that
period.) The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts
02116.
PRINCIPAL OCCUPATIONS & OTHER
POSITION(s) HELD TRUSTEE/OFFICER DIRECTORSHIPS(2) DURING
NAME, DATE OF BIRTH WITH FUND SINCE(1) THE PAST FIVE YEARS
----------------------------------
INTERESTED TRUSTEES
Robert J. Manning(3) Trustee and February 2004 Massachusetts Financial Services
(born 10/20/63) President Company, Chief Executive Officer,
President, Chief Investment
Officer and Director
Robert C. Pozen(3) Trustee February 2004 Massachusetts Financial Services
(born 08/08/46) Company, Chairman (since February
2004); Harvard Law School
(education), John Olin Visiting
Professor (since July 2002);
Secretary of Economic Affairs, The
Commonwealth of Massachusetts
(January 2002 to December 2002);
Fidelity Investments, Vice
Chairman (June 2000 to December
2001); Fidelity Management &
Research Company (investment
adviser), President (March 1997 to
July 2001); The Bank of New York
(financial services), Director;
Bell Canada Enterprises
(telecommunications), Director;
Telesat (satellite
communications), Director
INDEPENDENT TRUSTEES
J. Atwood Ives Trustee and Chair February 1992 Private investor; Eastern
(born 05/01/36) of Trustees Enterprises (diversified services
company), Chairman, Trustee and
Chief Executive Officer (until
November 2000)
Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital,
(born 03/11/37) Chief of Cardiac Surgery; Harvard
Medical School, Professor of
Surgery
David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining
(born 05/30/42) products and service provider),
Vice Chairman/Director (since
April 2001); Encinitos Ventures
(private investment company),
Principal (1997 to April 2001);
Lincoln Electric Holdings, Inc.
(welding equipment manufacturer),
Director; Southwest Gas
Corporation (natural gas
distribution company), Director
William R. Gutow Trustee December 1993 Private investor and real estate
(born 09/27/41) consultant; Capitol Entertainment
Management Company (video
franchise), Vice Chairman
Amy B. Lane Trustee January 2004 Retired; Merrill Lynch & Co.,
(born 02/08/53) Inc., Managing Director,
Investment Banking Group (1997 to
February 2001); Borders Group,
Inc. (book and music retailer),
Director; Federal Realty
Investment Trust (real estate
investment trust), Trustee
Lawrence T. Perera Trustee July 1981 Hemenway & Barnes (attorneys),
(born 06/23/35) Partner
William J. Poorvu Trustee August 1982 Private investor; Harvard
(born 04/10/35) University Graduate School of
Business Administration, Class of
1961 Adjunct Professor in
Entrepreneurship Emeritus; CBL &
Associates Properties, Inc. (real
estate investment trust), Director
J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 09/23/38) (acquisition planning
specialists), President; Wellfleet
Investments (investor in health
care companies), Managing General
Partner (since 1993); Cambridge
Nutraceuticals (professional
nutritional products), Chief
Executive Officer (until May 2001)
Elaine R. Smith Trustee February 1992 Independent health care industry
(born 04/25/46) consultant
OFFICERS
Robert J. Manning(3) President and February 2004 Massachusetts Financial Services
(born 10/20/63) Trustee Company, Chief Executive Officer,
President, Chief Investment
Officer and Director
James R. Bordewick, Jr.(3) Assistant September 1990 Massachusetts Financial Services
(born 03/06/59) Secretary and Company, Senior Vice President and
Assistant Clerk Associate General Counsel
Jeffrey N. Carp(3) Secretary and September 2004 Massachusetts Financial Services
(born 12/01/56) Clerk Company, Senior Vice President,
General Counsel and Secretary
(since April 2004); Hale and Dorr
LLP (law firm) (prior to April
2004)
James F. DesMarais(3) Assistant September 2004 Massachusetts Financial Services
(born 03/09/61) Secretary and Company, Assistant General Counsel
Assistant Clerk
Stephanie A. DeSisto(3) Assistant May 2003 Massachusetts Financial Services
(born 10/01/53) Treasurer Company, Vice President (since
April 2003); Brown Brothers
Harriman & Co., Senior Vice
President (November 2002 to April
2003); ING Groep N.V./Aeltus
Investment Management, Senior Vice
President (prior to November 2002)
Robert R. Flaherty(3) Assistant August 2000 Massachusetts Financial Services
(born 09/18/63) Treasurer Company, Vice President (since
August 2000); UAM Fund Services,
Senior Vice President (prior to
August 2000)
Richard M. Hisey(3) Treasurer August 2002 Massachusetts Financial Services
(born 08/29/58) Company, Senior Vice President
(since July 2002); The Bank of New
York, Senior Vice President
(September 2000 to July 2002);
Lexington Global Asset Managers,
Inc., Executive Vice President and
Chief Financial Officer (prior to
September 2000); Lexington Funds,
Chief Financial Officer (prior to
September 2000)
Brian T. Hourihan(3) Assistant September 2004 Massachusetts Financial Services
(born 11/11/64) Secretary and Company, Vice President, Senior
Assistant Clerk Counsel and Assistant Secretary
(since June 2004); Affiliated
Managers Group, Inc., Chief Legal
Officer/Centralized Compliance
Program (January to April 2004);
Fidelity Research & Management
Company, Assistant General Counsel
(prior to January 2004)
Ellen Moynihan(3) Assistant April 1997 Massachusetts Financial Services
(born 11/13/57) Treasurer Company, Vice President
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of
(born 03/07/44) Compliance compliance services), Principal
Officer (since June 2004); CRA Business
Strategies Group (consulting
services), Executive Vice
President (April 2003 to June
2004); David L. Babson & Co.
(investment adviser), Managing
Director, Chief Administrative
Officer and Director (February
1997 to March 2003)
James O. Yost(3) Assistant September 1990 Massachusetts Financial Services
(born 06/12/60) Treasurer Company, Senior Vice President
- ----------------
(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served
continuously since appointment unless indicated otherwise.
(2) Directorships or trusteeships of companies required to report to the Securities and Exchange
Commission (i.e., "public companies").
(3) "Interested person" of MFS within the meaning of the Investment Company Act of 1940 (referred to
as the 1940 Act), which is the principle federal law governing investment companies like the
fund. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
The Trust does not hold annual shareholder meetings for the purpose of electing Trustees, and
Trustees are not elected for fixed terms. The Trust will hold a shareholders' meeting in 2005 and at
least once every five years thereafter to elect Trustees. Each Trustee and officer holds office
until his or her successor is chosen and qualified or until his or her earlier death, resignation,
retirement or removal.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of
which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the
officers, with certain affiliates of MFS. Each Trustee serves as a board member of 109 funds within
the MFS Family of Funds.
The Statement of Additional Information contains further information about the Trustees and is
available without charge upon request by calling 1-800-225-2606.
- ---------------------------------------------------------------------------------------------------------
INVESTMENT ADVISER CUSTODIAN
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 225 Franklin Street, Boston, MA 02110
02116-3741
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
DISTRIBUTOR Ernst & Young LLP
MFS Fund Distributors, Inc. 200 Clarendon Street, Boston, MA 02116
500 Boylston Street, Boston, MA
02116-3741
PORTFOLIO MANAGER
Daniel G. Scherman
QUARTERLY PORTFOLIO DISCLOSURE
Beginning with the fund's first and third fiscal quarters following this report, the fund will file
a complete schedule of portfolio holdings with the Securities and Exchange Commission (the
Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q
may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-0102
Information on the operation of the Public Reference Room may be obtained by calling the Commission
at 1-800-SEC-0330. The fund's Form N-Q is available on the EDGAR database on the Commission's
Internet website at http://www.sec.gov, and copies of this information may be obtained, upon payment
of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or
by writing the Public Reference Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at www.mfs.com.
- -------------------------------------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS
- -------------------------------------------------------------------------------
YOUR GOALS ARE IMPORTANT
MFS offers a complete range of investments and investment services to address
specific financial needs over time. When your investing goals change, you can
easily stay with MFS for the products you need, when you need them. Whether
you're investing for college or retirement expenses or for tax management or
estate planning, MFS will be there.
Ask your investment professional how MFS can help you move toward the goals
you've set.
MFS FAMILY OF FUNDS(R)
More than 50 portfolios offer domestic and international
equity and fixed-income investments across the full risk
spectrum
VARIABLE ANNUITIES
A selection of annuity products with advantages for
building and preserving wealth
MFS 401(k) AND IRA SUITES
Retirement plans for businesses and individuals
MFS COLLEGE SAVINGS PLANS
Investment products to help meet education expenses
MFS PRIVATE PORTFOLIO SERVICES
Investment advisory services that provide custom products
for high-net-worth individuals
Variable annuities are offered through MFS/Sun Life Financial Distributors,
Inc.
- -------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED)
If applicable, in January 2005, shareholders will be mailed a Form 1099-DIV
reporting the federal tax status of all distributions paid during the calendar
year 2004.
The fund has the option to use equalization, which is a tax basis dividends
paid deduction from earnings and profits distributed to shareholders upon
redemption of shares.
- -------------------------------------------------------------------------------
CONTACT INFORMATION
INVESTOR INFORMATION
For information on MFS mutual funds, call your investment professional or, for
an information kit, call toll free: 1-800-225-2606 any business day from 8 a.m.
to 8 p.m. Eastern time.
A general description of the MFS funds' proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the About MFS section of mfs.com or by visiting the SEC's Web site at
http://www.sec. gov.
Information regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is
available without charge by visiting the Proxy Voting section of mfs.com or by
visiting the SEC's Web site at http://www.sec.gov.
INVESTOR SERVICE
Write to us at: MFS Service Center, Inc.
P.O. Box 55824
Boston, MA 02205-5824
Type of Information Phone number Hours, Eastern Time
- --------------------------------------------------------------------------------
General information 1-800-225-2606 8 a.m. to 8 p.m., any
business day
- --------------------------------------------------------------------------------
Speech- or hearing-impaired 1-800-637-6576 9 a.m. to 5 p.m., any
business day
- --------------------------------------------------------------------------------
Shares prices, account 1-800-MFS-TALK
balances exchanges (1-800-637-8255) 24 hours a day, 365 days a
or stock and bond outlooks touch-tone required year
- --------------------------------------------------------------------------------
WORLD WIDE WEB
Go to MFS.COM for a clear view of market events, investor education, account
access, and product and performance insights.
Go paperless with EDELIVERY: Join your fellow shareholders who are already
taking advantage of this great new benefit from MFS. With eDelivery, we send
you prospectuses, reports, and proxies electronically. You get timely
information without mailbox clutter (and help your fund save printing and
postage costs).
SIGN-UP instructions: If your account is registered with us, go to mfs.com, log
in to your account via MFS Access, and select the eDelivery sign up options.
If you own your MFS fund shares through a financial institution or through a
retirement plan, MFS TALK, MFS Access, and eDelivery may not be available to
you.
[logo] M F S(R)
INVESTMENT MANAGEMENT
(C) 2004 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116.
SCT-ANN-10/04 51M
MFS(R) Mutual Funds
ANNUAL REPORT 8/31/04
MFS(R) NEW DISCOVERY FUND
[graphic omitted]
A path for pursuing opportunity
[logo] M F S(R)
INVESTMENT MANAGEMENT
- --------------------------------------------------------------------------------
MFS(R) PRIVACY POLICY: A COMMITMENT TO YOU
- --------------------------------------------------------------------------------
Privacy is a concern for every investor today. At MFS Investment Management(R)
and the MFS funds, we take this concern very seriously. We want you to
understand our policies about every MFS investment product and service that we
offer and how we protect the nonpublic personal information of investors who
have a direct relationship with us and our wholly owned subsidiaries.
Throughout our business relationship, you provide us with personal information;
we maintain information and records about you, your investments, and the
services you use. Examples of the nonpublic personal information we maintain
include
o data from investment applications and other forms
o share balances and transactional history with us, our affiliates, or others
o facts from a consumer reporting agency
We do not disclose any nonpublic personal information about our customers or
former customers to anyone except as permitted by law. We may share information
with companies or financial institutions that perform marketing services on our
behalf or to other financial institutions with which we have joint marketing
arrangements.
Access to your nonpublic personal information is limited to appropriate
personnel who provide products, services, or information to you. We maintain
physical, electronic, and procedural safeguards that comply with applicable
federal regulations.
If you have any questions about MFS' privacy policy, please call 1-800-225-2606
any business day between 8 a.m. and 8 p.m. Eastern time.
Note: If you own MFS products or receive MFS services in the name of a third
party such as a bank or broker-dealer, their privacy policy may apply to you
instead of ours.
- --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK OR CREDIT UNION GUARANTEE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
- --------------------------------------------------------------------------------
MFS(R) NEW DISCOVERY FUND
The fund seeks capital appreciation.
- -------------------------------------------------------------------------------
A PROSPECTUS FOR ANY MFS PRODUCT CAN BE OBTAINED FROM YOUR INVESTMENT
PROFESSIONAL. YOU SHOULD READ THE PROSPECTUS CAREFULLY BEFORE INVESTING AS IT
CONTAINS COMPLETE INFORMATION ON THE FUND'S INVESTMENT OBJECTIVE(s), THE RISKS
ASSOCIATED WITH AN INVESTMENT IN THE FUND, AND THE FEES, CHARGES, AND EXPENSES
INVOLVED. THESE ELEMENTS, AS WELL AS OTHER INFORMATION CONTAINED IN THE
PROSPECTUS, SHOULD BE CONSIDERED CAREFULLY BEFORE INVESTING.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- ----------------------------------------------------
MFS PRIVACY POLICY
- ----------------------------------------------------
LETTER FROM THE CEO 1
- ----------------------------------------------------
MFS ORIGINAL RESEARCH(R) 5
- ----------------------------------------------------
MANAGEMENT REVIEW 6
- ----------------------------------------------------
PORTFOLIO COMPOSITION 9
- ----------------------------------------------------
PERFORMANCE SUMMARY 10
- ----------------------------------------------------
EXPENSE TABLE 14
- ----------------------------------------------------
PORTFOLIO OF INVESTMENTS 16
- ----------------------------------------------------
FINANCIAL STATEMENTS 27
- ----------------------------------------------------
NOTES TO FINANCIAL STATEMENTS 46
- ----------------------------------------------------
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 58
- ----------------------------------------------------
TRUSTEES AND OFFICERS 59
- ----------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS 63
- ----------------------------------------------------
FEDERAL TAX INFORMATION 64
- ----------------------------------------------------
ASSET ALLOCATION 65
- ----------------------------------------------------
CONTACT INFORMATION BACK COVER
- --------------------------------------------------------------------------------
LETTER FROM THE CEO
- --------------------------------------------------------------------------------
Dear Shareholders,
[Photo of Robert J. Manning]
Our firm was built on the strength of MFS Original Research(R), our in-depth
analysis of every security we consider for our portfolios. We've been honing
this process since 1932, when we created one of the mutual fund industry's
first research departments. And we continue to fine-tune this process so that
we can provide strong and consistent long-term investment performance to help
you achieve your financial goals.
While we have achieved strong investment performance in many of our portfolios,
our goal is to achieve the same strong results across all asset classes. To
ensure that our portfolio teams are doing the best possible job for our firm's
clients and shareholders, I am focusing the vast majority of my time on the
three key elements that I believe truly differentiate MFS from its competitors:
people, process, and culture.
PEOPLE
Our people have always been our most valuable resource. Our philosophy is to
deliver consistent, repeatable investment results by hiring the most talented
investors in our industry. We recruit from the nation's top business schools
and hire experienced analysts, both domestically and around the globe.
Our analysts are the engine that powers our entire investment team because
their recommendations have a direct impact on the investment performance of our
portfolios. To demonstrate our ongoing commitment in this area, we increased
the number of equity analysts at MFS from less than 40 at the end of 2000 to
about 50 in June 2004. During that same period, we doubled the average
investment experience of our domestic equity analysts, in part by recruiting
more seasoned analysts to the firm. Moreover, our international network of
investment personnel now spans key regions of the world with offices in London,
Mexico City, Singapore, and Tokyo, as well as Boston.
One of the major advantages that MFS has over many of its competitors is that
the position of research analyst is a long-term career for many members of our
team, not simply a steppingstone toward becoming a portfolio manager. We have
worked to elevate the stature of the analyst position to be on par with that of
a portfolio manager. In fact, an exceptional research analyst has the
opportunity to earn more at MFS than some portfolio managers.
At the same time, we look within the firm to promote talented analysts who
choose a path toward becoming a portfolio manager. We rarely hire portfolio
managers from our competitors because we believe the best investors are those
steeped in the MFS process and culture. In the past few months, we have
identified three senior research analysts who will assume roles on the
management teams of several of our larger portfolios. MFS is fortunate to have
a deep bench of talented investment personnel, and we welcome the opportunity
to put their skills to work for our clients.
PROCESS
MFS was built on the strength of its bottom-up approach to researching
securities. We have enhanced the mentoring process for our research analysts by
calling on several of our most seasoned portfolio managers to supplement the
work of Director of Global Equity Research David A. Antonelli. These portfolio
managers are taking a special interest in developing the careers of our
research analysts and strengthening our investment process. Kenneth J. Enright
of our value equity group is working with a team of domestic analysts; David E.
Sette-Ducati of our small- and mid-cap equity team is working with analysts
concentrating on small- and mid-cap companies; and Barnaby Wiener of our
international equity team in London heads the European equity research team.
We have combined the bottom-up approach of our research process with a top-
down approach to risk controls on portfolio composition. We have a very strong
quantitative team under the leadership of industry veteran Deborah H. Miller,
who represents the equity management department on the Management Committee of
the firm. Quantitative analysis helps us generate investment ideas and, more
importantly, assess the appropriate level of risk for each portfolio. The risk
assessment is designed to assure that each portfolio operates within its
investment objectives.
Additionally, we have increased the peripheral vision of our investment
personnel across asset classes through the collaboration of our Equity, Fixed
Income, Quantitative Analysis, and Risk Management teams. We recently codified
this key aspect of our culture by forming an Investment Management Committee,
composed of key members of these teams. This committee will work to ensure that
all teams are sharing information, actively debating investment ideas, and
creating a unified investment team.
CULTURE
Teamwork is at the heart of our ability to deliver consistent and competitive
investment performance over time. At MFS, each member of our team is involved
in our success; we have no superstars. The collaborative nature of our process
works to assure a consistent investment approach across all of our products and
provides a high level of continuity in portfolio management because our
investment performance never depends on the contributions of just a single
individual. Our culture is based on an environment of teamwork that allows our
investment personnel to be successful. In turn, we demand superior investment
results from every member of our team.
We have created a meritocracy at our firm based on investment results. We hold
all of our portfolio managers accountable for the performance of their
portfolios and their contributions to the team. We also track the equity and
fixed-income ratings of our analysts so we can evaluate them based on the
performance of their recommendations. We align bonus compensation to investment
performance by weighting rewards to those who have created the greatest
long-term benefit for our shareholders and who contribute most successfully to
the Original Research(SM) process.
The strength of our culture has resulted in a tremendous amount of stability.
Although we have dismissed members of our team whose performance did not meet
MFS' high standards, only one portfolio manager has voluntarily left the firm
over the past six months, based on a decision to retire from the industry.
In short, we can help you achieve your financial goals by hiring talented
people, following a disciplined process, and maintaining our firm's unique
culture. The enhancements described in this letter reflect the collaborative
spirit and the depth of resources in our investment teams.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R)
September 20, 2004
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed.
- --------------------------------------------------------------------------------
MFS ORIGINAL RESEARCH(R)
- --------------------------------------------------------------------------------
THE MFS(R) DIFFERENCE
For 80 years MFS has been offering investors clear paths to pursuing specific
investment objectives. Today, millions of individuals and thousands of
institutions all over the world look to MFS to manage their assets with insight
and care.
Our success, we believe, has to do with the fact that we see investors as
people with plans, not just dollars to invest.
When you invest with MFS, you invest with a company dedicated to helping you
realize your long-term financial goals.
INVESTORS CHOOSE MFS FOR OUR
o global asset management expertise across all asset classes
o time-tested money management process for pursuing consistent results
o full spectrum of investment products backed by MFS Original Research(R)
o resources and services that match real-life needs
TURNING INFORMATION INTO OPPORTUNITY
Sound investments begin with sound information. MFS has been doing its own
research and analyzing findings in-house for decades. The process we use to
uncover opportunity is called MFS Original Research(R).
MFS ORIGINAL RESEARCH INVOLVES
o meeting with the management of 3,000 companies each year to assess their
business plans and the managers' ability to execute those plans
o making onsite visits to more than 2,000 companies annually to gain first-hand
knowledge of their operations and products
o analyzing financial statements and balance sheets
o talking extensively with companies' customers and competitors
o developing our own proprietary estimates of companies' earnings
- --------------------------------------------------------------------------------
MANAGEMENT REVIEW
- --------------------------------------------------------------------------------
MARKET ENVIRONMENT
The recovery in global stock markets that began in the spring of 2003 continued
into the first quarter of 2004. Business capital expenditures, which had been
weak for several years, began to trend upward in the latter half of 2003,
adding support to a recovery that had been fueled largely by consumer spending.
In the spring and summer of 2004, many measures of global economic growth,
including employment, corporate spending, and earnings growth, continued to
improve. But stock prices made only modest gains as investors, in our view,
became increasingly concerned about higher interest rates, rising oil prices, a
slowdown in corporate earnings growth, and continuing unrest in Iraq. The U.S.
Federal Reserve Board raised interest rates in June and again in August, and
set expectations for an ongoing series of modest rate hikes. A pullback in
equity markets near the end of the period was triggered, we believe, by
indications from a number of bellwether companies that earnings growth was
starting to slow.
DETRACTORS FROM PERFORMANCE
Over the 12-month period ended August 31, 2004, the fund underperformed its
benchmark, the Russell 2000 Growth Index, and the average small-cap growth fund
as reported by Lipper Inc.
Relative to our benchmark, stock selection in the health care sector detracted
considerably from relative performance over the period. Holdings that held back
results included biopharmaceutical firms Neurochem and XOMA, cardiac
defibrillator maker Cardiac Sciences, and Advisory Board, a provider of best
practices research and analysis to the health care industry. None of those
holdings, however, were among the portfolio's top 10 detractors, and Neurochem
and XOMA were not positions in the fund's benchmark.
In technology, a relative overweighting in the sector hurt results as
technology stocks were the worst-performing area in the benchmark over the
period. To a lesser extent, stock selection in technology also detracted from
relative performance. For example, our shares in Zarlink Semiconductor, a maker
of semiconductor chips for telecommunications equipment, traded lower after the
company cut its projections for 2004 sales. Zarlink was not a holding in the
portfolio's benchmark. The fund's holding in DVD software company InterVideo
dropped in price after InterVideo's main competitor announced it would give
away DVD software in hopes of motivating consumers to upgrade to a paid version
later. Other technology positions that lost value over the period included
Powerwave Technologies, which sells components to wireless communications
providers, and Dot Hill Systems, a data storage products firm. The fund's
holdings in InterVideo, Powerwave, and Dot Hill were sold by period-end.
The industrial goods and services sector was another area of weakness during
the one-year period. Both stock selection and an underweighting in the sector
detracted from relative results.
Individual stocks in other sectors that hurt relative performance included
post-secondary education firms Career Education Corp. and Corinthian Colleges,
which were not holdings in the fund's benchmark, as well as WMS Industries, a
manufacturer of gaming machines.
CONTRIBUTORS TO PERFORMANCE
Stock selection in the utilities and communications and the autos and housing
sectors helped relative results. SpectraSite, which leases signal towers and
other infrastructure to wireless and broadcast companies, was the fund's
strongest relative performer in the utilities and communications area. The
stock was not a position in the fund's benchmark. Eagle Materials, a supplier
of cement, wallboard, and other construction materials, made the strongest
contribution in the autos and housing sector.
Stocks in other sectors that aided relative results over the period included
information management software firm Open Text and security software firm
McAfee - which were not represented in the fund's benchmark - as well as Cytyc,
a developer of systems for cervical cancer screening. Cytyc's stock rose when
analysts increased earnings estimates based on the introduction of new imaging
equipment to screen tissue samples automatically. At period-end, Open Text was
no longer a holding in the fund.
Respectfully,
/s/ Robert A. Henderson /s/ Camille H. Lee
Robert A. Henderson Camille H. Lee
Portfolio Manager Portfolio Manager
/s/ Thomas H. Wetherald
Thomas H. Wetherald
Portfolio Manager
Note to Shareholders: Effective July 1, 2004, Camille H. Lee and Thomas H.
Wetherald became managers of the fund. Also effective July 1, 2004, Donald F.
Pitcher, Jr. was no longer a manager of the fund.
The views expressed in this report are those of the portfolio managers only
through the end of the period of the report as stated on the cover and do not
necessarily reflect the views of MFS or any other person in the MFS
organization. These views are subject to change at any time based on market and
other conditions, and MFS disclaims any responsibility to update such views.
These views may not be relied upon as investment advice or as an indication of
trading intent on behalf of any MFS fund. References to specific securities are
not recommendations of such securities and may not be representative of any MFS
fund's current or future investments.
The fund may charge a 2% redemption fee on proceeds from A, B, C, and I shares
redeemed or exchanged within 5 business days of acquiring (either by purchasing
or exchanging) fund shares. See the prospectus for complete details.
- -------------------------------------------------------------------------------
Visit mfs.com for our latest economic and investment outlook.
o Under Updates & Announcements, click Week in Review for a summary of recent
investment-related news.
o From Week in Review, link to MFS Global Perspective for our current view of
the world.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
-------------------------------------------------------
PORTFOLIO STRUCTURE
-------------------------------------------------------
Stocks 97.0%
Cash and Other Net Assets 3.0%
-------------------------------------------------------
TOP 5 SECTOR WEIGHTINGS
-------------------------------------------------------
Health Care 25.9%
-------------------------------------------------------
Technology 18.7%
-------------------------------------------------------
Special Products and Services 15.7%
-------------------------------------------------------
Leisure 10.1%
-------------------------------------------------------
Financial Services 7.4%
-------------------------------------------------------
-------------------------------------------------------
TOP TEN HOLDINGS
-------------------------------------------------------
GEN-PROBE INC. 1.6%
-------------------------------------------------------
CYTYC CORP. 1.6%
-------------------------------------------------------
MEDICIS PHARMACEUTICAL CORP. 1.5%
-------------------------------------------------------
VENTANA MEDICAL SYSTEMS INC. 1.4%
-------------------------------------------------------
STRAYER EDUCATION INC. 1.3%
-------------------------------------------------------
GLOBAL PAYMENTS INC. 1.3%
-------------------------------------------------------
EAGLE MATERIALS INC. 1.1%
-------------------------------------------------------
KRONOS INC. 1.1%
-------------------------------------------------------
IDEXX LABORATORIES INC. 1.1%
-------------------------------------------------------
ALLIANCE DATA SYSTEMS CORP. 1.1%
-------------------------------------------------------
Percentages are based on total net assets as of 8/31/04.
The portfolio is actively managed, and current holdings may be different.
- -------------------------------------------------------------------------------
PERFORMANCE SUMMARY THROUGH 8/31/04
- -------------------------------------------------------------------------------
The following chart illustrates the historical performance of the fund's
original share class in comparison to its benchmark. Performance results
include the deduction of the maximum applicable sales charge and reflect the
percentage change in net asset value, including reinvestment of dividends and
capital gains distributions. Benchmark comparisons are unmanaged and do not
reflect any fees or expenses. The performance of other share classes will be
greater than or less than the line shown. (See Notes to Performance Summary.)
VISIT MFS.COM FOR THE MOST RECENT MONTH-END PERFORMANCE RESULTS. MARKET
VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND CURRENT
PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE
OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. ANY
HIGH SHORT-TERM RETURNS MAY BE AND LIKELY WERE ATTRIBUTABLE TO RECENT FAVORABLE
MARKET CONDITIONS, WHICH MAY NOT BE REPEATED. THE PERFORMANCE SHOWN DOES NOT
REFLECT THE DEDUCTION OF TAXES, IF ANY, THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(for the period from the commencement of the fund's investment operations,
January 2, 1997, through August 31, 2004. Index information is from January 1,
1997).
MFS New
Discovery Fund -- Russell 2000
Class A Growth Index
1/97 $ 9,425 $10,000
8/98 11,718 8,396
8/00 28,653 16,734
8/02 16,493 8,054
8/04 18,611 11,232
TOTAL RETURNS
- --------------------
Average annual
without sales charge
- --------------------
Class
Share class inception date 1-yr 3-yr 5-yr Life*
- ------------------------------------------------------------------------------
A 1/2/97 -7.14% -5.77% 2.79% 9.29%
- ------------------------------------------------------------------------------
B 11/3/97 -7.75% -6.37% 2.11% 8.67%
- ------------------------------------------------------------------------------
C 11/3/97 -7.81% -6.41% 2.11% 8.67%
- ------------------------------------------------------------------------------
I 1/2/97 -6.80% -5.44% 3.15% 9.67%
- ------------------------------------------------------------------------------
R1 12/31/02 -7.34% -5.84% 2.74% 9.26%
- ------------------------------------------------------------------------------
R2 10/31/03 -7.49% -5.89% 2.71% 9.23%
- ------------------------------------------------------------------------------
529A 7/31/02 -7.30% -5.91% 2.69% 9.23%
- ------------------------------------------------------------------------------
529B 7/31/02 -7.99% -6.36% 2.40% 9.02%
- ------------------------------------------------------------------------------
529C 7/31/02 -7.98% -6.39% 2.38% 9.01%
- ------------------------------------------------------------------------------
- --------------------
Average annual
- --------------------
Comparative benchmarks
- ------------------------------------------------------------------------------
Average small cap growth fund+ 0.72% -1.00% 1.09% 4.60%
- ------------------------------------------------------------------------------
Russell 2000 Growth Index# 3.38% 1.04% -1.37% 1.53%
- ------------------------------------------------------------------------------
- --------------------
Average annual
with sales charge
- --------------------
Share class
- ------------------------------------------------------------------------------
A -12.48% -7.61% 1.58% 8.45%
- ------------------------------------------------------------------------------
B -11.44% -7.32% 1.78% 8.67%
- ------------------------------------------------------------------------------
C -8.73% -6.41% 2.11% 8.67%
- ------------------------------------------------------------------------------
529A -12.63% -7.75% 1.49% 8.38%
- ------------------------------------------------------------------------------
529B -11.67% -7.28% 2.07% 9.02%
- ------------------------------------------------------------------------------
529C -8.90% -6.39% 2.38% 9.01%
- ------------------------------------------------------------------------------
I, R1, and R2 Class shares do not have a sales charge. Please see Notes to
Performance Summary for more details.
- --------------------
Cumulative
without sales charge
- --------------------
Share class
- ------------------------------------------------------------------------------
A -7.14% -16.33% 14.73% 97.47%
- ------------------------------------------------------------------------------
B -7.75% -17.93% 11.03% 89.00%
- ------------------------------------------------------------------------------
C -7.81% -18.02% 11.01% 89.11%
- ------------------------------------------------------------------------------
I -6.80% -15.44% 16.75% 102.79%
- ------------------------------------------------------------------------------
R1 -7.34% -16.51% 14.47% 97.03%
- ------------------------------------------------------------------------------
R2 -7.49% -16.64% 14.29% 96.72%
- ------------------------------------------------------------------------------
529A -7.30% -16.70% 14.22% 96.59%
- ------------------------------------------------------------------------------
529B -7.99% -17.89% 12.59% 93.79%
- ------------------------------------------------------------------------------
529C -7.98% -17.96% 12.48% 93.60%
- ------------------------------------------------------------------------------
* For the period from the commencement of the fund's investment operations,
January 2, 1997, through August 31, 2004. Index information is from
January 1, 1997.
+ Source: Lipper Inc., an independent firm that reports mutual fund performance.
# Source: Standard & Poor's Micropal, Inc.
INDEX DEFINITION
RUSSELL 2000 GROWTH INDEX - measures the performance of those companies in the
Russell 2000 index with higher price to book and forecasted growth values. The
Russell 2000 consists of the 2000 smallest market cap companies in the Russell
3000 index.
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
The performance shown reflects a non-recurring accrual made to the fund on July
28, 2004 relating to MFS' revenue sharing settlement with the Securities and
Exchange Commission without which the performance would have been lower.
Class A and 529A results, including sales charge, reflect the deduction of the
maximum 5.75% sales charge. Class B and 529B results, including sales charge,
reflect the deduction of the applicable contingent deferred sales charge
(CDSC), which declines over six years from 4% to 0%. Class C and 529C results,
(assuming redemption within one year from the end of the calendar month of
purchase) reflect the deduction of the 1% CDSC. Class I shares have no sales
charges and are available only to certain investors. Class R1 and R2 shares
have no sales charges and are available only to certain retirement plans. Class
529A, 529B, and 529C shares are only available in conjunction with qualified
tuition programs, such as the MFS 529 Savings Plan.
Performance for share classes offered after Class A shares includes the
performance of the fund's Class A shares for periods prior to their offering.
This blended class performance has been adjusted to take into account
differences in sales loads, if any, applicable to these share classes, but has
not been adjusted to take into account differences in class specific operating
expenses (such as Rule 12b-1 fees). Compared to performance these share classes
would have experienced had they been offered for the entire period, the use of
blended performance generally results in higher performance for share classes
with higher operating expenses than the initial share class to which it is
blended, and lower performance for share classes with lower operating expenses
than the initial share class to which it is blended.
Performance results reflect any applicable expense subsidies and waivers in
effect during the periods shown. Without such subsidies and waivers, the fund's
performance results would be less favorable. Please see the prospectus and
financial statements for complete details. There also is an additional annual
fee, which is detailed in the program description, on qualified tuition
programs. If this fee were reflected the performance for Class 529 shares would
have been lower.
KEY RISK CONSIDERATIONS
The portfolio may invest in foreign and/or emerging markets securities, which
are more susceptible to risks relating to interest rates, currency exchange
rates, economic, and political conditions.
The portfolio may invest in small, mid-sized, or emerging companies, which are
susceptible to greater risk than is customarily associated with investing in
more established companies.
The portfolio's value will vary daily since its investments will fluctuate in
response to issuer, market, regulatory, economic, or political developments.
Because stocks tend to be more volatile than some other investments, such as
bonds, the more assets a fund dedicates to stocks, generally the more volatile
the portfolio's value will be. Historically, stocks have outperformed bonds
over time. The portfolio's investment risks should be considered prior to
investing. Please see the prospectus for further information regarding these
and other risk considerations.
- -------------------------------------------------------------------------------
EXPENSE TABLE
- -------------------------------------------------------------------------------
FUND EXPENSES BORNE BY SHAREHOLDERS DURING THE PERIOD FROM
MARCH 1, 2004, THROUGH AUGUST 31, 2004.
As a shareholder of the fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on certain purchase or redemption
payments and redemption fees on certain exchanges and redemptions, and (2)
ongoing costs, including management fees; distribution and service (12b-1)
fees; and other fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of
the period and held for the entire period, March 1, 2004 through August 31,
2004.
ACTUAL EXPENSES
The first line for each share class in the table below provides information
about actual account values and actual expenses. You may use the information in
this line, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the first line under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during
this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line for each share class in the table below provides information
about hypothetical account values and hypothetical expenses based on the fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption fees. Therefore, the second line for each share
class in the table is useful in comparing ongoing costs only, and will not help
you determine the relative total costs of owning different funds. In addition,
if these transactional costs were included, your costs would have been higher.
- --------------
Share Class
- --------------
- -------------------------------------------------------------------------------
Expenses
Paid During
Annualized Beginning Ending Period**
Expense Account Value Account Value* 3/01/04-
Ratio 3/01/04 8/31/04 8/31/04
- -------------------------------------------------------------------------------
Actual 1.50% $1,000 $841 $6.96
A -------------------------------------------------------------------------
Hypothetical 1.50% $1,000 $1,017 $7.63
- -------------------------------------------------------------------------------
Actual 2.14% $1,000 $838 $9.91
B -------------------------------------------------------------------------
Hypothetical 2.14% $1,000 $1,014 $10.86
- -------------------------------------------------------------------------------
Actual 2.14% $1,000 $838 $9.91
C -------------------------------------------------------------------------
Hypothetical 2.14% $1,000 $1,014 $10.86
- -------------------------------------------------------------------------------
Actual 1.15% $1,000 $843 $5.34
I -------------------------------------------------------------------------
Hypothetical 1.15% $1,000 $1,019 $5.85
- -------------------------------------------------------------------------------
Actual 1.64% $1,000 $840 $7.61
R1 -------------------------------------------------------------------------
Hypothetical 1.64% $1,000 $1,017 $8.34
- -------------------------------------------------------------------------------
Actual 1.72% $1,000 $838 $7.97
R2 -------------------------------------------------------------------------
Hypothetical 1.72% $1,000 $1,016 $8.74
- -------------------------------------------------------------------------------
Actual 1.74% $1,000 $840 $8.07
529A -------------------------------------------------------------------------
Hypothetical 1.74% $1,000 $1,016 $8.84
- -------------------------------------------------------------------------------
Actual 2.39% $1,000 $837 $11.07
529B -------------------------------------------------------------------------
Hypothetical 2.39% $1,000 $1,013 $12.13
- -------------------------------------------------------------------------------
Actual 2.39% $1,000 $837 $11.07
529C -------------------------------------------------------------------------
Hypothetical 2.39% $1,000 $1,013 $12.13
- -------------------------------------------------------------------------------
* Ending account value reflects each class' ending account value assuming the
actual class return per year before expenses (Actual) and a hypothetical 5%
class return per year before expenses (Hypothetical).
** Expenses paid is equal to each class' annualized expense ratio for the most
recent six month period, as shown above, multiplied by the average account
value over the period, multiplied by the number of days in the period,
divided by the number of days in the year. Expenses paid do not include any
applicable sales charges (loads) or redemption fees. If these transaction
costs had been included, your costs would have been higher.
- -------------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS - 8/31/04
- -------------------------------------------------------------------------------------------------
The Portfolio of Investments is a complete list of all securities owned by your fund. It is
categorized by broad-based asset classes.
Stocks - 97.0%
- -------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
U.S. Stocks - 92.7%
- -------------------------------------------------------------------------------------------------
Aerospace - 0.8%
- -------------------------------------------------------------------------------------------------
Esterline Technologies Corp.*^ 78,700 $2,497,151
- -------------------------------------------------------------------------------------------------
Hexcel Corp.*^ 120,100 1,578,114
- -------------------------------------------------------------------------------------------------
KVH Industries, Inc.*^ 546,100 4,259,580
- -------------------------------------------------------------------------------------------------
Teledyne Technologies, Inc.*^ 54,400 1,313,760
- -------------------------------------------------------------------------------------------------
$9,648,605
- -------------------------------------------------------------------------------------------------
Apparel Manufacturers - 2.3%
- -------------------------------------------------------------------------------------------------
Carter's, Inc.*^ 48,210 $1,347,952
- -------------------------------------------------------------------------------------------------
Kellwood Co.^ 356,300 13,004,950
- -------------------------------------------------------------------------------------------------
Quiksilver, Inc.*^ 179,100 3,895,425
- -------------------------------------------------------------------------------------------------
Reebok International Ltd.^ 98,900 3,359,633
- -------------------------------------------------------------------------------------------------
Timberland Co., "A"* 79,300 4,428,905
- -------------------------------------------------------------------------------------------------
Wolverine World Wide, Inc.^ 84,400 2,035,728
- -------------------------------------------------------------------------------------------------
$28,072,593
- -------------------------------------------------------------------------------------------------
Automotive - 0.4%
- -------------------------------------------------------------------------------------------------
CLARCOR, Inc.^ 106,000 $4,695,800
- -------------------------------------------------------------------------------------------------
Banks & Credit Companies - 6.9%
- -------------------------------------------------------------------------------------------------
Alabama National BanCorporation^ 32,309 $1,930,786
- -------------------------------------------------------------------------------------------------
Bank Mutual Corp.^ 180,800 2,062,928
- -------------------------------------------------------------------------------------------------
BankUnited Financial Corp., "A"* 199,600 5,644,688
- -------------------------------------------------------------------------------------------------
Cathay General Bancorp, Inc.^ 73,600 5,127,712
- -------------------------------------------------------------------------------------------------
Collegiate Funding Services, Inc.* 228,568 3,017,098
- -------------------------------------------------------------------------------------------------
East West Bancorp, Inc.^ 172,600 6,253,298
- -------------------------------------------------------------------------------------------------
First BanCorp Puerto Rico 58,300 2,679,468
- -------------------------------------------------------------------------------------------------
Glacier Bancorp, Inc.^ 20,100 566,418
- -------------------------------------------------------------------------------------------------
Hanmi Financial Corp.^ 29,900 959,192
- -------------------------------------------------------------------------------------------------
Harbor Florida Bancshares, Inc.^ 130,700 4,088,296
- -------------------------------------------------------------------------------------------------
Investors Financial Services Corp.^ 148,300 6,878,154
- -------------------------------------------------------------------------------------------------
Nara Bancorp, Inc.^ 220,300 4,498,526
- -------------------------------------------------------------------------------------------------
Nelnet, Inc.* 32,600 761,862
- -------------------------------------------------------------------------------------------------
NetBank, Inc.^ 465,756 4,955,644
- -------------------------------------------------------------------------------------------------
NewAlliance Bancshares, Inc. 674,900 9,246,130
- -------------------------------------------------------------------------------------------------
Partners Trust Financial Group, Inc.*^ 515,357 5,158,724
- -------------------------------------------------------------------------------------------------
Placer Sierra Bancshares* 96,500 1,886,575
- -------------------------------------------------------------------------------------------------
Provident Financial Services, Inc. 116,100 2,073,546
- -------------------------------------------------------------------------------------------------
QC Holdings, Inc.*^ 117,500 1,637,950
- -------------------------------------------------------------------------------------------------
Rainier Pacific Financial Group, Inc.^ 41,300 757,855
- -------------------------------------------------------------------------------------------------
Southwest Bancorp, Inc.^ 124,100 2,616,028
- -------------------------------------------------------------------------------------------------
UCBH Holdings, Inc. 199,400 8,005,910
- -------------------------------------------------------------------------------------------------
Wilshire State Bank* 13,800 454,158
- -------------------------------------------------------------------------------------------------
Wintrust Financial Corp.^ 74,600 4,094,048
- -------------------------------------------------------------------------------------------------
$85,354,994
- -------------------------------------------------------------------------------------------------
Biotechnology - 7.1%
- -------------------------------------------------------------------------------------------------
Bruker BioSciences Corp.*^ 757,100 $2,702,847
- -------------------------------------------------------------------------------------------------
Corgentech, Inc.*^ 77,470 1,045,070
- -------------------------------------------------------------------------------------------------
CryoLife, Inc.*^ 297,100 1,839,049
- -------------------------------------------------------------------------------------------------
CV Therapeutics, Inc.*^ 799,400 10,256,302
- -------------------------------------------------------------------------------------------------
Cypress Bioscience, Inc.*^ 504,450 5,195,835
- -------------------------------------------------------------------------------------------------
Dyax Corp.*^ 60,700 481,958
- -------------------------------------------------------------------------------------------------
Encysive Pharmaceuticals, Inc.*^ 900,200 7,111,580
- -------------------------------------------------------------------------------------------------
Gen-Probe, Inc.*^ 548,600 19,804,460
- -------------------------------------------------------------------------------------------------
Keryx Biopharmaceuticals, Inc.*^ 508,500 5,659,605
- -------------------------------------------------------------------------------------------------
Kosan Biosciences, Inc.*^ 60,800 393,984
- -------------------------------------------------------------------------------------------------
Ligand Pharmaceuticals, Inc., "B"*^ 190,000 1,867,700
- -------------------------------------------------------------------------------------------------
MannKind Corp.*^ 440,230 6,141,209
- -------------------------------------------------------------------------------------------------
Martek Biosciences Corp.*^ 76,100 4,063,740
- -------------------------------------------------------------------------------------------------
NeoPharm, Inc.*^ 63,100 357,777
- -------------------------------------------------------------------------------------------------
Neurocrine Biosciences, Inc.*^ 144,500 7,191,765
- -------------------------------------------------------------------------------------------------
Onyx Pharmaceuticals, Inc.*^ 30,700 1,140,198
- -------------------------------------------------------------------------------------------------
Pharmos Corp.*^ 549,000 1,740,330
- -------------------------------------------------------------------------------------------------
Renovis, Inc.*^ 118,200 957,420
- -------------------------------------------------------------------------------------------------
Serologicals Corp.*^ 96,500 2,020,710
- -------------------------------------------------------------------------------------------------
Vicuron Pharmaceuticals, Inc.*^ 535,500 8,000,370
- -------------------------------------------------------------------------------------------------
$87,971,909
- -------------------------------------------------------------------------------------------------
Broadcast & Cable TV - 4.8%
- -------------------------------------------------------------------------------------------------
ADVO, Inc.^ 389,900 $11,533,242
- -------------------------------------------------------------------------------------------------
Citadel Broadcasting Corp.*^ 384,700 5,539,680
- -------------------------------------------------------------------------------------------------
Cox Radio, Inc., "A"*^ 366,300 6,157,503
- -------------------------------------------------------------------------------------------------
Entercom Communications Corp., "A"* 171,700 6,473,090
- -------------------------------------------------------------------------------------------------
Greenfield Online, Inc.*^ 190,000 3,934,900
- -------------------------------------------------------------------------------------------------
LodgeNet Entertainment Corp.*^ 297,554 4,332,386
- -------------------------------------------------------------------------------------------------
R.H. Donnelley Corp.*^ 259,332 12,045,971
- -------------------------------------------------------------------------------------------------
Radio One, Inc., "A"* 431,800 6,765,874
- -------------------------------------------------------------------------------------------------
Saga Communications, Inc., "A"*^ 135,800 2,437,610
- -------------------------------------------------------------------------------------------------
$59,220,256
- -------------------------------------------------------------------------------------------------
Brokerage & Asset Managers - 0.2%
- -------------------------------------------------------------------------------------------------
Archipelago Holdings, Inc.*^ 114,370 $1,704,113
- -------------------------------------------------------------------------------------------------
First Albany Cos., Inc.^ 72,600 633,072
- -------------------------------------------------------------------------------------------------
$2,337,185
- -------------------------------------------------------------------------------------------------
Business Services - 11.8%
- -------------------------------------------------------------------------------------------------
Alliance Data Systems Corp.*^ 363,800 $13,897,160
- -------------------------------------------------------------------------------------------------
aQuantive, Inc.*^ 322,700 2,794,582
- -------------------------------------------------------------------------------------------------
Asset Acceptance Capital Corp.*^ 87,000 1,525,110
- -------------------------------------------------------------------------------------------------
Bright Horizons Family Solutions, Inc.*^ 157,800 7,809,522
- -------------------------------------------------------------------------------------------------
CACI International, Inc.*^ 155,400 7,566,426
- -------------------------------------------------------------------------------------------------
CDI Corp.^ 162,100 3,404,100
- -------------------------------------------------------------------------------------------------
Charles River Associates, Inc.*^ 89,090 2,686,064
- -------------------------------------------------------------------------------------------------
Corporate Executive Board Co.^ 206,700 12,166,362
- -------------------------------------------------------------------------------------------------
CoStar Group, Inc.*^ 282,700 11,955,383
- -------------------------------------------------------------------------------------------------
Digitas, Inc.*^ 521,430 3,728,225
- -------------------------------------------------------------------------------------------------
Euronet Worldwide, Inc.*^ 63,300 1,111,548
- -------------------------------------------------------------------------------------------------
Getty Images, Inc.*^ 170,220 9,438,699
- -------------------------------------------------------------------------------------------------
Gevity HR, Inc.^ 154,390 2,754,318
- -------------------------------------------------------------------------------------------------
Global Payments, Inc. 372,149 16,508,530
- -------------------------------------------------------------------------------------------------
Harris Interactive, Inc.*^ 1,693,700 10,111,389
- -------------------------------------------------------------------------------------------------
Labor Ready, Inc.*^ 243,100 3,012,009
- -------------------------------------------------------------------------------------------------
Laureate Education, Inc.*^ 33,000 1,128,270
- -------------------------------------------------------------------------------------------------
MSC Industrial Direct Co., Inc., "A"^ 171,220 5,319,805
- -------------------------------------------------------------------------------------------------
Navigant Consulting Co.*^ 91,600 1,755,972
- -------------------------------------------------------------------------------------------------
SCP Pool Corp.^ 53,800 2,269,822
- -------------------------------------------------------------------------------------------------
SIRVA, Inc.* 109,580 2,320,904
- -------------------------------------------------------------------------------------------------
Ultimate Software Group, Inc.*^ 722,700 8,253,234
- -------------------------------------------------------------------------------------------------
Universal Technical Institute, Inc.*^ 473,040 12,951,835
- -------------------------------------------------------------------------------------------------
ValueClick, Inc.*^ 217,500 1,572,525
- -------------------------------------------------------------------------------------------------
$146,041,794
- -------------------------------------------------------------------------------------------------
Chemicals - 0.1%
- -------------------------------------------------------------------------------------------------
Terra Industries, Inc.*^ 164,300 $1,232,250
- -------------------------------------------------------------------------------------------------
Computer Software - 7.2%
- -------------------------------------------------------------------------------------------------
Akamai Technologies, Inc.*^ 610,900 $8,216,605
- -------------------------------------------------------------------------------------------------
Altiris, Inc.*^ 157,900 3,746,967
- -------------------------------------------------------------------------------------------------
ANSYS, Inc.* 70,200 3,166,020
- -------------------------------------------------------------------------------------------------
Ascential Software Corp.*^ 765,100 9,915,696
- -------------------------------------------------------------------------------------------------
Blackboard, Inc.*^ 86,465 1,740,540
- -------------------------------------------------------------------------------------------------
Kronos, Inc.*^ 329,650 14,102,427
- -------------------------------------------------------------------------------------------------
Macromedia, Inc.*^ 100,300 1,943,814
- -------------------------------------------------------------------------------------------------
Magma Design Automation, Inc.*^ 131,900 2,176,350
- -------------------------------------------------------------------------------------------------
Manhattan Associates, Inc.*^ 385,000 8,985,900
- -------------------------------------------------------------------------------------------------
McAfee, Inc.* 323,700 6,402,786
- -------------------------------------------------------------------------------------------------
MicroStrategy, Inc.*^ 135,000 4,672,350
- -------------------------------------------------------------------------------------------------
NAVTEQ Corp.*^ 156,980 5,161,502
- -------------------------------------------------------------------------------------------------
Open Solutions, Inc.*^ 213,200 4,916,392
- -------------------------------------------------------------------------------------------------
Progress Software Corp.*^ 125,100 2,519,514
- -------------------------------------------------------------------------------------------------
SafeNet, Inc.*^ 49,900 1,419,655
- -------------------------------------------------------------------------------------------------
SERENA Software, Inc.*^ 566,200 8,861,030
- -------------------------------------------------------------------------------------------------
SupportSoft, Inc.* 158,100 1,598,391
- -------------------------------------------------------------------------------------------------
$89,545,939
- -------------------------------------------------------------------------------------------------
Computer Software - Systems - 0.9%
- -------------------------------------------------------------------------------------------------
MICROS Systems, Inc.*^ 49,600 $2,308,384
- -------------------------------------------------------------------------------------------------
National Instruments Corp.^ 292,600 7,628,082
- -------------------------------------------------------------------------------------------------
SS&C Technologies, Inc.^ 97,500 1,600,950
- -------------------------------------------------------------------------------------------------
$11,537,416
- -------------------------------------------------------------------------------------------------
Construction - 1.6%
- -------------------------------------------------------------------------------------------------
Eagle Materials, Inc.^ 218,600 $14,189,326
- -------------------------------------------------------------------------------------------------
Florida Rock Industries, Inc.^ 71,200 3,239,600
- -------------------------------------------------------------------------------------------------
Simpson Manufacturing, Inc.^ 39,800 2,248,700
- -------------------------------------------------------------------------------------------------
$19,677,626
- -------------------------------------------------------------------------------------------------
Consumer Goods & Services - 4.1%
- -------------------------------------------------------------------------------------------------
Ace Cash Express, Inc.*^ 126,200 $3,452,832
- -------------------------------------------------------------------------------------------------
Career Education Corp.*^ 237,800 7,333,752
- -------------------------------------------------------------------------------------------------
Corinthian Colleges, Inc.*^ 334,907 3,807,893
- -------------------------------------------------------------------------------------------------
Education Management Corp.*^ 102,900 2,990,274
- -------------------------------------------------------------------------------------------------
First Marblehead Corp.^ 137,950 5,706,992
- -------------------------------------------------------------------------------------------------
Nu Skin Enterprises, Inc.^ 65,000 1,678,300
- -------------------------------------------------------------------------------------------------
Rayovac Corp.*^ 73,100 1,680,569
- -------------------------------------------------------------------------------------------------
RC2 Corp.* 65,800 2,079,938
- -------------------------------------------------------------------------------------------------
Strayer Education, Inc.^ 159,900 16,629,600
- -------------------------------------------------------------------------------------------------
Yankee Candle Co.* 179,100 4,855,401
- -------------------------------------------------------------------------------------------------
$50,215,551
- -------------------------------------------------------------------------------------------------
Electrical Equipment - 0.7%
- -------------------------------------------------------------------------------------------------
Brady Corp.^ 15,100 $664,853
- -------------------------------------------------------------------------------------------------
CUNO, Inc.*^ 39,400 2,241,072
- -------------------------------------------------------------------------------------------------
Dionex Corp.*^ 34,600 1,593,676
- -------------------------------------------------------------------------------------------------
Littelfuse, Inc.*^ 109,900 4,002,558
- -------------------------------------------------------------------------------------------------
$8,502,159
- -------------------------------------------------------------------------------------------------
Electronics - 6.2%
- -------------------------------------------------------------------------------------------------
American Superconductor Corp.*^ 798,032 $9,536,482
- -------------------------------------------------------------------------------------------------
Amphenol Corp., "A"* 147,900 4,445,874
- -------------------------------------------------------------------------------------------------
Applied Films Corp.*^ 523,900 10,425,610
- -------------------------------------------------------------------------------------------------
Bel Fuse, Inc.^ 57,800 2,188,886
- -------------------------------------------------------------------------------------------------
Cymer, Inc.*^ 149,600 3,997,312
- -------------------------------------------------------------------------------------------------
DSP Group, Inc.*^ 594,934 11,309,695
- -------------------------------------------------------------------------------------------------
Exar Corp.*^ 119,700 1,650,663
- -------------------------------------------------------------------------------------------------
Excel Technology, Inc.*^ 105,500 2,610,070
- -------------------------------------------------------------------------------------------------
FARO Technologies, Inc.*^ 18,200 374,374
- -------------------------------------------------------------------------------------------------
Hutchinson Technology, Inc.*^ 14,100 342,912
- -------------------------------------------------------------------------------------------------
Integrated Circuit Systems, Inc.*^ 432,400 9,504,152
- -------------------------------------------------------------------------------------------------
Metrologic Instruments, Inc.*^ 131,900 1,898,041
- -------------------------------------------------------------------------------------------------
MKS Instruments, Inc.*^ 170,700 2,294,208
- -------------------------------------------------------------------------------------------------
PMC-Sierra, Inc.*^ 733,700 6,852,758
- -------------------------------------------------------------------------------------------------
Power Integrations, Inc.*^ 419,100 8,415,528
- -------------------------------------------------------------------------------------------------
Silicon Image, Inc.*^ 23,150 254,650
- -------------------------------------------------------------------------------------------------
$76,101,215
- -------------------------------------------------------------------------------------------------
Energy - Independent - 0%
- -------------------------------------------------------------------------------------------------
Woodward Governor Co. 1,100 $64,680
- -------------------------------------------------------------------------------------------------
Engineering - Construction - 0.3%
- -------------------------------------------------------------------------------------------------
InfraSource Services, Inc.*^ 382,600 $3,408,966
- -------------------------------------------------------------------------------------------------
Food & Drug Stores - 0.1%
- -------------------------------------------------------------------------------------------------
Wild Oats Markets, Inc.*^ 181,500 $1,602,645
- -------------------------------------------------------------------------------------------------
Food & Non-Alcoholic Beverages - 0.3%
- -------------------------------------------------------------------------------------------------
United Natural Foods, Inc.*^ 126,500 $3,132,140
- -------------------------------------------------------------------------------------------------
Furniture & Appliances - 0.2%
- -------------------------------------------------------------------------------------------------
Toro Co. 39,200 $2,554,664
- -------------------------------------------------------------------------------------------------
Gaming & Lodging - 1.7%
- -------------------------------------------------------------------------------------------------
Ameristar Casinos, Inc.^ 20,200 $550,046
- -------------------------------------------------------------------------------------------------
Aztar Corp.*^ 194,300 4,830,298
- -------------------------------------------------------------------------------------------------
Gaylord Entertainment Co.*^ 74,960 2,176,838
- -------------------------------------------------------------------------------------------------
Pinnacle Entertainment, Inc.*^ 69,400 860,560
- -------------------------------------------------------------------------------------------------
WMS Industries, Inc.*^ 594,900 12,022,929
- -------------------------------------------------------------------------------------------------
$20,440,671
- -------------------------------------------------------------------------------------------------
General Merchandise - 0.6%
- -------------------------------------------------------------------------------------------------
99 Cents Only Stores*^ 389,000 $5,037,550
- -------------------------------------------------------------------------------------------------
Fred's, Inc., "A"^ 196,500 2,733,315
- -------------------------------------------------------------------------------------------------
$7,770,865
- -------------------------------------------------------------------------------------------------
Health Maintenance Organizations - 0.6%
- -------------------------------------------------------------------------------------------------
AMERIGROUP Corp.*^ 41,000 $2,104,940
- -------------------------------------------------------------------------------------------------
Molina Healthcare, Inc.*^ 28,300 939,560
- -------------------------------------------------------------------------------------------------
Sierra Health Services, Inc.*^ 44,000 1,897,280
- -------------------------------------------------------------------------------------------------
Wellcare Group, Inc.^ 108,236 1,975,307
- -------------------------------------------------------------------------------------------------
$6,917,087
- -------------------------------------------------------------------------------------------------
Internet - 1.4%
- -------------------------------------------------------------------------------------------------
Digital River, Inc.*^ 428,510 $10,314,236
- -------------------------------------------------------------------------------------------------
InfoSpace, Inc.*^ 196,500 7,467,000
- -------------------------------------------------------------------------------------------------
$17,781,236
- -------------------------------------------------------------------------------------------------
Leisure & Toys - 0.8%
- -------------------------------------------------------------------------------------------------
Take-Two Interactive Software, Inc.*^ 208,400 $6,825,100
- -------------------------------------------------------------------------------------------------
THQ, Inc.*^ 135,000 2,563,650
- -------------------------------------------------------------------------------------------------
$9,388,750
- -------------------------------------------------------------------------------------------------
Machinery & Tools - 1.8%
- -------------------------------------------------------------------------------------------------
Actuant Corp.*^ 46,700 $1,767,128
- -------------------------------------------------------------------------------------------------
Bucyrus International, Inc.*^ 105,400 2,785,722
- -------------------------------------------------------------------------------------------------
Cognex Corp.^ 350,000 9,369,500
- -------------------------------------------------------------------------------------------------
IDEX Corp.^ 76,700 2,356,224
- -------------------------------------------------------------------------------------------------
Lincoln Electric Holdings, Inc.^ 52,700 1,584,162
- -------------------------------------------------------------------------------------------------
Nordson Corp. 41,500 1,423,035
- -------------------------------------------------------------------------------------------------
Terex Corp.*^ 42,600 1,539,138
- -------------------------------------------------------------------------------------------------
Wabash National Corp.*^ 61,500 1,631,595
- -------------------------------------------------------------------------------------------------
$22,456,504
- -------------------------------------------------------------------------------------------------
Medical & Health Technology & Services - 3.7%
- -------------------------------------------------------------------------------------------------
Advisory Board Co.*^ 279,400 $8,957,564
- -------------------------------------------------------------------------------------------------
Apria Healthcare Group, Inc.*^ 429,325 12,124,138
- -------------------------------------------------------------------------------------------------
Fisher Scientific International, Inc.*^ 104,600 5,959,062
- -------------------------------------------------------------------------------------------------
LCA-Vision, Inc.^ 25,000 589,500
- -------------------------------------------------------------------------------------------------
LifePoint Hospitals, Inc.*^ 221,500 6,399,135
- -------------------------------------------------------------------------------------------------
Omnicell, Inc.*^ 814,236 9,990,676
- -------------------------------------------------------------------------------------------------
Symbion, Inc.*^ 92,930 1,502,678
- -------------------------------------------------------------------------------------------------
$45,522,753
- -------------------------------------------------------------------------------------------------
Medical Equipment - 10.9%
- -------------------------------------------------------------------------------------------------
Advanced Medical Optics, Inc.*^ 32,400 $1,205,928
- -------------------------------------------------------------------------------------------------
Advanced Neuromodulation Systems, Inc.*^ 191,386 5,611,438
- -------------------------------------------------------------------------------------------------
Aspect Medical Systems, Inc.*^ 832,245 13,315,920
- -------------------------------------------------------------------------------------------------
Conceptus, Inc.*^ 468,000 4,319,640
- -------------------------------------------------------------------------------------------------
Conceptus, Inc.*^ ## 238,000 2,196,740
- -------------------------------------------------------------------------------------------------
CTI Molecular Imaging, Inc.*^ 472,900 4,440,531
- -------------------------------------------------------------------------------------------------
Cyberonics, Inc.*^ 246,800 4,225,216
- -------------------------------------------------------------------------------------------------
Cytyc Corp.*^ 825,725 19,784,368
- -------------------------------------------------------------------------------------------------
EPIX Medical, Inc.*^ 126,400 2,509,040
- -------------------------------------------------------------------------------------------------
IDEXX Laboratories, Inc.* 285,565 13,909,871
- -------------------------------------------------------------------------------------------------
Integra LifeSciences Holdings Corp.*^ 91,100 2,721,157
- -------------------------------------------------------------------------------------------------
Invitrogen Corp.*^ 112,600 5,573,700
- -------------------------------------------------------------------------------------------------
Kensey Nash Corp.*^ 93,600 2,676,024
- -------------------------------------------------------------------------------------------------
Millipore Corp.* 146,400 7,363,920
- -------------------------------------------------------------------------------------------------
Nektar Therapeutics*^ 342,400 4,362,176
- -------------------------------------------------------------------------------------------------
Penwest Pharmaceuticals Co.*^ 469,600 5,052,896
- -------------------------------------------------------------------------------------------------
PolyMedica Corp.^ 60,900 1,851,969
- -------------------------------------------------------------------------------------------------
Sybron Dental Specialties, Inc.* 63,900 1,781,532
- -------------------------------------------------------------------------------------------------
Thoratec Corp.*^ 836,800 8,217,376
- -------------------------------------------------------------------------------------------------
Ventana Medical Systems, Inc.*^ 361,100 17,581,959
- -------------------------------------------------------------------------------------------------
Viasys Healthcare, Inc.*^ 382,400 5,563,920
- -------------------------------------------------------------------------------------------------
$134,265,321
- -------------------------------------------------------------------------------------------------
Metals & Mining - 0.4%
- -------------------------------------------------------------------------------------------------
Allegheny Technologies, Inc. 149,500 $2,812,095
- -------------------------------------------------------------------------------------------------
Compass Minerals International, Inc.^ 95,600 2,052,532
- -------------------------------------------------------------------------------------------------
$4,864,627
- -------------------------------------------------------------------------------------------------
Pharmaceuticals - 2.5%
- -------------------------------------------------------------------------------------------------
AtheroGenics, Inc.*^ 107,200 $1,799,888
- -------------------------------------------------------------------------------------------------
Connetics Corp.* 109,500 2,808,675
- -------------------------------------------------------------------------------------------------
Corcept Therapeutics, Inc.*^ 161,070 1,309,499
- -------------------------------------------------------------------------------------------------
Inspire Pharmaceuticals, Inc.*^ 410,200 5,927,390
- -------------------------------------------------------------------------------------------------
Medicis Pharmaceutical Corp., "A"^ 520,300 19,053,386
- -------------------------------------------------------------------------------------------------
$30,898,838
- -------------------------------------------------------------------------------------------------
Printing & Publishing - 0.3%
- -------------------------------------------------------------------------------------------------
Playboy Enterprises, Inc.*^ 435,900 $3,962,331
- -------------------------------------------------------------------------------------------------
Real Estate Investment Trusts - 0.3%
- -------------------------------------------------------------------------------------------------
CB Richard Ellis Group, Inc.* 206,050 $4,015,915
- -------------------------------------------------------------------------------------------------
Restaurants - 2.5%
- -------------------------------------------------------------------------------------------------
Cheesecake Factory, Inc.*^ 237,800 $9,840,164
- -------------------------------------------------------------------------------------------------
P.F. Chang's China Bistro, Inc.*^ 327,500 13,728,800
- -------------------------------------------------------------------------------------------------
Rare Hospitality International, Inc.* 117,600 3,179,904
- -------------------------------------------------------------------------------------------------
Sonic Corp.*^ 174,500 3,900,075
- -------------------------------------------------------------------------------------------------
$30,648,943
- -------------------------------------------------------------------------------------------------
Special Products & Services - 0.3%
- -------------------------------------------------------------------------------------------------
Ceradyne, Inc.*^ 39,774 $1,548,402
- -------------------------------------------------------------------------------------------------
Mine Safety Appliances Co.^ 55,400 2,189,962
- -------------------------------------------------------------------------------------------------
$3,738,364
- -------------------------------------------------------------------------------------------------
Specialty Chemicals - 1.3%
- -------------------------------------------------------------------------------------------------
Airgas, Inc.^ 152,700 $3,397,575
- -------------------------------------------------------------------------------------------------
Cytec Industries, Inc.^ 58,300 2,812,392
- -------------------------------------------------------------------------------------------------
Delta & Pine Land Co.^ 288,255 7,324,560
- -------------------------------------------------------------------------------------------------
Georgia Gulf Corp.^ 78,400 2,975,280
- -------------------------------------------------------------------------------------------------
$16,509,807
- -------------------------------------------------------------------------------------------------
Specialty Stores - 3.9%
- -------------------------------------------------------------------------------------------------
1-800-Flowers.com, Inc., "A"*^ 778,000 $5,788,320
- -------------------------------------------------------------------------------------------------
A.C. Moore Arts & Crafts, Inc.*^ 62,700 1,274,691
- -------------------------------------------------------------------------------------------------
Coldwater Creek, Inc.*^ 282,900 5,691,948
- -------------------------------------------------------------------------------------------------
Finish Line, Inc., "A"^ 170,900 4,957,809
- -------------------------------------------------------------------------------------------------
PETCO Animal Supplies, Inc.* 93,225 3,087,612
- -------------------------------------------------------------------------------------------------
Regis Corp. 215,050 8,801,997
- -------------------------------------------------------------------------------------------------
Tractor Supply Co.*^ 60,500 2,106,610
- -------------------------------------------------------------------------------------------------
Tuesday Morning Corp.*^ 178,900 5,560,212
- -------------------------------------------------------------------------------------------------
Urban Outfitters, Inc.*^ 122,200 3,708,770
- -------------------------------------------------------------------------------------------------
West Marine, Inc.*^ 373,100 6,749,379
- -------------------------------------------------------------------------------------------------
$47,727,348
- -------------------------------------------------------------------------------------------------
Telecommunications - Wireless - 1.6%
- -------------------------------------------------------------------------------------------------
Alamosa Holdings, Inc.*^ 192,680 $1,579,976
- -------------------------------------------------------------------------------------------------
Andrew Corp.*^ 491,300 5,448,517
- -------------------------------------------------------------------------------------------------
SpectraSite, Inc.*^ 280,400 12,601,176
- -------------------------------------------------------------------------------------------------
$19,629,669
- -------------------------------------------------------------------------------------------------
Telecommunications - Wireline - 1.3%
- -------------------------------------------------------------------------------------------------
Carrier Access Corp.*^ 115,500 $795,795
- -------------------------------------------------------------------------------------------------
CommScope, Inc.*^ 31,400 623,918
- -------------------------------------------------------------------------------------------------
F5 Networks, Inc.*^ 172,600 4,240,782
- -------------------------------------------------------------------------------------------------
Harmonic, Inc.*^ 241,700 1,433,281
- -------------------------------------------------------------------------------------------------
NMS Communications Corp.*^ 127,800 613,440
- -------------------------------------------------------------------------------------------------
Openwave Systems, Inc.*^ 363,333 3,386,264
- -------------------------------------------------------------------------------------------------
Tekelec*^ 201,600 3,683,232
- -------------------------------------------------------------------------------------------------
ViaSat, Inc.*^ 64,500 1,278,390
- -------------------------------------------------------------------------------------------------
$16,055,102
- -------------------------------------------------------------------------------------------------
Trucking - 0.8%
- -------------------------------------------------------------------------------------------------
Arkansas Best Corp.^ 60,000 $2,067,000
- -------------------------------------------------------------------------------------------------
EGL, Inc.*^ 51,600 1,250,268
- -------------------------------------------------------------------------------------------------
Landstar Systems, Inc.*^ 46,100 2,419,328
- -------------------------------------------------------------------------------------------------
UTI Worldwide, Inc.^ 46,200 2,370,060
- -------------------------------------------------------------------------------------------------
Yellow Roadway Corp.*^ 59,300 2,433,672
- -------------------------------------------------------------------------------------------------
$10,540,328
- -------------------------------------------------------------------------------------------------
Total U.S. Stocks $1,144,052,846
- -------------------------------------------------------------------------------------------------
Foreign Stocks - 4.3%
- -------------------------------------------------------------------------------------------------
Canada - 2.9%
- -------------------------------------------------------------------------------------------------
Aber Diamond Corp. (Metals & Mining)* 237,100 $7,501,844
- -------------------------------------------------------------------------------------------------
Axcan Pharma, Inc. (Pharmaceuticals)*^ 91,000 1,607,970
- -------------------------------------------------------------------------------------------------
Fairmont Hotels Resorts, Inc. (Gaming & Lodging)^ 37,600 1,014,824
- -------------------------------------------------------------------------------------------------
Meridian Gold, Inc. (Precious Metals & Minerals)*^ 321,800 4,222,016
- -------------------------------------------------------------------------------------------------
Neurochem, Inc. (Biotechnology)*^ 470,300 6,772,320
- -------------------------------------------------------------------------------------------------
Vasogen, Inc. (Biotechnology)*^ 1,571,700 7,072,650
- -------------------------------------------------------------------------------------------------
Zarlink Semiconductor, Inc. (Electronics)*^ 2,571,100 7,456,190
- -------------------------------------------------------------------------------------------------
$35,647,814
- -------------------------------------------------------------------------------------------------
Ireland - 0.4%
- -------------------------------------------------------------------------------------------------
SkillSoft PLC, ADR*^ 819,500 $5,089,095
- -------------------------------------------------------------------------------------------------
Israel - 1.0%
- -------------------------------------------------------------------------------------------------
AudioCodes Ltd. (Telecommunications - Wireline)* 412,000 $4,667,960
- -------------------------------------------------------------------------------------------------
PowerDsine Ltd. (Electronics)* 469,900 4,802,378
- -------------------------------------------------------------------------------------------------
Retalix Ltd. (Computer Software)*^ 173,603 3,246,376
- -------------------------------------------------------------------------------------------------
$12,716,714
- -------------------------------------------------------------------------------------------------
Total Foreign Stocks $53,453,623
- -------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $1,227,683,641) $1,197,506,469
- -------------------------------------------------------------------------------------------------
Short-Term Obligation - 0.6%
- -------------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
- -------------------------------------------------------------------------------------------------
General Electric Capital Corp., 1.57% due 9/01/04,
at Amortized Cost $7,650,000 $7,650,000
- -------------------------------------------------------------------------------------------------
Collateral for Securities Loaned - 23.7%
- -------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio, at Cost and
Net Asset Value 292,129,014 $292,129,014
- -------------------------------------------------------------------------------------------------
Repurchase Agreement - 1.4%
- -------------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
- -------------------------------------------------------------------------------------------------
Morgan Stanley, 1.57%, dated 8/31/04, due 9/1/04, total
to be received $17,579,767 (secured by various U.S.
Treasury and Federal Agency obligations in a jointly
traded account), at Cost $17,579,000 $17,579,000
- -------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,545,041,655) $1,514,864,483
- -------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - (22.7)% (279,889,711)
- -------------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,234,974,772
- -------------------------------------------------------------------------------------------------
* Non-income producing security.
^ All or a portion of this security is on loan.
## SEC Rule 144A restriction.
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------------------------------
This statement represents your fund's balance sheet, which details the assets and liabilities
composing the total value of your fund.
AT 8/31/04
ASSETS
Investments, at value, including $298,678,730 of
Investments, at value, including $284,711,820 of
securities on loan (identified cost, $1,545,041,655) $1,514,864,483
- -----------------------------------------------------------------------------------------------------
Cash 116,862
- -----------------------------------------------------------------------------------------------------
Receivable for investments sold 23,197,126
- -----------------------------------------------------------------------------------------------------
Receivable for fund shares sold 1,137,031
- -----------------------------------------------------------------------------------------------------
Interest and dividends receivable 162,116
- -----------------------------------------------------------------------------------------------------
Receivable from administrative proceeding settlement 171,376
- -----------------------------------------------------------------------------------------------------
Other assets 724
- -----------------------------------------------------------------------------------------------------
Total assets $1,539,649,718
- -----------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased $5,430,448
- -----------------------------------------------------------------------------------------------------
Payable for fund shares reacquired 6,494,421
- -----------------------------------------------------------------------------------------------------
Collateral for securities loaned, at value 292,129,014
- -----------------------------------------------------------------------------------------------------
Payable to affiliates
- ------------------------------------------------------------------------------
Management fee 30,414
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 265,685
- -----------------------------------------------------------------------------------------------------
Distribution and service fee 15,899
- -----------------------------------------------------------------------------------------------------
Administrative fee 159
- -----------------------------------------------------------------------------------------------------
Program manager fee 6
- -----------------------------------------------------------------------------------------------------
Administrative service fee 3
- -----------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 308,897
- -----------------------------------------------------------------------------------------------------
Total liabilities $304,674,946
- -----------------------------------------------------------------------------------------------------
Net assets $1,234,974,772
- -----------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Paid-in capital $1,684,943,581
- -----------------------------------------------------------------------------------------------------
Unrealized depreciation on investments (30,177,172)
- -----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (419,777,931)
- -----------------------------------------------------------------------------------------------------
Accumulated net investment loss (13,706)
- -----------------------------------------------------------------------------------------------------
Net assets $1,234,974,772
- -----------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 91,860,111
- -----------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued
Class A shares
Net assets $824,708,240
- -----------------------------------------------------------------------------------------------------
Shares outstanding 60,969,974
- -----------------------------------------------------------------------------------------------------
Net asset value per share $13.53
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/94.25X$13.53) $14.36
- -----------------------------------------------------------------------------------------------------
Class B shares
Net assets $231,653,368
- -----------------------------------------------------------------------------------------------------
Shares outstanding 17,699,304
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $13.09
- -----------------------------------------------------------------------------------------------------
Class C shares
Net assets $67,101,467
- -----------------------------------------------------------------------------------------------------
Shares outstanding 5,120,490
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $13.10
- -----------------------------------------------------------------------------------------------------
Class I shares
Net assets $103,031,374
- -----------------------------------------------------------------------------------------------------
Shares outstanding 7,440,986
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $13.85
- -----------------------------------------------------------------------------------------------------
Class R1 shares
Net assets $7,262,391
- -----------------------------------------------------------------------------------------------------
Shares outstanding 537,995
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $13.50
- -----------------------------------------------------------------------------------------------------
Class R2 shares
Net assets $453,530
- -----------------------------------------------------------------------------------------------------
Shares outstanding 33,657.34
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $13.47
- -----------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued
Class 529A shares
Net assets $389,877
- -----------------------------------------------------------------------------------------------------
Shares outstanding 28,954.67
- -----------------------------------------------------------------------------------------------------
Net asset value and redemption price per share $13.47
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/94.25X$13.47) $14.29
- -----------------------------------------------------------------------------------------------------
Class 529B shares
Net assets $134,733
- -----------------------------------------------------------------------------------------------------
Shares outstanding 10,348
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $13.02
- -----------------------------------------------------------------------------------------------------
Class 529C shares
Net assets $239,792
- -----------------------------------------------------------------------------------------------------
Shares outstanding 18,402
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $13.03
- -----------------------------------------------------------------------------------------------------
On sales of $50,000 or more, the offering prices of Class A and Class 529A shares are reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A, Class B, Class C,
Class 529B, and Class 529C shares.
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
This statement describes how much your fund received in investment income and
paid in expenses. It also describes any gains and/or losses generated by fund
operations.
FOR YEAR ENDED 8/31/04
NET INVESTMENT INCOME
Income
- -----------------------------------------------------------------------------------------------------
Dividends $3,403,864
- -----------------------------------------------------------------------------------------------------
Income on securities loaned 810,216
- -----------------------------------------------------------------------------------------------------
Interest 374,440
- -----------------------------------------------------------------------------------------------------
Other# 171,376
- -----------------------------------------------------------------------------------------------------
Total investment income $4,759,896
- -----------------------------------------------------------------------------------------------------
Expenses
- -----------------------------------------------------------------------------------------------------
Management fee $13,725,226
- -----------------------------------------------------------------------------------------------------
Trustees' compensation 36,241
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 3,060,584
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class A) 3,654,794
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class B) 2,818,507
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class C) 833,746
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class R1) 26,166
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class R2) 230
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529A) 1,124
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529B) 1,163
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529C) 2,247
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529A) 803
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529B) 291
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529C) 562
- -----------------------------------------------------------------------------------------------------
Administrative service fee (Class R2) 115
- -----------------------------------------------------------------------------------------------------
Administrative fee 127,863
- -----------------------------------------------------------------------------------------------------
Custodian fee 344,699
- -----------------------------------------------------------------------------------------------------
Printing 180,202
- -----------------------------------------------------------------------------------------------------
Postage 116,531
- -----------------------------------------------------------------------------------------------------
Auditing fees 35,790
- -----------------------------------------------------------------------------------------------------
Legal fees 15,534
- -----------------------------------------------------------------------------------------------------
Miscellaneous 88,451
- -----------------------------------------------------------------------------------------------------
Total expenses $25,070,869
- -----------------------------------------------------------------------------------------------------
Reduction of expenses by investment adviser (135)
- -----------------------------------------------------------------------------------------------------
Fees paid indirectly (11,835)
- -----------------------------------------------------------------------------------------------------
Net expenses $25,058,899
- -----------------------------------------------------------------------------------------------------
Net investment loss $(20,299,003)
- -----------------------------------------------------------------------------------------------------
Statement of Operations - continued
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (identified cost basis)
- -----------------------------------------------------------------------------------------------------
Investment transactions $210,951,667
- -----------------------------------------------------------------------------------------------------
Foreign currency transactions 1,802
- -----------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign
currency transactions $210,953,469
- -----------------------------------------------------------------------------------------------------
Change in unrealized depreciation on investments $(288,980,394)
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized loss on investments and
foreign currency $(78,026,925)
- -----------------------------------------------------------------------------------------------------
Decrease in net assets from operations $(98,325,928)
- -----------------------------------------------------------------------------------------------------
# A non-recurring accrual recorded as a result of an administrative proceeding regarding disclosure
of brokerage allocation practices in connection with fund sales, as described in the Legal
Proceedings and Transactions with Affiliates footnotes.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------------------------
This statement describes the increases and/or decreases in net assets resulting
from operations, any distributions, and any shareholder transactions.
FOR YEARS ENDED 8/31 2004 2003
INCREASE IN NET ASSETS
OPERATIONS
Net investment loss $(20,299,003) $(14,400,066)
- -------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions 210,953,469 (44,256,550)
- -------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments (288,980,394) 302,185,359
- ----------------------------------------------------------- -------------- ------------
Increase (decrease) in net assets from operations $(98,325,928) $243,528,743
- ----------------------------------------------------------- -------------- ------------
Net increase (decrease) in net assets from fund share
transactions $(120,252,572) $20,105,464
- ----------------------------------------------------------- -------------- ------------
Redemption fees $1,904 $--
- ----------------------------------------------------------- -------------- ------------
Total increase (decrease) in net assets $(218,576,596) $263,634,207
- ----------------------------------------------------------- -------------- ------------
NET ASSETS
At beginning of period $1,453,551,368 $1,189,917,161
- -------------------------------------------------------------------------------------------------------
At end of period (including accumulated net investment
loss of $13,706 and $14,627, respectively) $1,234,974,772 $1,453,551,368
- -------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the fund's financial performance for the past 5 years (or,
if shorter, the period of the fund's operation). Certain information reflects financial results for a single fund share. The
total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund
(assuming reinvestment of all distributions) held for the entire period. This information has been audited by the fund's
independent registered public accounting firm, whose report, together with the fund's financial statements, are included in
this report.
YEARS ENDED 8/31
-----------------------------------------------------------------------------------
CLASS A 2004 2003 2002 2001 2000
Net asset value, beginning of period $14.57 $11.99 $16.17 $25.00 $14.59
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.18) $(0.13) $(0.18) $(0.20) $(0.26)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and foreign
currency (0.86) 2.71 (4.00) (5.02) 11.28
- --------------------------------------------- ------ ------ ------ ------ ------
Total from investment operations $(1.04) $2.58 $(4.18) $(5.22) $11.02
- --------------------------------------------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments
and foreign currency transactions $-- $-- $-- $(3.23) $(0.61)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- (0.00)+ (0.30) --
- -----------------------------------------------------------------------------------------------------------------------------
From paid-in capital -- -- -- (0.08) --
- --------------------------------------------- ------ ------ ------ ------ ------
Total distributions declared to
shareholders $-- $-- $(0.00)+ $(3.61) $(0.61)
- --------------------------------------------- ------ ------ ------ ------ ------
Redemption fees added to paid-in
capital# $(0.00)+ $-- $-- $-- $--
- --------------------------------------------- ------ ------ ------ ------ ------
Net asset value, end of period $13.53 $14.57 $11.99 $16.17 $25.00
- --------------------------------------------- ------ ------ ------ ------ ------
Total return (%)(+) (7.14)^^ 21.52 (25.85) (22.37) 76.63
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
----------------------------------------------------------------------------------
CLASS A (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.51 1.58 1.58 1.52 1.53
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.20) (1.11) (1.21) (1.06) (1.17)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 122 104 102 49 103
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $824,708 $1,004,473 $822,193 $1,050,554 $904,142
- -----------------------------------------------------------------------------------------------------------------------------
(S) Subject to reimbursement by the fund, the investment adviser agreed to maintain the expenses of the fund, exclusive of
management and distribution and service fees, at not more than 0.25% of average daily net assets, effective November 1,
1997 through December 31, 1999, and 0.30% through August 31, 2000. For the year ended August 31, 2004, the investment
adviser has voluntarily agreed to reimburse the fund for its proportional share of Independent Chief Compliance Officer
services paid to Tarantino LLC. To the extent actual expenses were over/under these limitations and the
waivers/reimbursement had not been in place for the periods indicated, the net investment loss per share and the ratios
would have been:
Net investment loss $(0.18) $-- $-- $-- $(0.26)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.51 -- -- -- 1.51
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.20) -- -- -- (1.15)
- -----------------------------------------------------------------------------------------------------------------------------
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
-------------------------------------------------------------------------------
CLASS B 2004 2003 2002 2001 2000
Net asset value, beginning of period $14.19 $11.75 $15.95 $24.71 $14.46
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.27) $(0.21) $(0.28) $(0.32) $(0.39)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency (0.83) 2.65 (3.92) (4.97) 11.17
- ----------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $(1.10) $2.44 $(4.20) $(5.29) $10.78
- ----------------------------------------------- -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments and
foreign currency transactions $-- $-- $-- $(3.10) $(0.53)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- (0.00)+ (0.29) --
- -----------------------------------------------------------------------------------------------------------------------------
From paid-in capital -- -- -- (0.08) --
- ----------------------------------------------- -------- ------ ------ ------ ------
Total distributions declared to
shareholders $-- $-- $(0.00)+ $(3.47) $(0.53)
- ----------------------------------------------- -------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $(0.00)+ $-- $-- $-- $--
- ----------------------------------------------- -------- ------ ------ ------ ------
Net asset value, end of period $13.09 $14.19 $11.75 $15.95 $24.71
- ----------------------------------------------- -------- ------ ------ ------ ------
Total return (%) )^
(7.75^ 20.77 (26.33) (22.92) 75.50
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
------------------------------------------------------------------------------
CLASS B (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.15 2.23 2.23 2.17 2.18
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.84) (1.76) (1.86) (1.70) (1.81)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 122 104 102 49 103
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $231,653 $271,580 $232,792 $352,886 $483,805
- -----------------------------------------------------------------------------------------------------------------------------
(S) Subject to reimbursement by the fund, the investment adviser agreed to maintain the expenses of the fund, exclusive of
management and distribution and service fees, at not more than 0.30% of average daily net assets from January 1, 2000,
through August 31, 2000. Prior to January 1, 2000, the investment adviser agreed to maintain the expenses of the fund,
exclusive of management and distribution and service fees, at not more than 0.25% average daily net assets. For the year
ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of
Independent Chief Compliance Officer services paid to Tarantino LLC. To the extent actual expenses were over/under these
limitations and the reimbursement had not been in place, the net investment loss per share and the ratios would have been:
Net investment loss $(0.27) $-- $-- $-- $(0.39)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.15 -- -- -- 2.16
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.84) -- -- -- (1.79)
- -----------------------------------------------------------------------------------------------------------------------------
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
-------------------------------------------------------------------------------
CLASS C 2004 2003 2002 2001 2000
Net asset value, beginning of period $14.21 $11.77 $15.97 $24.73 $14.47
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.27) $(0.21) $(0.28) $(0.32) $(0.39)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency (0.84) 2.65 (3.92) (4.97) 11.18
- ----------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $(1.11) $2.44 $(4.20) $(5.29) $10.79
- ----------------------------------------------- -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments and
foreign currency transactions $-- $-- $-- $(3.10) $(0.53)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- (0.00)+ (0.29) --
- -----------------------------------------------------------------------------------------------------------------------------
From paid-in capital -- -- -- (0.08) --
- ----------------------------------------------- -------- ------ ------ ------ ------
Total distributions declared to
shareholders $-- $-- $(0.00)+ $(3.47) $(0.53)
- ----------------------------------------------- -------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $(0.00)+ $-- $-- $-- $--
- ----------------------------------------------- -------- ------ ------ ------ ------
Net asset value, end of period $13.10 $14.21 $11.77 $15.97 $24.73
- ----------------------------------------------- -------- ------ ------ ------ ------
Total return (%) (7.81)^^ 20.73 (26.34) (22.87) 75.57
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
------------------------------------------------------------------------------
CLASS C (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.15 2.23 2.23 2.17 2.18
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.84) (1.76) (1.86) (1.70) (1.79)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 122 104 102 49 103
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $67,102 $84,391 $87,271 $136,530 $202,891
- -----------------------------------------------------------------------------------------------------------------------------
(S) Subject to reimbursement by the fund, the investment adviser agreed to maintain the expenses of the fund, exclusive of
management and distribution and service fees, at not more than 0.30% of average daily net assets from January 1, 2000,
through August 31, 2000. Prior to January 1, 2000, the investment adviser agreed to maintain the expenses of the fund,
exclusive of management and distribution and service fees, at not more than 0.25% average daily net assets. For the year
ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of
Independent Chief Compliance Officer services paid to Tarantino LLC. To the extent actual expenses were over/under these
limitations and the reimbursement had not been in place, the net investment loss per share and the ratios would have been:
Net investment loss $(0.27) $-- $-- $-- $(0.39)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.15 -- -- -- 2.16
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.84) -- -- -- (1.77)
- -----------------------------------------------------------------------------------------------------------------------------
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
-------------------------------------------------------------------------------
CLASS I 2004 2003 2002 2001 2000
Net asset value, beginning of period $14.86 $12.19 $16.37 $25.26 $14.71
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.13) $(0.09) $(0.13) $(0.13) $(0.18)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency (0.88) 2.76 (4.05) (5.09) 11.37
- ----------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $(1.01) $2.67 $(4.18) $(5.22) $11.19
- ----------------------------------------------- -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net realized gain on investments and
foreign currency transactions $-- $-- $-- $(3.28) $(0.64)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- (0.00)+ (0.31) --
- -----------------------------------------------------------------------------------------------------------------------------
From paid-in capital -- -- -- (0.08) --
- ----------------------------------------------- -------- ------ ------ ------ ------
Total distributions declared to
shareholders $-- $-- $(0.00)+ $(3.67) $(0.64)
- ----------------------------------------------- -------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $(0.00)+ $-- $-- $-- $--
- ----------------------------------------------- -------- ------ ------ ------ ------
Net asset value, end of period $13.85 $14.86 $12.19 $16.37 $25.26
- ----------------------------------------------- -------- ------ ------ ------ ------
Total return (%) (6.80)^^ 21.90 (25.58) (22.09) 77.22
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
------------------------------------------------------------------------------
CLASS I (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.16 1.23 1.23 1.17 1.18
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.84) (0.75) (0.86) (0.71) (0.83)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 122 104 102 49 103
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $103,031 $90,872 $47,641 $52,121 $35,311
- -----------------------------------------------------------------------------------------------------------------------------
(S) Subject to reimbursement by the fund, the investment adviser agreed to maintain the expenses of the fund, exclusive of
management fee, at not more than 0.25% of average daily net assets, effective November 1, 1997 through December 31, 1999,
and 0.30% through August 31, 2000. For the year ended August 31, 2004, the investment adviser has voluntarily agreed to
reimburse the fund for its proportional share of Independent Chief Compliance Officer services paid to Tarantino LLC. To
the extent actual expenses were over/under these limitations and the waivers/reimbursement had not been in place for the
periods indicated, the net investment loss per share and the ratios would have been:
Net investment loss $(0.13) $-- $-- $-- $(0.18)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.16 -- -- -- 1.16
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.84) -- -- -- (0.81)
- -----------------------------------------------------------------------------------------------------------------------------
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEAR ENDED PERIOD ENDED
CLASS R1 8/31/04 8/31/03*
Net asset value, beginning of period $14.57 $11.43
- -------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.20) $(0.11)
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
foreign currency (0.87) 3.25
- ---------------------------------------------------------------------- -------- ------
Total from investment operations $(1.07) $3.14
- ---------------------------------------------------------------------- -------- ------
Redemption fees added to paid-in capital# $(0.00)+++ $--
- ---------------------------------------------------------------------- -------- ------
Net asset value, end of period $13.50 $14.57
- ---------------------------------------------------------------------- -------- ------
Total return (%) (7.34)^^ 27.47++
- -------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.66 1.78+
- -------------------------------------------------------------------------------------------------------
Net investment loss (1.32) (1.26)+
- -------------------------------------------------------------------------------------------------------
Portfolio turnover 122 104
- -------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $7,262 $1,824
- -------------------------------------------------------------------------------------------------------
(S) For the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the
fund for its proportional share of Independent Chief Compliance Officer services paid to Tarantino
LLC. If this fee had been incurred by the fund, the net investment loss per share and the ratios
would have been:
Net investment loss $(0.20) $--
- -------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.66 --
- -------------------------------------------------------------------------------------------------------
Net investment loss (1.32) --
- -------------------------------------------------------------------------------------------------------
* For the period from the inception of Class R1 shares, December 31, 2002, through August
31, 2003.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as
a result of an administrative proceeding regarding disclosure of brokerage allocation practices in
connection with fund sales, as described in the Legal Proceedings and Transactions with Affiliates
footnotes. The non-recurring accrual did not have a material impact on the net asset value per share
based on shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
PERIOD ENDED
CLASS R2 8/31/04*
Net asset value, beginning of period $15.23
- ---------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.11)
- ------------------------------------------------------------------ --------
Net realized and unrealized loss on investments and
foreign currency (1.65)
- ------------------------------------------------------------------ --------
Total from investment operations $(1.76)
- ------------------------------------------------------------------ --------
Redemption fees added to paid-in capital# $(0.00)+++
- ------------------------------------------------------------------ --------
Net asset value, end of period $13.47
- ------------------------------------------------------------------ --------
Total return (%) (11.56)++^^
- ---------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.73+
- ---------------------------------------------------------------------------
Net investment loss (1.23)+
- ---------------------------------------------------------------------------
Portfolio turnover 122
- ---------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $454
- ---------------------------------------------------------------------------
(S) For the year ended August 31, 2004, the investment adviser has voluntarily
agreed to reimburse the fund for its proportional share of Independent Chief
Compliance Officer services paid to Tarantino LLC. If this fee had been
incurred by the fund, the net investment loss per share and the ratios would
have been:
Net investment loss $(0.11)
- ---------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.73
- ---------------------------------------------------------------------------
Net investment loss (1.23)
- ---------------------------------------------------------------------------
* For the period from the inception of Class R2 shares, October 31, 2003,
through August 31, 2004.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
^^ The fund's net asset value and total return calculation include a
non-recurring accrual recorded as a result of an administrative proceeding
regarding disclosure of brokerage allocation practices in connection with
fund sales, as described in the Legal Proceedings and Transactions with
Affiliates footnotes. The non-recurring accrual did not have a material
impact on the net asset value per share based on shares outstanding on the
day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEAR ENDED 8/31,
--------------------------- PERIOD ENDED
CLASS 529A 2004 2003 8/31/02*
Net asset value, beginning of period $14.53 $11.99 $11.85
- ------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.21) $(0.16) $(0.01)
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments
and foreign currency (0.85) 2.70 0.15
- ------------------------------------------------------------- ------- ------ ------
Total from investment operations $(1.06) $2.54 $0.14
- ------------------------------------------------------------- ------- ------ ------
Redemption fees added to paid-in capital# $(0.00)+++ $-- $--
- ------------------------------------------------------------- ------- ------ ------
Net asset value, end of period $13.47 $14.53 $11.99
- ------------------------------------------------------------- ------- ------ ------
Total return (%)(+) (7.30)^^ 21.18 1.18++
- ------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.75 1.84 1.83+
- ------------------------------------------------------------------------------------------------------------------
Net investment loss (1.43) (1.35) (1.20)+
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover 122 104 102
- ------------------------------------------------------------------------------------------------------------------
Net assets at end of year (000 Omitted) $390 $180 $10
- ------------------------------------------------------------------------------------------------------------------
(S) For the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the
fund for its proportional share of Independent Chief Compliance Officer services paid to Tarantino
LLC. If this fee had been incurred by the fund, the net investment loss per share and the ratios
would have been:
Net investment loss $(0.21) $-- $--
- ------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.75 -- --
- ------------------------------------------------------------------------------------------------------------------
Net investment loss (1.43) -- --
- ------------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529A shares, July 31, 2002, through August 31, 2002.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
(+) Total returns for Class 529A shares do not include the applicable sales charge. If the charge had
been included, the results would have been lower.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as
a result of an administrative proceeding regarding disclosure of brokerage allocation practices in
connection with fund sales, as described in the Legal Proceedings and Transactions with Affiliates
footnotes. The non-recurring accrual did not have a material impact on the net asset value per share
based on shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEAR ENDED 8/31,
----------------------------- PERIOD ENDED
CLASS 529B 2004 2003 8/31/02*
Net asset value, beginning of period $14.15 $11.75 $11.62
- ------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.30) $(0.24) $(0.02)
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments
and foreign currency (0.83) 2.64 0.15
- ------------------------------------------------------------- ------- ------ ------
Total from investment operations $(1.13) $2.40 $0.13
- ------------------------------------------------------------- ------- ------ ------
Redemption fees added to paid-in capital# $(0.00)+++ $-- $--
- ------------------------------------------------------------- ------- ------ ------
Net asset value, end of period $13.02 $14.15 $11.75
- ------------------------------------------------------------- ------- ------ ------
Total return (%) (7.99)^^ 20.43 1.12++
- ------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.40 2.49 2.48+
- ------------------------------------------------------------------------------------------------------------------
Net investment loss (2.07) (1.99) (1.87)+
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover 122 104 102
- ------------------------------------------------------------------------------------------------------------------
Net assets at end of year (000 Omitted) $135 $84 $6
- ------------------------------------------------------------------------------------------------------------------
(S) For the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the
fund for its proportional share of Independent Chief Compliance Officer services paid to Tarantino
LLC. If this fee had been incurred by the fund, the net investment loss per share and the ratios
would have been:
Net investment loss $(0.30) $-- $--
- ------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.40 -- --
- ------------------------------------------------------------------------------------------------------------------
Net investment loss (2.07) -- --
- ------------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529B shares, July 31, 2002, through August 31, 2002.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as
a result of an administrative proceeding regarding disclosure of brokerage allocation practices in
connection with fund sales, as described in the Legal Proceedings and Transactions with Affiliates
footnotes. The non-recurring accrual did not have a material impact on the net asset value per share
based on shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEAR ENDED 8/31,
----------------------------- PERIOD ENDED
CLASS 529C 2004 2003 8/31/02*
Net asset value, beginning of period $14.16 $11.77 $11.64
- ------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.31) $(0.24) $(0.02)
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments
and foreign currency (0.82) 2.63 0.15
- ------------------------------------------------------------- ------- ------ ------
Total from investment operations $(1.13) $2.39 $0.13
- ------------------------------------------------------------- ------- ------ ------
Redemption fees added to paid-in capital# $(0.00)+++ $-- $--
- ------------------------------------------------------------- ------- ------ ------
Net asset value, end of period $13.03 $14.16 $11.77
- ------------------------------------------------------------- ------- ------ ------
Total return (%) (7.98)^^ 20.31 1.12++
- ------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.40 2.50 2.48+
- ------------------------------------------------------------------------------------------------------------------
Net investment loss (2.08) (1.99) (1.88)+
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover 122 104 102
- ------------------------------------------------------------------------------------------------------------------
Net assets at end of year (000 Omitted) $240 $147 $5
- ------------------------------------------------------------------------------------------------------------------
(S) For the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the
fund for its proportional share of Independent Chief Compliance Officer services paid to Tarantino
LLC. If this fee had been incurred by the fund, the net investment loss per share and the ratios
would have been:
Net investment loss $(0.31) $-- $--
- ------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.40 -- --
- ------------------------------------------------------------------------------------------------------------------
Net investment loss (2.08) -- --
- ------------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529C shares, July 31, 2002, through August 31, 2002.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
^^ The fund's net asset value and total return calculation include a non-recurring accrual
recorded as a result of an administrative proceeding regarding disclosure of brokerage
allocation practices in connection with fund sales, as described in the Legal Proceedings
and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on shares outstanding on the day
the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(1) BUSINESS AND ORGANIZATION
MFS New Discovery Fund (the fund) is a diversified series of MFS Series Trust I
(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 U.S.
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.
The fund can invest in foreign securities. 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 in the fund's portfolio for which
market quotations are available are valued at the last sale or official closing
price as reported by an independent pricing service on the primary market or
exchange on which they are primarily traded, or at the last quoted bid price
for securities in which there were no sales during the day. Equity securities
traded over the counter are valued at the last sales price traded each day as
reported by an independent pricing service, or to the extent there are no sales
reported, such securities are valued on the basis of quotations obtained from
brokers and dealers. Short-term obligations with a remaining maturity in excess
of 60 days will be valued upon dealer-supplied valuations. All other short-term
obligations in the fund's portfolio are valued at amortized cost, which
constitutes market value as determined by the Board of Trustees. Money market
mutual funds are valued at net asset value. 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. When
pricing service information or market quotations are not readily available,
securities are priced at fair value as determined under the direction of the
Board of Trustees. For example, significant events (such as movement in the
U.S. securities market, or other regional and local developments) may occur
between the time that foreign markets close (where the security is principally
traded) and the time that the fund calculates its net asset value (generally,
the close of the NYSE) that may impact the value of securities traded in these
foreign markets. In these cases, the fund may utilize information from an
external vendor or other sources to adjust closing market quotations of foreign
equity securities to reflect what it believes to be the fair value of the
securities as of the fund's valuation time. Because the frequency of
significant events is not predictable, fair valuation of foreign equity
securities may occur on a frequent basis.
REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements with
institutions that the fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The fund requires
that the securities collateral in a repurchase transaction be transferred to
the custodian in a manner sufficient to enable the fund to obtain those
securities in the event of a default under the repurchase agreement. The fund
monitors, on a daily basis, the value of the collateral to ensure that its
value, including accrued interest, is greater than amounts owed to the fund
under each such repurchase agreement. The fund, along with other affiliated
entities of Massachusetts Financial Services Company (MFS), may utilize a joint
trading account for the purpose of entering into one or more repurchase
agreements.
FOREIGN CURRENCY TRANSLATION - 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.
SECURITY LOANS - State Street Bank and Trust Company ("State Street"), as
lending agent, may loan the securities of the fund to certain qualified
institutions (the "Borrowers") approved by the fund. The loans are
collateralized at all times by cash and/or U.S. Treasury securities in an
amount at least equal to the market value of the securities loaned. State
Street provides the fund with indemnification against Borrower default. The
fund bears the risk of loss with respect to the investment of cash collateral.
On loans collateralized by cash, the cash collateral is invested in a money
market fund or short-term securities. A portion of the income generated upon
investment of the collateral is remitted to the Borrowers, and the remainder is
allocated between the fund and the lending agent. On loans collateralized by
U.S. Treasury securities, a fee is received from the Borrower, and is allocated
between the fund and the lending agent. The dividend and interest income earned
on the securities loaned is accounted for in the same manner as other dividend
and interest income.
SHORT TERM FEES - For purchases made on or after July 1, 2004, the fund will
charge a 2% redemption fee (which is retained by the fund) on proceeds from
shares redeemed or exchanged within 5 business days following their acquisition
(either by purchase or exchange). The fund may change the redemption fee period
in the future, including changes in connection with pending Securities and
Exchange rules. See the fund's prospectus for details. These fees are accounted
for as an addition to paid-in-capital.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and discount is amortized or accreted for financial statement purposes in
accordance with U.S. generally accepted accounting principles. All discount is
accreted for tax reporting purposes as required by federal income tax
regulations. Dividends received in cash are recorded on the ex-dividend date.
FEES PAID INDIRECTLY - The fund's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by the
fund. During the year ended August 31, 2004, the fund's custodian fees were
reduced by $10,716 under this arrangement. The fund has entered into a
commission recapture agreement, under which certain brokers will credit the
fund a portion of the commissions generated, to offset certain expenses of the
fund. For the year ended August 31, 2004, the fund's miscellaneous expenses
were reduced by $1,119 under this agreement. These amounts are shown as a
reduction of total 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 net 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 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. Common
types of book and tax differences that could occur include differences in
accounting for currency transactions, wash sales, and capital losses.
The fund paid no distributions for the years ended August 31, 2004 and August
31, 2003.
During the year ended August 31, 2004, accumulated net investment loss
decreased by $20,299,924, accumulated net realized loss on investments and
foreign currency transactions decreased by $55,252 and paid-in capital
decreased by $20,355,176 due to differences between book and tax accounting for
currency transactions and net operating losses. This change had no effect on
the net assets or net asset value per share.
As of August 31, 2004, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed ordinary income $--
----------------------------------------------------------
Capital loss carryforward (417,302,416)
----------------------------------------------------------
Unrealized depreciation (32,652,687)
----------------------------------------------------------
Other temporary differences (13,706)
----------------------------------------------------------
For federal income tax purposes, the capital loss carryforward may be applied
against any net taxable realized gains of each succeeding year until the
earlier of its utilization or expiration as follows:
EXPIRATION DATE
August 31, 2010 $(63,294,814)
----------------------------------------------------------
August 31, 2011 (354,007,602)
----------------------------------------------------------
Total $(417,302,416)
----------------------------------------------------------
MULTIPLE CLASSES OF SHARES OF BENEFICIAL INTEREST - The fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the fund based on daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class. Differences in per share dividend rates are
generally due to differences in separate class expenses. Class B and Class 529B
shares will convert to Class A and Class 529A shares, respectively,
approximately eight years after purchase.
(3) TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISER - The fund has an investment advisory agreement with 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 0.90% of the fund's average daily net assets. Effective
September 1, 2004, MFS has agreed to a voluntary reduction in its management
fee to an annual rate of 0.80% on net assets up to $1.5 billion and further
reduced to 0.75% on net assets in excess of $1.5 billion. This fee reduction
arrangement may only be changed with approval by the Board of Trustees which
oversees the fund.
The fund pays compensation to its Independent Trustees in the form of a
retainer, attendance fees, and additional compensation to Board and Committee
chairpersons, and 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 Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC). On January 1, 2002, the
Trustees terminated the Independent trustee unfunded defined benefit plan for
active trustees. Included in Trustees' compensation is a pension expense of
$1,229 for retired Independent Trustees for the year ended August 31, 2004.
The MFS funds, including this fund, have entered into a services agreement (the
"Agreement") which provides for payment of fees by the MFS funds to Tarantino
LLC in return for the provision of services of an Independent Chief Compliance
Officer (ICCO) for the MFS funds. The ICCO is an officer of the MFS funds and
the sole member of Tarantino LLC. MFS has agreed to reimburse each of the MFS
funds for a proportional share of substantially all of the payments made by the
MFS funds to Tarantino LLC and also to provide office space and other
administrative support and supplies to the ICCO. The MFS funds can terminate
the Agreement with Tarantino LLC at any time under the terms of the Agreement.
The fund's investment adviser, MFS, has been the subject of an administrative
proceeding regarding disclosure of brokerage allocation practices in connection
with fund sales, as described in the Legal Proceedings Footnote. Pursuant to
the SEC Order, on July 28, 2004, MFS transferred $1.00 in disgorgement and $50
million in penalty to the SEC (the "Payments"). A plan for distribution of
these Payments has been submitted to the SEC. Contemporaneous with the
transfer, the fund accrued an estimate of the amount to be received upon final
approval of the plan of distribution. The non- recurring accrual in the amount
of $171,376 did not have a material impact on the net asset value per share
based on the shares outstanding on the day the proceeds were recorded.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment advisor. Under an administrative services
agreement between the funds and MFS, MFS is entitled to partial reimbursement
of the costs MFS incurs to provide these services, subject to review and
approval by the Board of Trustees. Each fund is allocated a portion of these
administrative costs based on its size and relative average net assets. Prior
to April 1, 2004, the fund paid MFS an administrative fee up to the following
annual percentage rates of the fund's average daily net assets:
First $2 billion 0.0175%
----------------------------------------------------------
Next $2.5 billion 0.0130%
----------------------------------------------------------
Next $2.5 billion 0.0005%
----------------------------------------------------------
In excess of $7 billion 0.0000%
----------------------------------------------------------
Effective April 1, 2004, the fund paid MFS an administrative fee up to the
following annual percentage rates of the fund's average daily net assets:
First $2 billion 0.01120%
----------------------------------------------------------
Next $2.5 billion 0.00832%
----------------------------------------------------------
Next $2.5 billion 0.00032%
----------------------------------------------------------
In excess of $7 billion 0.00000%
----------------------------------------------------------
For the year ended August 31, 2004, the fund paid MFS $127,863, equivalent to
0.00834% of average daily net assets, to partially reimburse MFS for the costs
of providing administrative services.
In addition to the administrative services provided by MFS to the fund as
described above, MFS is responsible for providing certain administrative
services with respect to Class R2 shares. These services include various
administrative, recordkeeping, and communication/educational services with
respect to the retirement plans which invest in Class R2 shares, and may be
provided directly by MFS or by a third party. The fund pays an annual 0.25%
administrative service fee solely from the assets of Class R2 shares to MFS for
the provision of these services.
DISTRIBUTOR - MFD, a wholly owned subsidiary of MFS, as distributor, received
$109,539 and $1,224 for the year ended August 31, 2004, as its portion of the
sales charge on sales of Class A and Class 529A shares of the fund,
respectively.
The Trustees have adopted a distribution plan for Class A, Class B, Class C,
Class R1, Class R2, Class 529A, Class 529B, and Class 529C shares pursuant to
rule 12b-1 of the Investment Company Act of 1940 as follows:
The fund's distribution plan provides that the fund will pay MFD an annual
percentage of its average daily net assets attributable to certain share
classes in order that MFD may pay expenses on behalf of the fund related to the
distribution and servicing of its shares. These expenses include a service fee
paid to each securities dealer that enters into a sales agreement with MFD
based on the average daily net assets of accounts attributable to such dealers.
The fees are calculated based on each class' average daily net assets. The
maximum distribution and service fees for each class of shares are as follows:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Distribution Fee 0.10% 0.75% 0.75% 0.25% 0.25%
- ------------------------------------------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25% 0.25% 0.25%
- ------------------------------------------------------------------------------------------------------------------
Total Distribution Plan 0.35% 1.00% 1.00% 0.50% 0.50%
- ------------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Distribution Fee 0.25% 0.75% 0.75%
- ------------------------------------------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25%
- ------------------------------------------------------------------------------------------------------------------
Total Distribution Plan 0.50% 1.00% 1.00%
- ------------------------------------------------------------------------------------------------------------------
MFD retains the service fee for accounts not attributable to a securities dealer, which for the year ended
August 31, 2004 amounted to:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Service Fee Retained by MFD $34,018 $3,515 $1,735 $7 $13
- ------------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Service Fee Retained by MFD $180 $14 $58
- ------------------------------------------------------------------------------------------------------------------
Fees incurred under the distribution plan during the year ended August 31, 2004 were as follows:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Effective Annual Percentage Rates 0.35% 1.00% 1.00% 0.50% 0.50%
- ------------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Effective Annual Percentage Rates 0.35% 1.00% 1.00%
- ------------------------------------------------------------------------------------------------------------------
Payment of the 0.15% per annum portion of the Class 529A distribution fee that
is not currently being charged will be implemented on such date as the
Trustees of the Trust may determine.
Certain Class A, Class C and Class 529C shares are subject to a contingent
deferred sales charge in the event of a shareholder redemption within, for
Class A shares, 12 months following the purchase, and, for Class C and Class
529C shares, the first year from the end of the calendar month of purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B and Class 529B shares in the event of a shareholder redemption within six
years from the end of the calendar month of purchase. MFD receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the year ended August 31, 2004 were as follows:
CLASS A CLASS B CLASS C CLASS 529B CLASS 529C
Contingent Deferred Sales
Charges Imposed $55,397 $432,477 $9,440 $21 $0
- --------------------------------------------------------------------------------
The fund has and may from time to time enter into contracts with program
managers and other parties that administer the tuition programs through which
an investment in the fund's 529 share classes is made. The fund has entered
into an agreement with MFD pursuant to which MFD receives an annual fee of up
to 0.35% from the fund based solely upon the value of the fund's 529 share
classes attributable to tuition programs to which MFD, or a third party which
contracts with MFD, provides administrative services. The current fee has been
established at 0.25% annually of average net assets of the fund's 529 share
classes attributable to such programs. The fee may only be increased with the
approval of the board of trustees that oversees the fund. The services provided
by MFD, or a third party with which MFD contracts, include recordkeeping and
tax reporting and account services, as well as services designed to maintain
the program's compliance with the Internal Revenue Code and other regulatory
requirements.
SHAREHOLDER SERVICING AGENT - Included in shareholder servicing costs is a fee
paid to MFSC, a wholly owned subsidiary of MFS, for its services as shareholder
servicing agent. The fee, which is calculated as a percentage of the fund's
average daily net assets is set periodically under the supervision of the
fund's Trustees. Prior to April 1, 2004, the fee was set at 0.11% of the fund's
average daily net assets. For the period April 1, 2004 through June 30, 2004,
the fee was set at 0.10% of the fund's average daily net assets. Effective July
1, 2004, the fund is charged up to 0.0861% of its average daily net assets. For
the year ended August 31, 2004, the fund paid MFSC a fee of $1,580,302 for
shareholder services which equated to 0.1031% of the fund's average daily net
assets. Also included in shareholder servicing costs are out-of-pocket
expenses, paid to MFSC, which amounted to $542,600 for the year ended August
31, 2004, as well as other expenses paid to unaffiliated vendors.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$1,817,618,234 and $1,936,320,530, 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 $1,547,517,170
----------------------------------------------------------
Gross unrealized appreciation $104,330,686
----------------------------------------------------------
Gross unrealized depreciation (136,983,373)
----------------------------------------------------------
Net unrealized depreciation $(32,652,687)
----------------------------------------------------------
(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:
Year ended 8/31/04 Year ended 8/31/03
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares sold 27,881,162 $427,444,261 35,664,447 $430,133,582
- -------------------------------------------------------------------------------------------------------------
Shares reacquired (35,845,570) (543,460,338) (35,299,458) (415,394,400)
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) (7,964,408) $(116,016,077) 364,989 $14,739,182
- -------------------------------------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 4,190,532 $62,289,343 5,358,532 $62,805,270
- -------------------------------------------------------------------------------------------------------------
Shares reacquired (5,630,740) (82,666,681) (6,028,202) (69,524,682)
- -------------------------------------------------------------------------------------------------------------
Net decrease (1,440,208) $(20,377,338) (669,670) $(6,719,412)
- -------------------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 1,285,450 $19,079,978 1,776,376 $20,636,995
- -------------------------------------------------------------------------------------------------------------
Shares reacquired (2,103,564) (31,044,196) (3,251,716) (37,093,561)
- -------------------------------------------------------------------------------------------------------------
Net decrease (818,114) $(11,964,218) (1,475,340) $(16,456,566)
- -------------------------------------------------------------------------------------------------------------
CLASS I SHARES
Shares sold 4,167,456 $65,121,180 3,929,334 $47,692,689
- -------------------------------------------------------------------------------------------------------------
Shares reacquired (2,840,698) (44,371,479) (1,723,884) (21,047,940)
- -------------------------------------------------------------------------------------------------------------
Net increase 1,326,758 $20,749,701 2,205,450 $26,644,749
- -------------------------------------------------------------------------------------------------------------
Year ended 8/31/04 Period ended 8/31/03*
SHARES AMOUNT SHARES AMOUNT
CLASS R1 SHARES
Shares sold 678,187 $10,521,406 205,386 $2,552,772
- -------------------------------------------------------------------------------------------------------------
Shares reacquired (265,383) (4,086,141) (80,195) (967,828)
- -------------------------------------------------------------------------------------------------------------
Net increase 412,804 $6,435,265 125,191 $1,584,944
- -------------------------------------------------------------------------------------------------------------
Period ended 8/31/04**
SHARES AMOUNT
CLASS R2 SHARES
Shares sold 48,031 $704,104
- ------------------------------------------------------------------------
Shares reacquired (14,374) (221,632)
- ------------------------------------------------------------------------
Net increase 33,657 $482,472
- ------------------------------------------------------------------------
Year ended 8/31/04 Year ended 8/31/03
SHARES AMOUNT SHARES AMOUNT
CLASS 529A SHARES
Shares sold 17,857 $272,955 12,297 $145,200
- -------------------------------------------------------------------------------------------------------------
Shares reacquired (1,267) (18,993) (763) (10,347)
- -------------------------------------------------------------------------------------------------------------
Net increase 16,590 $253,962 11,534 $134,853
- -------------------------------------------------------------------------------------------------------------
CLASS 529B SHARES
Shares sold 4,746 $70,399 5,471 $63,409
- -------------------------------------------------------------------------------------------------------------
Shares reacquired (316) (4,635) (22) (252)
- -------------------------------------------------------------------------------------------------------------
Net increase 4,430 $65,764 5,449 $63,157
- -------------------------------------------------------------------------------------------------------------
CLASS 529C SHARES
Shares sold 9,841 $145,885 9,964 $114,725
- -------------------------------------------------------------------------------------------------------------
Shares reacquired (1,827) (27,988) (15) (168)
- -------------------------------------------------------------------------------------------------------------
Net increase 8,014 $117,897 9,949 $114,557
- -------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class R1 shares, December 31, 2002, through August 31, 2003.
** For the period from the inception of Class R2 shares, October 31, 2003, through August 31, 2004.
(6) LINE OF CREDIT
The fund and other affiliated funds participate in an $800 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the Federal
Reserve funds rate plus 0.50%. 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 calendar quarter. The commitment fee
allocated to the fund for the year ended August 31, 2004 was $7,953, and is
included in miscellaneous expense. The fund had no significant borrowings
during the year ended August 31, 2004.
(7) LEGAL PROCEEDINGS
On March 31, 2004, MFS settled an administrative proceeding with the Securities
and Exchange Commission ("SEC") regarding disclosure of brokerage allocation
practices in connection with MFS fund sales (the term "MFS funds" means the
open-end registered management investment companies sponsored by MFS). Under
the terms of the settlement, in which MFS neither admitted nor denied any
wrongdoing, MFS agreed to pay (one dollar) $1.00 in disgorgement and $50
million in penalty to certain MFS funds, pursuant to a plan developed by an
independent distribution consultant. The brokerage allocation practices which
were the subject of this proceeding were discontinued by MFS in November 2003.
The agreement with the SEC is reflected in an order of the SEC. Pursuant to the
SEC order, on July 28, 2004, MFS transferred these settlement amounts to the
SEC, and those MFS funds entitled to these settlement amounts accrued an
estimate of their pro rata portion of these amounts. Once the final
distribution plan is approved by the SEC, these amounts will be distributed by
the SEC to the affected MFS funds. The SEC settlement order states that MFS
failed to adequately disclose to the Boards of Trustees and to shareholders of
the MFS funds the specifics of its preferred arrangements with certain
brokerage firms selling MFS fund shares. The SEC settlement order states that
MFS had in place policies designed to obtain best execution of all MFS fund
trades. As part of the settlement, MFS retained an independent compliance
consultant to review the completeness of its current policies and practices
regarding disclosure to MFS fund trustees and to MFS fund shareholders of
strategic alliances between MFS or its affiliates and broker-dealers and other
financial advisers who support the sale of MFS fund shares.
In addition, in February, 2004, MFS reached agreement with the SEC, the New
York Attorney General ("NYAG") and the Bureau of Securities Regulation of the
State of New Hampshire ("NH") to settle administrative proceedings alleging
false and misleading information in certain MFS retail fund prospectuses
regarding market timing and related matters (the "February Settlements"). These
regulators alleged that prospectus language for certain MFS retail funds was
false and misleading because, although the prospectuses for those funds in the
regulators' view indicated that the MFS funds prohibited market timing, MFS did
not limit trading activity in 11 domestic large cap stock, high grade bond and
money market funds. MFS' former Chief Executive Officer, John W. Ballen, and
former President, Kevin R. Parke, also reached agreement with the SEC in which
they agreed to, among other terms, monetary fines and temporary suspensions
from association with any investment adviser or registered investment company.
Messrs. Ballen and Parke have resigned their positions with, and will not be
returning to, MFS and the MFS funds. Under the terms of the February
Settlements, MFS and the executives neither admit nor deny wrongdoing.
Under the terms of the February Settlements, a $225 million pool has been
established for distribution to shareholders in certain MFS retail funds, which
has been funded by MFS and of which $50 million is characterized as a penalty.
This pool will be distributed in accordance with a methodology developed by an
independent distribution consultant in consultation with MFS and the Board of
Trustees of the MFS retail funds, and acceptable to the SEC. MFS has further
agreed with NYAG to reduce its management fees in the aggregate amount of
approximately $25 million annually over the next five years, and not to
increase certain management fees during this period. MFS has also paid an
administrative fine to NH in the amount of $1 million, which will be used for
investor education purposes (NH retained $250,000 and $750,000 was contributed
to the North American Securities Administrators Association's Investor
Protection Trust). In addition, under the terms of the February Settlements,
MFS is in the process of adopting certain governance changes and reviewing its
policies and procedures.
Since December 2003, MFS, Sun Life Financial Inc., various MFS funds, the
Trustees of these MFS funds, and certain officers of MFS have been named as
defendants in multiple lawsuits filed in federal and state courts. The lawsuits
variously have been commenced as class actions or individual actions on behalf
of investors who purchased, held or redeemed shares of the MFS funds during
specified periods, as class actions on behalf of participants in certain
retirement plan accounts, or as derivative actions on behalf of the MFS funds.
The lawsuits relating to market timing and related matters have been
transferred to, and consolidated before, the United States District Court for
the District of Maryland, as part of a multi-district litigation of market
timing and related claims involving several other fund complexes (In re Mutual
Funds Investment Litigation (Alger, Columbia, Janus, MFS, One Group, Putnam,
PIMCO), No. 1:04-md-15863 (transfer began March 19, 2004)). Four lawsuits
alleging improper brokerage allocation practices and excessive compensation are
pending in the United States District Court for the District of Massachusetts
(Forsythe v. Sun Life Financial Inc., et al., No. 04cv10584 (GAO) (March 25,
2004); Eddings v. Sun Life Financial Inc., et al., No. 04cv10764 (GAO) (April
15, 2004); Marcus Dumond, et al. v. Massachusetts Financial Servs. Co., et al.,
No. 04cv11458 (GAO) (May 4, 2004); and Koslow v. Sun Life Financial Inc., et
al., No. 04cv11019 (GAO) (May 20, 2004)). The lawsuits generally allege that
some or all of the defendants (i) permitted or acquiesced in market timing
and/or late trading in some of the MFS funds, inadequately disclosed MFS'
internal policies concerning market timing and such matters, and received
excessive compensation as fiduciaries to the MFS funds, or (ii) permitted or
acquiesced in the improper use of fund assets by MFS to support the
distribution of MFS fund shares and inadequately disclosed MFS' use of fund
assets in this manner. The actions assert that some or all of the defendants
violated the federal securities laws, including the Securities Act of 1933 and
the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the
Investment Advisers Act of 1940, the Employee Retirement Income Security Act of
1974, as well as fiduciary duties and other violations of common law. The
lawsuits seek unspecified damages. Insofar as any of the actions is
appropriately brought derivatively on behalf of any of the MFS funds, any
recovery will inure to the benefit of the MFS funds. The defendants are
reviewing the allegations of the multiple complaints and will respond
appropriately. Additional lawsuits based on similar allegations may be filed in
the future.
Any potential resolution of these matters may include, but not be limited to,
judgments or settlements for damages against MFS, the MFS funds, or any other
named defendant. As noted above, as part of the regulatory settlements, MFS has
established a restitution pool in the amount of $225 million to compensate
certain shareholders of the MFS retail funds for damages that they allegedly
sustained as a result of market timing or late trading in certain of the MFS
retail funds, and transferred $50 million for distribution to affected MFS
funds to compensate those funds based upon the amount of brokerage commissions
allocated in recognition of MFS fund sales. It is not clear whether these
amounts will be sufficient to compensate shareholders for all of the damage
they allegedly sustained, whether certain shareholders or putative class
members may have additional claims to compensation, or whether the damages that
may be awarded in any of the actions will exceed these amounts. In the event
the MFS funds incur any losses, costs or expenses in connection with such
lawsuits, the Boards of Trustees of the affected MFS funds may pursue claims on
behalf of such funds against any party that may have liability to the funds in
respect thereof.
Review of these matters by the independent Trustees of the MFS funds and their
counsel is continuing. There can be no assurance that these regulatory actions
and lawsuits, or the adverse publicity associated with these developments, will
not result in increased fund redemptions, reduced sales of fund shares, or
other adverse consequences to the MFS funds.
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------------------------------
To the Trustees of the MFS Series Trust I and the Shareholders of
MFS New Discovery Fund:
We have audited the accompanying statement of assets and liabilities of MFS New
Discovery Fund (the Fund) (one of the portfolios comprising MFS Series Trust
I), including the portfolio of investments, as of August 31, 2004, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the periods indicated therein. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 and financial
highlights. Our procedures included confirmation of securities owned at August
31, 2004, by correspondence with the custodian and brokers or by other
appropriate auditing procedures where replies from brokers were not received.
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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
New Discovery Fund at August 31, 2004, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and its financial highlights for each of the periods
indicated therein, in conformity with U.S. generally accepted accounting
principles. ERNST & YOUNG LLP Boston, Massachusetts October 8, 2004
- ------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
- ------------------------------------------------------------------------------------------------------
The Trustees and officers of the Trust, as of October 10, 2004, are listed below, together with their
principal occupations during the past five years. (Their titles may have varied during that period.)
The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
PRINCIPAL OCCUPATIONS & OTHER
POSITION(s) HELD TRUSTEE/OFFICER DIRECTORSHIPS(2) DURING
NAME, DATE OF BIRTH WITH FUND SINCE(1) THE PAST FIVE YEARS
- ------------------- ---------------- --------------- -----------------------------
INTERESTED TRUSTEES
Robert J. Manning(3) Trustee and February 2004 Massachusetts Financial
(born 10/20/63) President Services Company, Chief
Executive Officer, President,
Chief Investment Officer and
Director
Robert C. Pozen(3) Trustee February 2004 Massachusetts Financial
(born 08/08/46) Services Company, Chairman
(since February 2004);
Harvard Law School
(education), John Olin
Visiting Professor (since
July 2002); Secretary of
Economic Affairs, The
Commonwealth of Massachusetts
(January 2002 to December
2002); Fidelity Investments,
Vice Chairman (June 2000 to
December 2001); Fidelity
Management & Research Company
(investment adviser),
President (March 1997 to July
2001); The Bank of New York
(financial services),
Director; Bell Canada
Enterprises
(telecommunications),
Director; Telesat (satellite
communications), Director
INDEPENDENT TRUSTEES
J. Atwood Ives Trustee and Chair of February 1992 Private investor; Eastern
(born 05/01/36) Trustees Enterprises (diversified
services company), Chairman,
Trustee and Chief Executive
Officer (until November 2000)
Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital,
(born 03/11/37) Chief of Cardiac Surgery;
Harvard Medical School,
Professor of Surgery
David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining
(born 05/30/42) products and service
provider), Vice Chairman/
Director (since April 2001);
Encinitos Ventures (private
investment company),
Principal (1997 to April
2001); Lincoln Electric
Holdings, Inc. (welding
equipment manufacturer),
Director; Southwest Gas
Corporation (natural gas
distribution company),
Director
William R. Gutow Trustee December 1993 Private investor and real
(born 09/27/41) estate consultant; Capitol
Entertainment Management
Company (video franchise),
Vice Chairman
Amy B. Lane Trustee January 2004 Retired; Merrill Lynch & Co.,
(born 02/08/53) Inc., Managing Director,
Investment Banking Group
(1997 to February 2001);
Borders Group, Inc. (book and
music retailer), Director;
Federal Realty Investment
Trust (real estate investment
trust), Trustee
Lawrence T. Perera Trustee July 1981 Hemenway & Barnes
(born 06/23/35) (attorneys), Partner
William J. Poorvu Trustee August 1982 Private investor; Harvard
(born 04/10/35) University Graduate School of
Business Administration,
Class of 1961 Adjunct
Professor in Entrepreneurship
Emeritus; CBL & Associates
Properties, Inc. (real estate
investment trust), Director
J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 09/23/38) (acquisition planning
specialists), President;
Wellfleet Investments
(investor in health care
companies), Managing General
Partner (since 1993);
Cambridge Nutraceuticals
(professional nutritional
products), Chief Executive
Officer (until May 2001)
Elaine R. Smith Trustee February 1992 Independent health care
(born 04/25/46) industry consultant
OFFICERS
Robert J. Manning(3) President and February 2004 Massachusetts Financial
(born 10/20/63) Trustee Services Company, Chief
Executive Officer, President,
Chief Investment Officer and
Director
James R. Bordewick, Jr.(3) Assistant Secretary September 1990 Massachusetts Financial
(born 03/06/59) and Assistant Clerk Services Company, Senior Vice
President and Associate
General Counsel
Jeffrey N. Carp(3) Secretary and Clerk September 2004 Massachusetts Financial
(born 12/01/56) Services Company, Senior Vice
President, General Counsel
and Secretary (since April
2004); Hale and Dorr LLP (law
firm) (prior to April 2004)
James F. DesMarais(3) Assistant Secretary September 2004 Massachusetts Financial
(born 03/09/61) and Assistant Clerk Services Company, Assistant
General Counsel
Stephanie A. DeSisto(3) Assistant Treasurer May 2003 Massachusetts Financial
(born 10/01/53) Services Company, Vice
President (since April 2003);
Brown Brothers Harriman &
Co., Senior Vice President
(November 2002 to April
2003); ING Groep N.V./Aeltus
Investment Management, Senior
Vice President (prior to
November 2002)
Robert R. Flaherty(3) Assistant Treasurer August 2000 Massachusetts Financial
(born 09/18/63) Services Company, Vice
President (since August
2000); UAM Fund Services,
Senior Vice President (prior
to August 2000)
Richard M. Hisey(3) Treasurer August 2002 Massachusetts Financial
(born 08/29/58) Services Company, Senior Vice
President (since July 2002);
The Bank of New York, Senior
Vice President (September
2000 to July 2002); Lexington
Global Asset Managers, Inc.,
Executive Vice President and
Chief Financial Officer
(prior to September 2000);
Lexington Funds, Chief
Financial Officer (prior to
September 2000)
Brian T. Hourihan(3) Assistant Secretary September 2004 Massachusetts Financial
(born 11/11/64) and Assistant Clerk Services Company, Vice
President, Senior Counsel and
Assistant Secretary (since
June 2004); Affiliated
Managers Group, Inc., Chief
Legal Officer/Centralized
Compliance Program (January
to April 2004); Fidelity
Research & Management
Company, Assistant General
Counsel (prior to January
2004)
Ellen Moynihan(3) Assistant Treasurer April 1997 Massachusetts Financial
(born 11/13/57) Services Company, Vice
President
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of
(born 03/07/44) Compliance Officer compliance services),
Principal (since June 2004);
CRA Business Strategies Group
(consulting services),
Executive Vice President
(April 2003 to June 2004);
David L. Babson & Co.
(investment adviser),
Managing Director, Chief
Administrative Officer and
Director (February 1997 to
March 2003)
James O. Yost(3) Assistant Treasurer September 1990 Massachusetts Financial
(born 06/12/60) Services Company, Senior Vice
President
- ----------------
(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously
since appointment unless indicated otherwise.
(2) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission
(i.e., "public companies").
(3) "Interested person" of MFS within the meaning of the Investment Company Act of 1940 (referred to as the
1940 Act), which is the principle federal law governing investment companies like the fund. The address of MFS
is 500 Boylston Street, Boston, Massachusetts 02116.
The Trust does not hold annual shareholder meetings for the purpose of electing Trustees, and Trustees are not
elected for fixed terms. The Trust will hold a shareholders' meeting in 2005 and at least once every five
years thereafter to elect Trustees. Each Trustee and officer holds office until his or her successor is chosen
and qualified or until his or her earlier death, resignation, retirement or removal.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or
a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain
affiliates of MFS. Each Trustee serves as a board member of 109 funds within the MFS Family of Funds.
The Statement of Additional Information contains further information about the Trustees and is available
without charge upon request by calling 1-800-225-2606.
- -----------------------------------------------------------------------------------------------------
INVESTMENT ADVISER CUSTODIAN
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 02116-3741 225 Franklin Street, Boston, MA 02110
DISTRIBUTOR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
MFS Fund Distributors, Inc. Ernst & Young LLP
500 Boylston Street, Boston, MA 02116-3741 200 Clarendon Street, Boston, MA 02116
PORTFOLIO MANAGERS
Robert A. Henderson
Camille H. Lee
Thomas H. Wetherald
QUARTERLY PORTFOLIO DISCLOSURE
Beginning with the fund's first and third fiscal quarters following this report, the fund will file a complete
schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and
third quarters of each fiscal year on Form N-Q. The fund's Form N-Q may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-0102
Information on the operation of the Public Reference Room may be obtained by calling the Commission at
1-800-SEC-0330. The fund's Form N-Q is available on the EDGAR database on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference
Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at www.mfs.com.
- -------------------------------------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS
- -------------------------------------------------------------------------------
YOUR GOALS ARE IMPORTANT
MFS offers a complete range of investments and investment services to address
specific financial needs over time. When your investing goals change, you can
easily stay with MFS for the products you need, when you need them. Whether
you're investing for college or retirement expenses or for tax management or
estate planning, MFS will be there.
Ask your investment professional how MFS can help you move toward the goals
you've set.
MFS FAMILY OF FUNDS(R)
More than 50 portfolios offer domestic and international
equity and fixed-income investments across the full risk
spectrum
VARIABLE ANNUITIES
A selection of annuity products with advantages for
building and preserving wealth
MFS 401(k) AND IRA SUITES
Retirement plans for businesses and individuals
MFS COLLEGE SAVINGS PLANS
Investment products to help meet education expenses
MFS PRIVATE PORTFOLIO SERVICES
Investment advisory services that provide custom products
for high-net-worth individuals
Variable annuities are offered through MFS/Sun Life Financial Distributors, Inc.
- ------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED)
In January 2005, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 2004.
- --------------------------------------------------------------------------------
CONTACT INFORMATION
INVESTOR INFORMATION
For information on MFS mutual funds, call your investment professional or, for
an information kit, call toll free: 1-800-225-2606 any business day from 8 a.m.
to 8 p.m. Eastern time.
A general description of the MFS funds' proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the About MFS section of mfs.com or by visiting the SEC's Web site at
http://www.sec. gov.
Information regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is
available without charge by visiting the Proxy Voting section of mfs.com or by
visiting the SEC's Web site at http://www.sec.gov.
INVESTOR SERVICE
Write to us at: MFS Service Center, Inc.
P.O. Box 55824
Boston, MA 02205-5824
Type of Information Phone number Hours, Eastern Time
- --------------------------------------------------------------------------------
General information 1-800-225-2606 8 a.m. to 8 p.m., any
business day
- --------------------------------------------------------------------------------
Speech- or hearing-impaired 1-800-637-6576 9 a.m. to 5 p.m., any
business day
- --------------------------------------------------------------------------------
Shares prices, account 1-800-MFS-TALK
balances exchanges (1-800-637-8255) 24 hours a day, 365 days a
or stock and bond outlooks touch-tone required year
- --------------------------------------------------------------------------------
WORLD WIDE WEB
Go to MFS.COM for a clear view of market events, investor education, account
access, and product and performance insights.
Go paperless with EDELIVERY: Join your fellow shareholders who are already
taking advantage of this great new benefit from MFS. With eDelivery, we send
you prospectuses, reports, and proxies electronically. You get timely
information without mailbox clutter (and help your fund save printing and
postage costs).
SIGN-UP instructions: If your account is registered with us, go to mfs.com, log
in to your account via MFS Access, and select the eDelivery sign up options.
If you own your MFS fund shares through a financial institution or through a
retirement plan, MFS TALK, MFS Access, and eDelivery may not be available to
you.
[logo] M F S(R)
INVESTMENT MANAGEMENT
(C) 2004 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116.
NDF-ANN-10/04 127M
MFS(R) Mutual Funds
ANNUAL REPORT 8/31/04
MFS(R) CORE EQUITY FUND
(Formerly MFS(R) Research Growth
and Income Fund)
A path for pursuing opportunity
[graphic omitted]
[logo] M F S(R)
INVESTMENT MANAGEMENT
- --------------------------------------------------------------------------------
MFS(R) PRIVACY POLICY: A COMMITMENT TO YOU
- --------------------------------------------------------------------------------
Privacy is a concern for every investor today. At MFS Investment Management(R)
and the MFS funds, we take this concern very seriously. We want you to
understand our policies about every MFS investment product and service that we
offer and how we protect the nonpublic personal information of investors who
have a direct relationship with us and our wholly owned subsidiaries.
Throughout our business relationship, you provide us with personal information;
we maintain information and records about you, your investments, and the
services you use. Examples of the nonpublic personal information we maintain
include
o data from investment applications and other forms
o share balances and transactional history with us, our affiliates, or others
o facts from a consumer reporting agency
We do not disclose any nonpublic personal information about our customers or
former customers to anyone except as permitted by law. We may share information
with companies or financial institutions that perform marketing services on our
behalf or to other financial institutions with which we have joint marketing
arrangements.
Access to your nonpublic personal information is limited to appropriate
personnel who provide products, services, or information to you. We maintain
physical, electronic, and procedural safeguards that comply with applicable
federal regulations.
If you have any questions about MFS' privacy policy, please call 1-800-225-2606
any business day between 8 a.m. and 8 p.m. Eastern time.
Note: If you own MFS products or receive MFS services in the name of a third
party such as a bank or broker-dealer, their privacy policy may apply to you
instead of ours.
- --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK OR CREDIT UNION GUARANTEE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
- --------------------------------------------------------------------------------
MFS(R) CORE EQUITY FUND
The fund seeks capital appreciation.
- -------------------------------------------------------------------------------
A PROSPECTUS FOR ANY MFS PRODUCT CAN BE OBTAINED FROM YOUR INVESTMENT
PROFESSIONAL. YOU SHOULD READ THE PROSPECTUS CAREFULLY BEFORE INVESTING AS IT
CONTAINS COMPLETE INFORMATION ON THE FUND'S INVESTMENT OBJECTIVE(s), THE RISKS
ASSOCIATED WITH AN INVESTMENT IN THE FUND, AND THE FEES, CHARGES, AND EXPENSES
INVOLVED. THESE ELEMENTS, AS WELL AS OTHER INFORMATION CONTAINED IN THE
PROSPECTUS, SHOULD BE CONSIDERED CAREFULLY BEFORE INVESTING.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- ----------------------------------------------------
MFS PRIVACY POLICY
- ----------------------------------------------------
LETTER FROM THE CEO 1
- ----------------------------------------------------
MFS ORIGINAL RESEARCH(R) 5
- ----------------------------------------------------
MANAGEMENT REVIEW 6
- ----------------------------------------------------
PORTFOLIO COMPOSITION 10
- ----------------------------------------------------
PERFORMANCE SUMMARY 11
- ----------------------------------------------------
EXPENSE TABLE 15
- ----------------------------------------------------
PORTFOLIO OF INVESTMENTS 17
- ----------------------------------------------------
FINANCIAL STATEMENTS 25
- ----------------------------------------------------
NOTES TO FINANCIAL STATEMENTS 37
- ----------------------------------------------------
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 48
- ----------------------------------------------------
TRUSTEES AND OFFICERS 49
- ----------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS 53
- ----------------------------------------------------
FEDERAL TAX INFORMATION 54
- ----------------------------------------------------
ASSET ALLOCATION 55
- ----------------------------------------------------
CONTACT INFORMATION BACK COVER
- --------------------------------------------------------------------------------
LETTER FROM THE CEO
- --------------------------------------------------------------------------------
Dear Shareholders,
[Photo of Robert J. Manning]
Our firm was built on the strength of MFS Original Research(R), our in-depth
analysis of every security we consider for our portfolios. We've been honing
this process since 1932, when we created one of the mutual fund industry's
first research departments. And we continue to fine-tune this process so that
we can provide strong and consistent long-term investment performance to help
you achieve your financial goals.
While we have achieved strong investment performance in many of our portfolios,
our goal is to achieve the same strong results across all asset classes. To
ensure that our portfolio teams are doing the best possible job for our firm's
clients and shareholders, I am focusing the vast majority of my time on the
three key elements that I believe truly differentiate MFS from its competitors:
people, process, and culture.
PEOPLE
Our people have always been our most valuable resource. Our philosophy is to
deliver consistent, repeatable investment results by hiring the most talented
investors in our industry. We recruit from the nation's top business schools
and hire experienced analysts, both domestically and around the globe.
Our analysts are the engine that powers our entire investment team because
their recommendations have a direct impact on the investment performance of our
portfolios. To demonstrate our ongoing commitment in this area, we increased
the number of equity analysts at MFS from less than 40 at the end of 2000 to
about 50 in June 2004. During that same period, we doubled the average
investment experience of our domestic equity analysts, in part by recruiting
more seasoned analysts to the firm. Moreover, our international network of
investment personnel now spans key regions of the world with offices in London,
Mexico City, Singapore, and Tokyo, as well as Boston.
One of the major advantages that MFS has over many of its competitors is that
the position of research analyst is a long-term career for many members of our
team, not simply a steppingstone toward becoming a portfolio manager. We have
worked to elevate the stature of the analyst position to be on par with that of
a portfolio manager. In fact, an exceptional research analyst has the
opportunity to earn more at MFS than some portfolio managers.
At the same time, we look within the firm to promote talented analysts who
choose a path toward becoming a portfolio manager. We rarely hire portfolio
managers from our competitors because we believe the best investors are those
steeped in the MFS process and culture. In the past few months, we have
identified three senior research analysts who will assume roles on the
management teams of several of our larger portfolios. MFS is fortunate to have
a deep bench of talented investment personnel, and we welcome the opportunity
to put their skills to work for our clients.
PROCESS
MFS was built on the strength of its bottom-up approach to researching
securities. We have enhanced the mentoring process for our research analysts by
calling on several of our most seasoned portfolio managers to supplement the
work of Director of Global Equity Research David A. Antonelli. These portfolio
managers are taking a special interest in developing the careers of our
research analysts and strengthening our investment process. Kenneth J. Enright
of our value equity group is working with a team of domestic analysts; David E.
Sette-Ducati of our small- and mid-cap equity team is working with analysts
concentrating on small- and mid-cap companies; and Barnaby Wiener of our
international equity team in London heads the European equity research team.
We have combined the bottom-up approach of our research process with a top-
down approach to risk controls on portfolio composition. We have a very strong
quantitative team under the leadership of industry veteran Deborah H. Miller,
who represents the equity management department on the Management Committee of
the firm. Quantitative analysis helps us generate investment ideas and, more
importantly, assess the appropriate level of risk for each portfolio. The risk
assessment is designed to assure that each portfolio operates within its
investment objectives.
Additionally, we have increased the peripheral vision of our investment
personnel across asset classes through the collaboration of our Equity, Fixed
Income, Quantitative Analysis, and Risk Management teams. We recently codified
this key aspect of our culture by forming an Investment Management Committee,
composed of key members of these teams. This committee will work to ensure that
all teams are sharing information, actively debating investment ideas, and
creating a unified investment team.
CULTURE
Teamwork is at the heart of our ability to deliver consistent and competitive
investment performance over time. At MFS, each member of our team is involved
in our success; we have no superstars. The collaborative nature of our process
works to assure a consistent investment approach across all of our products and
provides a high level of continuity in portfolio management because our
investment performance never depends on the contributions of just a single
individual. Our culture is based on an environment of teamwork that allows our
investment personnel to be successful. In turn, we demand superior investment
results from every member of our team.
We have created a meritocracy at our firm based on investment results. We hold
all of our portfolio managers accountable for the performance of their
portfolios and their contributions to the team. We also track the equity and
fixed-income ratings of our analysts so we can evaluate them based on the
performance of their recommendations. We align bonus compensation to investment
performance by weighting rewards to those who have created the greatest
long-term benefit for our shareholders and who contribute most successfully to
the Original Research(SM) process.
The strength of our culture has resulted in a tremendous amount of stability.
Although we have dismissed members of our team whose performance did not meet
MFS' high standards, only one portfolio manager has voluntarily left the firm
over the past six months, based on a decision to retire from the industry.
In short, we can help you achieve your financial goals by hiring talented
people, following a disciplined process, and maintaining our firm's unique
culture. The enhancements described in this letter reflect the collaborative
spirit and the depth of resources in our investment teams.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R)
September 20, 2004
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed.
- --------------------------------------------------------------------------------
MFS ORIGINAL RESEARCH(R)
- --------------------------------------------------------------------------------
THE MFS(R) DIFFERENCE
For 80 years MFS has been offering investors clear paths to pursuing specific
investment objectives. Today, millions of individuals and thousands of
institutions all over the world look to MFS to manage their assets with insight
and care.
Our success, we believe, has to do with the fact that we see investors as
people with plans, not just dollars to invest.
When you invest with MFS, you invest with a company dedicated to helping you
realize your long-term financial goals.
INVESTORS CHOOSE MFS FOR OUR
o global asset management expertise across all asset classes
o time-tested money management process for pursuing consistent results
o full spectrum of investment products backed by MFS Original Research(R)
o resources and services that match real-life needs
TURNING INFORMATION INTO OPPORTUNITY
Sound investments begin with sound information. MFS has been doing its own
research and analyzing findings in-house for decades. The process we use to
uncover opportunity is called MFS Original Research(R).
MFS ORIGINAL RESEARCH INVOLVES
o meeting with the management of 3,000 companies each year to assess their
business plans and the managers' ability to execute those plans
o making onsite visits to more than 2,000 companies annually to gain first-hand
knowledge of their operations and products
o analyzing financial statements and balance sheets
o talking extensively with companies' customers and competitors
o developing our own proprietary estimates of companies' earnings
- --------------------------------------------------------------------------------
MANAGEMENT REVIEW
- --------------------------------------------------------------------------------
MARKET ENVIRONMENT
The recovery in global stock markets that began in the spring of 2003 continued
into the first quarter of 2004. Business capital expenditures, which had been
weak for several years, began to trend upward in the latter half of 2003,
adding support to a recovery that had been fueled largely by consumer spending.
In the spring and summer of 2004, many measures of global economic growth,
including employment, corporate spending, and earnings growth, continued to
improve. But stock prices made only modest gains as investors, in our view,
became increasingly concerned about higher interest rates, rising oil prices, a
slowdown in corporate earnings growth, and continuing unrest in Iraq. The U.S.
Federal Reserve Board raised interest rates in June and again in August, and
set expectations for an ongoing series of modest rate hikes. (Indeed, several
weeks after the period ended, the Fed announced a third 0.25% rate hike on
September 21.) A pullback in equity markets near the end of the period was
triggered, we believe, by indications from a number of bellwether companies
that earnings growth was starting to slow.
DETRACTORS FROM PERFORMANCE
Stock selection in the health care, leisure, and special products and services
sectors held back relative returns over the period. In the health care area,
our position in large-cap pharmaceutical firm Wyeth lost value as the company
dealt with diet drug litigation and sales of new products that were lower than
analysts had projected. Our stake in hospital chain Tenet Healthcare retreated
as federal and state regulators investigated the firm's past Medicare billing
practices.
Elsewhere in health care, stock in Cyberonics, which makes implantable medical
devices for the treatment of epilepsy and other neurological disorders, sank
when the company experienced delays in the new product approval process with
the U.S. Food and Drug Administration. In our opinion, the company was
distracted by the delays and, as a consequence, its core business deteriorated.
Cyberonics was not a position in the fund's benchmark, the Standard & Poor's
500 Stock Index (the S&P 500).
In the leisure sector, our holding in radio station, outdoor advertising, and
concert venue giant Clear Channel Communications hurt results as its earnings
fell short of our growth expectations. Clear Channel, along with most other
traditional media companies, did not enjoy the strong increases in advertising
revenues that we had anticipated in an improving economy. Our position in
satellite broadcaster EchoStar Communications lost ground as well because
investors, we believe, were concerned about higher subscriber acquisition costs
and intensifying competition from cable companies. EchoStar was not represented
in the fund's benchmark.
Post-secondary education firm Corinthian Colleges was the chief relative
detractor in the special products and services sector. The firm was not a
holding in the portfolio's benchmark, and we sold our position during the
period.
Stocks in other sectors that significantly held back relative results included
niche clothing retailer Hot Topic, which was not held by our benchmark. We had
sold our Hot Topic stock by period-end. Not owning cellular communications
products firm QUALCOMM and integrated energy firm ChevronTexaco also hurt
relative performance as both stocks rose sharply during the period.
The portfolio's cash position, while it averaged less than 3% of assets over
the period, also detracted from relative performance. As with nearly all mutual
funds, this portfolio holds some cash to buy new holdings and to provide
liquidity. In a period when equity markets rose, holding any cash hurt
performance against the fund's benchmark, the S&P 500 Index, which has no cash
position.
CONTRIBUTORS TO PERFORMANCE
On a sector basis, stock selection in the basic materials, retailing, and
utilities and communication sectors contributed significantly to relative
performance.
Within basic materials, the fund benefited from its positions in Lyondell
Chemical, which makes intermediate chemicals used to manufacture other
chemicals and plastics, and Georgia Gulf Corp., which specializes in chemical
compounds for the construction and housing markets. Georgia Gulf Corp. was no
longer held within the portfolio at period end. In addition, Lyondell's stock
rose after the firm announced its acquisition of Millenium Chemicals.
In the retailing sector, underweighting retail giant Wal-Mart and selling our
position during the period lifted relative returns as Wal-Mart's stock sank.
Cellular operator Sprint PCS Group delivered the largest relative contribution
in the utilities and communications sector. The firm's stock soared during the
period as the bidding war for AT&T Wireless drove up stock prices across the
cellular industry. We sold part of our Sprint PCS stock into that rally. Our
remaining Sprint PCS holdings became Sprint FON holdings late in the period, as
Sprint's wireless and wireline stocks, which had been separated years earlier,
were recombined under the Sprint FON name.
Holdings in other sectors that helped relative results included semiconductor
firm Marvell Technology Group, which was not a position in the fund's
benchmark, and FleetBoston Financial Corp. FleetBoston's stock rose sharply
after Bank of America made a bid to acquire the financial services firm. The
acquisition was completed during the period.
Underweighting semiconductor giant Intel, a large position in the fund's
benchmark, and selling our holding during the period aided relative performance
as well. We believe Intel declined because of investor concerns about the
semiconductor industry's near-term prospects.
Respectfully,
/s/ David A. Antonelli
David A. Antonelli
Director of Global Equity Research
The fund is managed by a team of global MFS equity research analysts under the
general supervision of Mr. Antonelli.
Note to Shareholders: Prior to May 1, 2004, MFS(R) Core Equity Fund was known
as MFS(R) Research Growth and Income Fund. The fund's name was changed to
better reflect its new primary investment objective of one seeking to provide
long-term growth of capital rather than one seeking to provide long-term growth
of capital, current income, and growth of income.
The views expressed in this report are those of the Director of Global Equity
Research only through the end of the period of the report as stated on the
cover and do not necessarily reflect the views of MFS or any other person in
the MFS organization. These views are subject to change at any time based on
market and other conditions, and MFS disclaims any responsibility to update
such views. These views may not be relied upon as investment advice or as an
indication of trading intent on behalf of any MFS fund. References to specific
securities are not recommendations of such securities and may not be
representative of any MFS fund's current or future investments.
The fund will charge a 2% redemption fee on proceeds from Class A, B, C, and I
shares redeemed or exchanged within 5 business days of acquiring (either by
purchasing or exchanging) fund shares. See the prospectus for complete details.
- -------------------------------------------------------------------------------
Visit mfs.com for our latest economic and investment outlook.
o Under Updates & Announcements, click Week in Review for a summary of recent
investment-related news.
o From Week in Review, link to MFS Global Perspective for our current view of
the world.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
-------------------------------------------------------
PORTFOLIO STRUCTURE
-------------------------------------------------------
Stocks 96.0%
Cash & Other Net Assets 4.0%
-------------------------------------------------------
TOP FIVE SECTOR WEIGHTINGS
-------------------------------------------------------
Financial Services 19.9%
-------------------------------------------------------
Technology 13.2%
-------------------------------------------------------
Health Care 13.0%
-------------------------------------------------------
Industrial Goods & Services 7.5%
-------------------------------------------------------
Consumer Staples 7.2%
-------------------------------------------------------
-------------------------------------------------------
TOP TEN HOLDINGS
-------------------------------------------------------
JOHNSON & JOHNSON 3.7%
-------------------------------------------------------
GENERAL ELECTRIC CO. 3.4%
-------------------------------------------------------
EXXON MOBIL CORP. 3.0%
-------------------------------------------------------
CITIGROUP INC. 2.9%
-------------------------------------------------------
FREDDIE MAC 2.9%
-------------------------------------------------------
KOHL'S CORP. 2.6%
-------------------------------------------------------
BANK OF AMERICA CORP. 2.5%
-------------------------------------------------------
AMERICAN INTERNATIONAL GROUP INC. 2.4%
-------------------------------------------------------
ABBOTT LABORATORIES 2.2%
-------------------------------------------------------
LOCKHEED MARTIN CORP. 2.1%
-------------------------------------------------------
Percentages are based on total net assets as of 8/31/04.
The portfolio is actively managed, and current holdings may be different.
- -------------------------------------------------------------------------------
PERFORMANCE SUMMARY THROUGH 8/31/04
- -------------------------------------------------------------------------------
The following chart illustrates the historical performance of the fund's
original share class in comparison to its benchmark. Performance results
include the deduction of the maximum applicable sales charge and reflect the
percentage change in net asset value, including reinvestment of dividends and
capital gains distributions. Benchmark comparisons are unmanaged and do not
reflect any fees or expenses. The performance of other share classes will be
greater than or less than the line shown. (See Notes to Performance Summary.)
VISIT MFS.COM FOR THE MOST RECENT MONTH-END PERFORMANCE RESULTS. MARKET
VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND CURRENT
PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE
OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. ANY
HIGH SHORT-TERM RETURNS MAY BE AND LIKELY WERE ATTRIBUTABLE TO RECENT FAVORABLE
MARKET CONDITIONS, WHICH MAY NOT BE REPEATED. THE PERFORMANCE SHOWN DOES NOT
REFLECT THE DEDUCTION OF TAXES, IF ANY, THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from the commencement of the fund's investment operations,
January 2, 1996, through August 31, 2004. Index information is from January 2,
1996.)
MFS Core Standard &
Equity Fund -- Poor's 500
Class A Stock Index
1/96 $ 9,425 $10,000
8/98 15,194 16,334
8/00 22,235 26,564
8/02 15,036 16,475
8/04 18,449 20,575
TOTAL RETURNS
- --------------------
Average annual
without sales charge
- --------------------
Class
Share class inception date 1-yr 3-yr 5-yr Life*
- ------------------------------------------------------------------------------
A 1/2/96 9.88% 1.01% -1.15% 8.06%
- ------------------------------------------------------------------------------
B 1/2/97 9.12% 0.36% -1.80% 7.36%
- ------------------------------------------------------------------------------
C 1/2/97 9.16% 0.36% -1.80% 7.34%
- ------------------------------------------------------------------------------
I 1/2/97 10.27% 1.37% -0.81% 8.38%
- ------------------------------------------------------------------------------
R1 12/31/02 9.67% 0.93% -1.20% 8.03%
- ------------------------------------------------------------------------------
R2 10/31/03 9.60% 0.93% -1.20% 8.03%
- --------------------
Average annual
- --------------------
Comparative benchmarks
- ------------------------------------------------------------------------------
Average multi-cap core fund+ 9.27% 0.96% 0.80% 8.12%
- ------------------------------------------------------------------------------
Standard & Poor's 500 Stock Index# 11.45% 0.80% -2.06% 8.68%
- ------------------------------------------------------------------------------
- --------------------
Average annual
with sales charge
- --------------------
Share class
- ------------------------------------------------------------------------------
A 3.56% -0.96% -2.31% 7.33%
- ------------------------------------------------------------------------------
B 5.12% -0.64% -2.16% 7.36%
- ------------------------------------------------------------------------------
C 8.16% 0.36% -1.80% 7.34%
- ------------------------------------------------------------------------------
I, R1, and R2 Class shares do not have a sales charge. Please see Notes to
Performance Summary for more details.
- --------------------
Cumulative
without sales charge
- --------------------
Share class
- ------------------------------------------------------------------------------
A 9.88% 3.07% -5.61% 95.75%
- ------------------------------------------------------------------------------
B 9.12% 1.09% -8.67% 85.02%
- ------------------------------------------------------------------------------
C 9.16% 1.09% -8.70% 84.70%
- ------------------------------------------------------------------------------
I 10.27% 4.17% -3.96% 100.86%
- ------------------------------------------------------------------------------
R1 9.67% 2.80% -5.86% 95.24%
- ------------------------------------------------------------------------------
R2 9.60% 2.81% -5.85% 95.25%
- ------------------------------------------------------------------------------
* For the period from the commencement of the fund's investment operations,
January 2, 1996, through August 31, 2004. Index information is from
January 1, 1996.
+ Source: Lipper Inc., an independent firm that reports mutual fund
performance.
# Source: Standard & Poor's Micropal, Inc.
INDEX DEFINITION
STANDARD & POOR'S 500 STOCK INDEX (THE S&P 500) - a commonly used measure of the
broad U.S. stock market.
It is no possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
The performance shown reflects a non-recurring accrual made to the fund on July
28, 2004, relating to MFS' revenue sharing settlement with the Securities and
Exchange Commission, without which the performance would have been lower.
Class A results, including sales charge, reflects the deduction of the maximum
5.75% sales charge. Class B results, including sales charge, reflects the
deduction of the applicable contingent deferred sales charge (CDSC), which
declines over six years from 4% to 0%. Class C results, including sales charge,
(assuming redemption within one year from the end of the calendar month of
purchase) reflects the deduction of the 1% CDSC. Class I shares have no sales
charges and are available only to certain investors. Class R1 and R2 shares
have no sales charges and are available only to certain retirement plans.
Performance for share classes offered after Class A shares includes the
performance of the fund's Class A shares for periods prior to their offering.
This blended class performance has been adjusted to take into account
differences in sales loads, if any, applicable to these share classes, but has
not been adjusted to take into account differences in class specific operating
expenses (such as Rule 12b-1 fees). Compared to performance these share classes
would have experienced had they been offered for the entire period, the use of
blended performance generally results in higher performance for share classes
with higher operating expenses than the initial share class to which it is
blended, and lower performance for share classes with lower operating expenses
than the initial share class to which it is blended.
Performance results reflect any applicable expense subsidies and waivers in
effect during the periods shown. Without such subsidies and waivers the fund's
performance results would be less favorable. Please see the prospectus and
financial statements for complete details.
KEY RISK CONSIDERATIONS
The portfolio may invest in foreign and/or emerging markets securities, which
are more susceptible to risks relating to interest rates, currency exchange
rates, economic, and political conditions.
The portfolio's value will vary daily since its investments will fluctuate in
response to issuer, market, regulatory, economic, or political developments.
Because stocks tend to be more volatile than some other investments, such as
bonds, the more assets a fund dedicates to stocks, generally the more volatile
the portfolio's value will be. Historically, stocks have outperformed bonds
over time. The portfolio's investment risks should be considered prior to
investing.
Please see the prospectus for further information on these and other risk
considerations.
- -------------------------------------------------------------------------------
EXPENSE TABLE
- -------------------------------------------------------------------------------
FUND EXPENSES BORNE BY SHAREHOLDERS DURING THE PERIOD FROM MARCH 1, 2004,
THROUGH AUGUST 31, 2004.
As a shareholder of the fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on certain purchase or redemption
payments and redemption fees on certain exchanges and redemptions, and (2)
ongoing costs, including management fees; distribution and service (12b-1)
fees; and other fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of
the period and held for the entire period, March 1, 2004 through August 31,
2004.
ACTUAL EXPENSES
The first line for each share class in the table below provides information
about actual account values and actual expenses. You may use the information in
this line, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the first line under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during
this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line for each share class in the table below provides information
about hypothetical account values and hypothetical expenses based on the fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption fees. Therefore, the second line for each share
class in the table is useful in comparing ongoing costs only, and will not help
you determine the relative total costs of owning different funds. In addition,
if these transactional costs were included, your costs would have been higher.
- --------------
Share Class
- --------------
- -------------------------------------------------------------------------------
Expenses
Paid During
Annualized Beginning Ending Period**
Expense Account Value Account Value* 3/01/04-
Ratio 3/01/04 8/31/04 8/31/04
- -------------------------------------------------------------------------------
Actual 1.38% $1,000 $964 $6.83
A -------------------------------------------------------------------------
Hypothetical 1.38% $1,000 $1,018 $7.02
- -------------------------------------------------------------------------------
Actual 2.02% $1,000 $960 $9.98
B -------------------------------------------------------------------------
Hypothetical 2.02% $1,000 $1,015 $10.26
- -------------------------------------------------------------------------------
Actual 2.02% $1,000 $961 $9.98
C -------------------------------------------------------------------------
Hypothetical 2.02% $1,000 $1,015 $10.26
- -------------------------------------------------------------------------------
Actual 1.03% $1,000 $966 $5.10
I Hypothetical 1.03% $1,000 $1,020 $5.24
- -------------------------------------------------------------------------------
Actual 1.49% $1,000 $963 $7.37
R1 -------------------------------------------------------------------------
Hypothetical 1.49% $1,000 $1,017 $7.58
- -------------------------------------------------------------------------------
Actual 1.80% $1,000 $962 $8.90
R2 -------------------------------------------------------------------------
Hypothetical 1.80% $1,000 $1,016 $9.15
- -------------------------------------------------------------------------------
* Ending account value reflects each class' ending account value assuming the
actual class return per year before expenses (Actual) and a hypothetical 5%
class return per year before expenses (Hypothetical).
** Expenses paid is equal to each class' annualized expense ratio for the most
recent six month period, as shown above, multiplied by the average account
value over the period, multiplied by the number of days in the period,
divided by the number of days in the year. Expenses paid do not include any
applicable sales charges (loads) or redemption fees. If these transaction
costs had been included, your costs would have been higher.
- -------------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS - 8/31/04
- -------------------------------------------------------------------------------------------------
The Portfolio of Investments is a complete list of all securities owned by your
fund. It is categorized by broad-based asset classes.
Stocks - 96.0%
- -------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
U.S. Stocks - 88.8%
- -------------------------------------------------------------------------------------------------
Aerospace - 2.3%
- -------------------------------------------------------------------------------------------------
KVH Industries, Inc.* 43,000 $335,400
- -------------------------------------------------------------------------------------------------
Lockheed Martin Corp. 63,740 3,427,937
- -------------------------------------------------------------------------------------------------
$3,763,337
- -------------------------------------------------------------------------------------------------
Alcoholic Beverages - 1.0%
- -------------------------------------------------------------------------------------------------
Anheuser-Busch Cos., Inc. 29,630 $1,564,464
- -------------------------------------------------------------------------------------------------
Apparel Manufacturers - 0.2%
- -------------------------------------------------------------------------------------------------
K-Swiss, Inc., "A"^ 20,700 $403,857
- -------------------------------------------------------------------------------------------------
Automotive - 0.5%
- -------------------------------------------------------------------------------------------------
Harley-Davidson, Inc. 12,300 $750,546
- -------------------------------------------------------------------------------------------------
Banks & Credit Companies - 13.1%
- -------------------------------------------------------------------------------------------------
Bank of America Corp. 90,634 $4,076,717
- -------------------------------------------------------------------------------------------------
Citigroup, Inc. 101,408 4,723,585
- -------------------------------------------------------------------------------------------------
Countrywide Financial Corp. 45,800 1,628,190
- -------------------------------------------------------------------------------------------------
Freddie Mac 69,970 4,696,386
- -------------------------------------------------------------------------------------------------
J.P. Morgan Chase & Co. 36,560 1,447,045
- -------------------------------------------------------------------------------------------------
Mellon Financial Corp. 13,270 382,972
- -------------------------------------------------------------------------------------------------
PNC Financial Services Group, Inc. 32,700 1,755,009
- -------------------------------------------------------------------------------------------------
SunTrust Banks, Inc. 35,830 2,440,023
- -------------------------------------------------------------------------------------------------
$21,149,927
- -------------------------------------------------------------------------------------------------
Biotechnology - 1.4%
- -------------------------------------------------------------------------------------------------
Genzyme Corp.* 25,800 $1,393,200
- -------------------------------------------------------------------------------------------------
Medimmune, Inc.* 34,800 830,676
- -------------------------------------------------------------------------------------------------
$2,223,876
- -------------------------------------------------------------------------------------------------
Broadcast & Cable TV - 2.1%
- -------------------------------------------------------------------------------------------------
ADVO, Inc.^ 8,400 $248,472
- -------------------------------------------------------------------------------------------------
Citadel Broadcasting Corp.* 16,800 241,920
- -------------------------------------------------------------------------------------------------
Comcast Corp., "A"* 37,300 1,050,741
- -------------------------------------------------------------------------------------------------
EchoStar Communications Corp., "A"* 47,890 1,467,829
- -------------------------------------------------------------------------------------------------
R.H. Donnelley Corp.* 7,200 334,440
- -------------------------------------------------------------------------------------------------
$3,343,402
- -------------------------------------------------------------------------------------------------
Brokerage & Asset Managers - 1.8%
- -------------------------------------------------------------------------------------------------
Franklin Resources, Inc. 7,500 $399,525
- -------------------------------------------------------------------------------------------------
Goldman Sachs Group, Inc. 17,900 1,604,735
- -------------------------------------------------------------------------------------------------
Legg Mason, Inc. 10,300 831,004
- -------------------------------------------------------------------------------------------------
$2,835,264
- -------------------------------------------------------------------------------------------------
Business Services - 1.9%
- -------------------------------------------------------------------------------------------------
Corporate Executive Board Co. 13,700 $806,382
- -------------------------------------------------------------------------------------------------
DST Systems, Inc.* 6,660 301,298
- -------------------------------------------------------------------------------------------------
Fiserv, Inc.* 46,900 1,631,182
- -------------------------------------------------------------------------------------------------
Getty Images, Inc.^* 4,500 249,525
- -------------------------------------------------------------------------------------------------
$2,988,387
- -------------------------------------------------------------------------------------------------
Chemicals - 3.1%
- -------------------------------------------------------------------------------------------------
E.I. du Pont de Nemours & Co. 52,100 $2,201,746
- -------------------------------------------------------------------------------------------------
Lyondell Chemical Co. 85,240 1,678,376
- -------------------------------------------------------------------------------------------------
Monsanto Co. 32,200 1,178,520
- -------------------------------------------------------------------------------------------------
$5,058,642
- -------------------------------------------------------------------------------------------------
Computer Software - 3.5%
- -------------------------------------------------------------------------------------------------
Computer Associates International, Inc. 39,200 $949,424
- -------------------------------------------------------------------------------------------------
MicroStrategy, Inc.* 20,500 709,505
- -------------------------------------------------------------------------------------------------
Red Hat, Inc.^* 36,300 445,038
- -------------------------------------------------------------------------------------------------
SupportSoft, Inc.^* 61,000 616,710
- -------------------------------------------------------------------------------------------------
Symantec Corp.* 38,800 1,860,848
- -------------------------------------------------------------------------------------------------
VERITAS Software Corp.* 61,800 1,033,296
- -------------------------------------------------------------------------------------------------
$5,614,821
- -------------------------------------------------------------------------------------------------
Computer Software - Systems - 0.4%
- -------------------------------------------------------------------------------------------------
Hewlett-Packard Co. 34,500 $617,205
- -------------------------------------------------------------------------------------------------
Construction - 0.4%
- -------------------------------------------------------------------------------------------------
Eagle Materials, Inc.^ 9,700 $629,627
- -------------------------------------------------------------------------------------------------
Consumer Goods & Services - 2.6%
- -------------------------------------------------------------------------------------------------
Colgate-Palmolive Co. 27,600 $1,490,400
- -------------------------------------------------------------------------------------------------
Kimberly-Clark Corp. 10,000 667,000
- -------------------------------------------------------------------------------------------------
Newell Rubbermaid, Inc. 56,900 1,225,057
- -------------------------------------------------------------------------------------------------
Playtex Products, Inc.^* 115,800 756,174
- -------------------------------------------------------------------------------------------------
$4,138,631
- -------------------------------------------------------------------------------------------------
Containers - 0.7%
- -------------------------------------------------------------------------------------------------
Smurfit-Stone Container Corp.* 61,960 $1,099,170
- -------------------------------------------------------------------------------------------------
Electrical Equipment - 4.3%
- -------------------------------------------------------------------------------------------------
American Standard Cos., Inc.* 2,670 $100,419
- -------------------------------------------------------------------------------------------------
General Electric Co. 164,510 5,394,283
- -------------------------------------------------------------------------------------------------
Tyco International Ltd. 47,570 1,489,892
- -------------------------------------------------------------------------------------------------
$6,984,594
- -------------------------------------------------------------------------------------------------
Electronics - 1.7%
- -------------------------------------------------------------------------------------------------
Cymer, Inc.^* 28,400 $758,848
- -------------------------------------------------------------------------------------------------
Integrated Circuit Systems, Inc.* 64,400 1,415,512
- -------------------------------------------------------------------------------------------------
PMC-Sierra, Inc.* 56,300 525,842
- -------------------------------------------------------------------------------------------------
$2,700,202
- -------------------------------------------------------------------------------------------------
Energy - Independent - 0.6%
- -------------------------------------------------------------------------------------------------
Unocal Corp. 27,700 $1,034,318
- -------------------------------------------------------------------------------------------------
Energy - Integrated - 2.9%
- -------------------------------------------------------------------------------------------------
Exxon Mobil Corp. 103,572 $4,774,669
- -------------------------------------------------------------------------------------------------
Entertainment - 1.1%
- -------------------------------------------------------------------------------------------------
Clear Channel Communications, Inc. 31,600 $1,058,916
- -------------------------------------------------------------------------------------------------
Walt Disney Co. 34,800 781,260
- -------------------------------------------------------------------------------------------------
$1,840,176
- -------------------------------------------------------------------------------------------------
Food & Drug Stores - 1.0%
- -------------------------------------------------------------------------------------------------
CVS Corp. 25,700 $1,028,000
- -------------------------------------------------------------------------------------------------
Rite Aid Corp.* 129,600 570,240
- -------------------------------------------------------------------------------------------------
$1,598,240
- -------------------------------------------------------------------------------------------------
Food & Non-Alcoholic Beverages - 2.5%
- -------------------------------------------------------------------------------------------------
Chiquita Brands International, Inc.* 11,800 $222,312
- -------------------------------------------------------------------------------------------------
General Mills, Inc. 20,100 949,725
- -------------------------------------------------------------------------------------------------
PepsiCo, Inc. 57,839 2,891,950
- -------------------------------------------------------------------------------------------------
$4,063,987
- -------------------------------------------------------------------------------------------------
Furniture & Appliances - 0.2%
- -------------------------------------------------------------------------------------------------
Mohawk Industries, Inc.* 3,800 $292,296
- -------------------------------------------------------------------------------------------------
Gaming & Lodging - 0.7%
- -------------------------------------------------------------------------------------------------
Carnival Corp. 10,600 $485,374
- -------------------------------------------------------------------------------------------------
WMS Industries, Inc.^* 34,000 687,140
- -------------------------------------------------------------------------------------------------
$1,172,514
- -------------------------------------------------------------------------------------------------
General Merchandise - 4.6%
- -------------------------------------------------------------------------------------------------
Kohl's Corp.* 85,200 $4,215,696
- -------------------------------------------------------------------------------------------------
Target Corp. 73,430 3,273,509
- -------------------------------------------------------------------------------------------------
$7,489,205
- -------------------------------------------------------------------------------------------------
Insurance - 3.6%
- -------------------------------------------------------------------------------------------------
American International Group, Inc. 55,100 $3,925,324
- -------------------------------------------------------------------------------------------------
Hartford Financial Services Group, Inc. 11,100 678,876
- -------------------------------------------------------------------------------------------------
MetLife, Inc. 32,810 1,222,173
- -------------------------------------------------------------------------------------------------
$5,826,373
- -------------------------------------------------------------------------------------------------
Internet - 0.8%
- -------------------------------------------------------------------------------------------------
Digital River, Inc.^* 35,600 $856,892
- -------------------------------------------------------------------------------------------------
eBay, Inc.* 4,900 424,046
- -------------------------------------------------------------------------------------------------
$1,280,938
- -------------------------------------------------------------------------------------------------
Leisure & Toys - 0.3%
- -------------------------------------------------------------------------------------------------
Electronic Arts, Inc.* 3,200 $159,296
- -------------------------------------------------------------------------------------------------
Hasbro, Inc. 6,800 126,004
- -------------------------------------------------------------------------------------------------
Mattel, Inc. 8,300 133,547
- -------------------------------------------------------------------------------------------------
$418,847
- -------------------------------------------------------------------------------------------------
Machinery & Tools - 0.6%
- -------------------------------------------------------------------------------------------------
Caterpillar, Inc. 6,200 $450,740
- -------------------------------------------------------------------------------------------------
Deere & Co. 2,420 153,113
- -------------------------------------------------------------------------------------------------
Eaton Corp. 2,300 138,805
- -------------------------------------------------------------------------------------------------
Illinois Tool Works, Inc. 1,700 155,193
- -------------------------------------------------------------------------------------------------
$897,851
- -------------------------------------------------------------------------------------------------
Medical & Health Technology & Services - 1.6%
- -------------------------------------------------------------------------------------------------
Apria Healthcare Group, Inc.* 2,800 $79,072
- -------------------------------------------------------------------------------------------------
HCA, Inc. 24,300 943,083
- -------------------------------------------------------------------------------------------------
Lincare Holdings, Inc.* 3,500 112,490
- -------------------------------------------------------------------------------------------------
Omnicell, Inc.^* 31,700 388,959
- -------------------------------------------------------------------------------------------------
Tenet Healthcare Corp.* 106,400 1,108,688
- -------------------------------------------------------------------------------------------------
$2,632,292
- -------------------------------------------------------------------------------------------------
Medical Equipment - 2.0%
- -------------------------------------------------------------------------------------------------
Aspect Medical Systems, Inc.^* 54,260 $868,160
- -------------------------------------------------------------------------------------------------
Cyberonics, Inc.^* 25,600 438,272
- -------------------------------------------------------------------------------------------------
Guidant Corp. 18,400 1,100,320
- -------------------------------------------------------------------------------------------------
Medtronic, Inc. 16,100 800,975
- -------------------------------------------------------------------------------------------------
$3,207,727
- -------------------------------------------------------------------------------------------------
Natural Gas - Distribution - 0.4%
- -------------------------------------------------------------------------------------------------
NiSource, Inc. 33,400 $694,720
- -------------------------------------------------------------------------------------------------
Oil Services - 0.9%
- -------------------------------------------------------------------------------------------------
GlobalSantaFe Corp. 16,572 $462,027
- -------------------------------------------------------------------------------------------------
Halliburton Co. 14,100 411,297
- -------------------------------------------------------------------------------------------------
Noble Corp.* 7,600 305,672
- -------------------------------------------------------------------------------------------------
Smith International, Inc.* 5,160 294,017
- -------------------------------------------------------------------------------------------------
$1,473,013
- -------------------------------------------------------------------------------------------------
Personal Computers & Peripherals - 3.6%
- -------------------------------------------------------------------------------------------------
Apple Computer, Inc.* 26,400 $910,536
- -------------------------------------------------------------------------------------------------
Dell, Inc.* 78,820 2,746,089
- -------------------------------------------------------------------------------------------------
Lexmark International, Inc., "A"* 18,000 1,592,100
- -------------------------------------------------------------------------------------------------
Solectron Corp.* 96,300 496,908
- -------------------------------------------------------------------------------------------------
$5,745,633
- -------------------------------------------------------------------------------------------------
Pharmaceuticals - 8.0%
- -------------------------------------------------------------------------------------------------
Abbott Laboratories 84,100 $3,506,129
- -------------------------------------------------------------------------------------------------
Johnson & Johnson 101,200 5,879,720
- -------------------------------------------------------------------------------------------------
Wyeth 93,500 3,419,295
- -------------------------------------------------------------------------------------------------
$12,805,144
- -------------------------------------------------------------------------------------------------
Pollution Control - 0.2%
- -------------------------------------------------------------------------------------------------
Waste Management, Inc. 10,530 $292,629
- -------------------------------------------------------------------------------------------------
Printing & Publishing - 0.1%
- -------------------------------------------------------------------------------------------------
Lamar Advertising Co., "A"* 3,480 $152,041
- -------------------------------------------------------------------------------------------------
Real Estate - 0.4%
- -------------------------------------------------------------------------------------------------
American Financial Realty Trust 19,700 $276,785
- -------------------------------------------------------------------------------------------------
Boston Properties, Inc. 6,200 343,976
- -------------------------------------------------------------------------------------------------
$620,761
- -------------------------------------------------------------------------------------------------
Restaurants - 0.7%
- -------------------------------------------------------------------------------------------------
Wendy's International, Inc. 7,800 $268,086
- -------------------------------------------------------------------------------------------------
YUM! Brands, Inc. 20,600 818,026
- -------------------------------------------------------------------------------------------------
$1,086,112
- -------------------------------------------------------------------------------------------------
Specialty Chemicals - 0.1%
- -------------------------------------------------------------------------------------------------
Delta & Pine Land Co.^ 6,500 $165,165
- -------------------------------------------------------------------------------------------------
Specialty Stores - 1.3%
- -------------------------------------------------------------------------------------------------
Circuit City Stores, Inc. 79,600 $1,032,412
- -------------------------------------------------------------------------------------------------
Finish Line, Inc., "A"^ 19,300 559,893
- -------------------------------------------------------------------------------------------------
Gap, Inc. 14,500 271,730
- -------------------------------------------------------------------------------------------------
Regis Corp. 5,300 216,929
- -------------------------------------------------------------------------------------------------
$2,080,964
- -------------------------------------------------------------------------------------------------
Telecommunications - Wireless - 1.0%
- -------------------------------------------------------------------------------------------------
Andrew Corp.* 61,300 $679,817
- -------------------------------------------------------------------------------------------------
SpectraSite, Inc.* 20,360 914,978
- -------------------------------------------------------------------------------------------------
$1,594,795
- -------------------------------------------------------------------------------------------------
Telecommunications - Wireline - 1.2%
- -------------------------------------------------------------------------------------------------
ADTRAN, Inc. 15,600 $417,768
- -------------------------------------------------------------------------------------------------
Cisco Systems, Inc.* 59,560 1,117,346
- -------------------------------------------------------------------------------------------------
Harmonic, Inc.^* 64,600 383,078
- -------------------------------------------------------------------------------------------------
$1,918,192
- -------------------------------------------------------------------------------------------------
Telephone Services - 2.3%
- -------------------------------------------------------------------------------------------------
Citizens Communications Co. 56,300 $711,069
- -------------------------------------------------------------------------------------------------
IDT Corp., "B"^* 33,900 509,517
- -------------------------------------------------------------------------------------------------
Sprint FON Group 126,550 2,490,504
- -------------------------------------------------------------------------------------------------
$3,711,090
- -------------------------------------------------------------------------------------------------
Tobacco - 1.0%
- -------------------------------------------------------------------------------------------------
Altria Group, Inc. 33,760 $1,652,552
- -------------------------------------------------------------------------------------------------
Trucking - 1.5%
- -------------------------------------------------------------------------------------------------
United Parcel Service, Inc., "B" 24,610 $1,797,761
- -------------------------------------------------------------------------------------------------
Werner Enterprises, Inc. 36,850 652,982
- -------------------------------------------------------------------------------------------------
$2,450,743
- -------------------------------------------------------------------------------------------------
Utilities - Electric Power - 2.6%
- -------------------------------------------------------------------------------------------------
Ameren Corp. 2,680 $125,397
- -------------------------------------------------------------------------------------------------
Dominion Resources, Inc. 7,690 499,004
- -------------------------------------------------------------------------------------------------
Entergy Corp. 11,200 675,360
- -------------------------------------------------------------------------------------------------
PG&E Corp.* 34,400 1,004,136
- -------------------------------------------------------------------------------------------------
PPL Corp. 21,200 1,013,996
- -------------------------------------------------------------------------------------------------
TXU Corp. 20,600 857,578
- -------------------------------------------------------------------------------------------------
$4,175,471
- -------------------------------------------------------------------------------------------------
Total U.S. Stocks $143,014,410
- -------------------------------------------------------------------------------------------------
Foreign Stocks - 7.2%
- -------------------------------------------------------------------------------------------------
Bermuda - 2.0%
- -------------------------------------------------------------------------------------------------
Ace Ltd. (Insurance) 43,750 $1,686,563
- -------------------------------------------------------------------------------------------------
Ingersoll-Rand Co. Ltd., "A" (Machinery & Tools) 1,500 97,515
- -------------------------------------------------------------------------------------------------
Marvell Technology Group Ltd. (Electronics)* 62,900 1,454,248
- -------------------------------------------------------------------------------------------------
$3,238,326
- -------------------------------------------------------------------------------------------------
Brazil - 0.8%
- -------------------------------------------------------------------------------------------------
Companhia Vale do Rio Doce, ADR (Metals & Mining) 20,700 $1,195,839
- -------------------------------------------------------------------------------------------------
Canada - 1.2%
- -------------------------------------------------------------------------------------------------
CoolBrands International, Inc. (Food & Non-Alcoholic
Beverages)* 26,400 $203,942
- -------------------------------------------------------------------------------------------------
EnCana Corp. (Energy - Independent) 25,440 1,038,976
- -------------------------------------------------------------------------------------------------
Magna International, Inc., "A" (Automotive)^ 9,400 700,112
- -------------------------------------------------------------------------------------------------
$1,943,030
- -------------------------------------------------------------------------------------------------
Germany - 0.4%
- -------------------------------------------------------------------------------------------------
SAP AG, ADR (Computer Software) 16,800 $612,528
- -------------------------------------------------------------------------------------------------
Hong Kong - 0.1%
- -------------------------------------------------------------------------------------------------
Radica Games Ltd. (Gaming & Lodging) 12,700 $110,998
- -------------------------------------------------------------------------------------------------
Israel - 0.5%
- -------------------------------------------------------------------------------------------------
PowerDsine Ltd. (Electronics)* 74,300 $759,346
- -------------------------------------------------------------------------------------------------
Singapore - 0.3%
- -------------------------------------------------------------------------------------------------
Flextronics International Ltd. (Personal Computers &
Peripherals)* 42,230 $524,074
- -------------------------------------------------------------------------------------------------
United Kingdom - 1.9%
- -------------------------------------------------------------------------------------------------
BP PLC (Energy - Integrated) 228,200 $2,036,867
- -------------------------------------------------------------------------------------------------
Vodafone Group PLC, ADR (Telecommunications - Wireless) 47,480 1,087,292
- -------------------------------------------------------------------------------------------------
$3,124,159
- -------------------------------------------------------------------------------------------------
Total Foreign Stocks $11,508,300
- -------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $142,365,474) $154,522,710
- -------------------------------------------------------------------------------------------------
Short-Term Obligation - 0.2%
- -------------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
- -------------------------------------------------------------------------------------------------
General Electric Capital Corp., 1.57%, due 9/01/04,
at Amortized Cost $320,000 $320,000
- -------------------------------------------------------------------------------------------------
Collateral for Securities Loaned - 4.8%
- -------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio, at Cost and
Net Asset Value 7,762,971 $7,762,971
- -------------------------------------------------------------------------------------------------
Repurchase Agreement - 3.9%
- -------------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
- -------------------------------------------------------------------------------------------------
Morgan Stanley, 1.57%, dated 8/31/04, due 9/01/04, total
to be received $6,325,276 (secured by various U.S. Treasury
and Federal Agency obligations in a jointly traded account),
at Cost $6,325,000 $6,325,000
- -------------------------------------------------------------------------------------------------
Total Investments (+) (Identified Cost, $156,773,445) $168,930,681
- -------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - (4.9)% (8,025,017)
- -------------------------------------------------------------------------------------------------
Net Assets - 100.0% $160,905,664
- -------------------------------------------------------------------------------------------------
* Non-income producing security.
^ All or a portion of this security is on loan.
(+) As of August 31, 2004, one security representing $2,036,867 and 1.3% of net assets was fair
valued in accordance with the policies adopted by the Board of Trustees.
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------------------------------
This statement represents your fund's balance sheet, which details the assets
and liabilities composing the total value of your fund.
AT 8/31/04
ASSETS
Investments, at value, including $7,550,387 of
securities on loan (identified cost, $156,773,445) $168,930,681
- -----------------------------------------------------------------------------------------------------
Cash 340
- -----------------------------------------------------------------------------------------------------
Receivable for investments sold 764,463
- -----------------------------------------------------------------------------------------------------
Receivable for fund shares sold 83,739
- -----------------------------------------------------------------------------------------------------
Interest and dividends receivable 319,035
- -----------------------------------------------------------------------------------------------------
Receivable from administrative proceeding settlement 52,378
- -----------------------------------------------------------------------------------------------------
Other assets 720
- -----------------------------------------------------------------------------------------------------
Total assets $170,151,356
- -----------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased $987,523
- -----------------------------------------------------------------------------------------------------
Payable for fund shares reacquired 333,703
- -----------------------------------------------------------------------------------------------------
Collateral for securities loaned, at value 7,762,971
- -----------------------------------------------------------------------------------------------------
Payable to affiliates
- -----------------------------------------------------------------------------------------------------
Management fee 2,858
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 7,153
- -----------------------------------------------------------------------------------------------------
Distribution and service fee 3,141
- -----------------------------------------------------------------------------------------------------
Administrative fee 22
- -----------------------------------------------------------------------------------------------------
Administrative service fee 4
- -----------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 148,317
- -----------------------------------------------------------------------------------------------------
Total liabilities $9,245,692
- -----------------------------------------------------------------------------------------------------
Net assets $160,905,664
- -----------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Paid-in capital $159,683,527
- -----------------------------------------------------------------------------------------------------
Unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies 12,157,037
- -----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (10,882,879)
- -----------------------------------------------------------------------------------------------------
Accumulated net investment loss (52,021)
- -----------------------------------------------------------------------------------------------------
Net assets $160,905,664
- -----------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 10,738,643
- -----------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued
Class A shares
Net assets $67,414,889
- -----------------------------------------------------------------------------------------------------
Shares outstanding 4,391,670
- -----------------------------------------------------------------------------------------------------
Net asset value per share $15.35
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/94.25X$15.35) $16.29
- -----------------------------------------------------------------------------------------------------
Class B shares
Net assets $73,394,746
- -----------------------------------------------------------------------------------------------------
Shares outstanding 4,988,674
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $14.71
- -----------------------------------------------------------------------------------------------------
Class C shares
Net assets $15,990,409
- -----------------------------------------------------------------------------------------------------
Shares outstanding 1,090,748
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $14.66
- -----------------------------------------------------------------------------------------------------
Class I shares
Net assets $460,014
- -----------------------------------------------------------------------------------------------------
Shares outstanding 29,336
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $15.68
- -----------------------------------------------------------------------------------------------------
Class R1 shares
Net assets $3,029,761
- -----------------------------------------------------------------------------------------------------
Shares outstanding 197,937
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $15.31
- -----------------------------------------------------------------------------------------------------
Class R2 shares
Net assets $615,845
- -----------------------------------------------------------------------------------------------------
Shares outstanding 40,278
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $15.29
- -----------------------------------------------------------------------------------------------------
On sales of $50,000 or more, the offering price of Class A shares is reduced. A contingent deferred
sales charge may be imposed on redemptions of Class A, Class B and Class C shares.
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
This statement describes how much your fund received in investment income and paid in expenses. It
also describes any gains and/or losses generated by fund operations.
FOR YEAR ENDED 8/31/04
NET INVESTMENT INCOME (LOSS)
Income
- -----------------------------------------------------------------------------------------------------
Dividends $2,468,848
- -----------------------------------------------------------------------------------------------------
Interest 68,651
- -----------------------------------------------------------------------------------------------------
Other# 52,378
- -----------------------------------------------------------------------------------------------------
Foreign taxes withheld (14,180)
- -----------------------------------------------------------------------------------------------------
Total investment income $2,575,697
- -----------------------------------------------------------------------------------------------------
Expenses
- -----------------------------------------------------------------------------------------------------
Management fee $1,046,418
- -----------------------------------------------------------------------------------------------------
Trustees' compensation 11,931
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 291,575
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class A) 232,701
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class B) 758,117
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class C) 165,279
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class R1) 8,150
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class R2) 360
- -----------------------------------------------------------------------------------------------------
Administrative service fee (Class R2) 180
- -----------------------------------------------------------------------------------------------------
Administrative fee 13,450
- -----------------------------------------------------------------------------------------------------
Custodian fee 57,960
- -----------------------------------------------------------------------------------------------------
Printing 73,305
- -----------------------------------------------------------------------------------------------------
Postage 16,921
- -----------------------------------------------------------------------------------------------------
Auditing fees 38,086
- -----------------------------------------------------------------------------------------------------
Legal fees 4,249
- -----------------------------------------------------------------------------------------------------
Miscellaneous 109,991
- -----------------------------------------------------------------------------------------------------
Total expenses $2,828,673
- -----------------------------------------------------------------------------------------------------
Fees paid indirectly (2,121)
- -----------------------------------------------------------------------------------------------------
Reduction of expenses by investment adviser (197)
- -----------------------------------------------------------------------------------------------------
Net expenses $2,826,355
- -----------------------------------------------------------------------------------------------------
Net investment loss $(250,658)
- -----------------------------------------------------------------------------------------------------
Statement of Operations - continued
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain (identified cost basis)
- -----------------------------------------------------------------------------------------------------
Investment transactions $17,253,129
- -----------------------------------------------------------------------------------------------------
Foreign currency transactions 2,488
- -----------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign
currency transactions $17,255,617
- -----------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
- -----------------------------------------------------------------------------------------------------
Investments $(2,283,964)
- -----------------------------------------------------------------------------------------------------
Translation of assets and liabilities in foreign currencies (219)
- -----------------------------------------------------------------------------------------------------
Net unrealized loss on investments and foreign
currency translation $(2,284,183)
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency $14,971,434
- -----------------------------------------------------------------------------------------------------
Increase in net assets from operations $14,720,776
- -----------------------------------------------------------------------------------------------------
# A non-recurring accrual recorded as a result of an administrative proceeding regarding disclosure of
brokerage allocation practices in connection with fund sales, as described in the Legal Proceedings
and Transactions with Affiliates footnotes.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------------------------
This statement describes the increases and/or decreases in net assets resulting
from operations, any distributions, and any shareholder transactions.
FOR YEARS ENDED 8/31 2004 2003
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment loss $(250,658) $(157,917)
- -------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions 17,255,617 (6,593,906)
- -------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation (2,284,183) 20,395,735
- ------------------------------------------------------------- -------------- ------------
Increase in net assets from operations $14,720,776 $13,643,912
- ------------------------------------------------------------- -------------- ------------
Net increase (decrease) in net assets from fund share
transactions $1,733,217 $(10,654,181)
- ------------------------------------------------------------- -------------- ------------
Total increase in net assets $16,453,993 $2,989,731
- ------------------------------------------------------------- -------------- ------------
NET ASSETS
At beginning of period $144,451,671 $141,461,940
- -------------------------------------------------------------------------------------------------------
At end of period (including accumulated net investment
loss of $52,021 and $63,317, respectively) $160,905,664 $144,451,671
- -------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the fund's financial performance for the past 5 years (or,
if shorter, the period of the fund's operation). Certain information reflects financial results for a single fund share. The
total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund
(assuming reinvestment of all distributions) held for the entire period. This information has been audited by the fund's
independent registered public accounting firm, whose report, together with the fund's financial statements, are included in
this report.
YEARS ENDED 8/31
--------------------------------------------------------------------------
CLASS A 2004 2003 2002 2001 2000
Net asset value, beginning of period $13.97 $12.51 $15.15 $18.82 $17.87
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.03 $0.04 $0.00+++ $0.02 $0.02
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 1.35 1.42 (2.38) (3.69) 2.26
- ----------------------------------------------------- ------ ------ ------ ------ ------
Total from investment operations $1.38 $1.46 $(2.38) $(3.67) $2.28
- ----------------------------------------------------- ------ ------ ------ ------ ------
Less distributions declared to shareholders from
net realized gain on investments and foreign
currency transactions $-- $-- $(0.26) $-- $(1.33)
- ----------------------------------------------------- ------ ------ ------ ------ ------
Net asset value, end of period $15.35 $13.97 $12.51 $15.15 $18.82
- ----------------------------------------------------- ------ ------ ------ ------ ------
Total return (%)(+) 9.88^^ 11.67 (16.00) (19.50) 13.76
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 8/31
--------------------------------------------------------------------------
CLASS A (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.38 1.47 1.37 1.32 1.28
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.22 0.29 0.03 0.12 0.13
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 116 121 100 78 74
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $67,415 $53,704 $50,366 $63,319 $73,910
- -----------------------------------------------------------------------------------------------------------------------------
(S) Prior to January 1, 2000, the distributor voluntarily waived all or a portion of its distribution fee. For the year ended
August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of
Independent Chief Compliance Officer service fees paid to Tarantino LLC. If these fees had been incurred by the fund, the
net investment income per share and the ratios would have been:
Net investment income $0.03^ $-- $-- $-- $0.01
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.38^ -- -- -- 1.32
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.22^ -- -- -- 0.09
- -----------------------------------------------------------------------------------------------------------------------------
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
^ The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on the shares outstanding on the day the proceeds were recorded.
(+) Total returns do not include the applicable sales charge. If the charge had been included, the results would have been
lower.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
---------------------------------------------------------------------------
CLASS B 2004 2003 2002 2001 2000
Net asset value, beginning of period $13.48 $12.14 $14.81 $18.52 $17.72
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.06) $(0.04) $(0.09) $(0.09) $(0.09)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 1.29 1.38 (2.32) (3.62) 2.22
- --------------------------------------------------- ------- ------ ------ ------ ------
Total from investment operations $1.23 $1.34 $(2.41) $(3.71) $2.13
- --------------------------------------------------- ------- ------ ------ ------ ------
Less distributions declared to shareholders
from net realized gain on investments and
foreign currency transactions $-- $-- $(0.26) $-- $(1.33)
- --------------------------------------------------- ------- ------ ------ ------ ------
Net asset value, end of period $14.71 $13.48 $12.14 $14.81 $18.52
- --------------------------------------------------- ------- ------ ------ ------ ------
Total return (%) 9.12^^ 11.04 (16.57) (20.03) 12.98
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.02 2.12 2.02 1.97 1.96
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.43) (0.36) (0.62) (0.53) (0.55)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 116 121 100 78 74
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $73,395 $75,007 $73,146 $91,455 $111,380
- -----------------------------------------------------------------------------------------------------------------------------
(S) For the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its
proportional share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If this fee had been
incurred by the fund, the net investment loss per share and the ratios would have been:
Net investment loss $(0.06)^ $-- $-- $-- $--
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.02^ -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.43)^ -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
^ The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on the shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
--------------------------------------------------------------------------
CLASS C 2004 2003 2002 2001 2000
Net asset value, beginning of period $13.43 $12.10 $14.76 $18.46 $17.67
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.06) $(0.04) $(0.09) $(0.09) $(0.09)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 1.29 1.37 (2.31) (3.61) 2.21
- ---------------------------------------------------- ------- ------ ------ ------ ------
Total from investment operations $1.23 $1.33 $(2.40) $(3.70) $2.12
- ---------------------------------------------------- ------- ------ ------ ------ ------
Less distributions declared to shareholders from
net realized gain on investments and foreign
currency transactions $-- $-- $(0.26) $-- $(1.33)
- ---------------------------------------------------- ------- ------ ------ ------ ------
Net asset value, end of period $14.66 $13.43 $12.10 $14.76 $18.46
- ---------------------------------------------------- ------- ------ ------ ------ ------
Total return (%) 9.16^^ 10.99 (16.56) (20.04) 12.96
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.02 2.12 2.02 1.97 1.96
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.43) (0.35) (0.62) (0.52) (0.55)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 116 121 100 78 74
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $15,990 $15,325 $17,521 $22,081 $20,432
- -----------------------------------------------------------------------------------------------------------------------------
(S) For the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its
proportional share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If this fee had been
incurred by the fund, the net investment loss per share and the ratios would have been:
Net investment loss $(0.06)^ $-- $-- $-- $--
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.02^ -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.43)^ -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
^ The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on the shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 8/31
--------------------------------------------------------------------------
CLASS I 2004 2003 2002 2001 2000
Net asset value, beginning of period $14.22 $12.69 $15.31 $18.95 $17.93
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.09 $0.08 $0.06 $0.08 $0.08
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 1.37 1.45 (2.42) (3.72) 2.27
- --------------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $1.46 $1.53 $(2.36) $(3.64) $2.35
- --------------------------------------------------- -------- ------ ------ ------ ------
Less distributions declared to shareholders from
net realized gain on investments and foreign
currency transactions $-- $-- $(0.26) $-- $(1.33)
- --------------------------------------------------- -------- ------ ------ ------ ------
Net asset value, end of period $15.68 $14.22 $12.69 $15.31 $18.95
- --------------------------------------------------- -------- ------ ------ ------ ------
Total return (%) 10.27^^ 12.06 (15.70) (19.21) 14.12
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.03 1.12 1.02 0.97 0.97
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.56 0.65 0.38 0.47 0.45
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 116 121 100 78 74
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $460 $398 $428 $486 $554
- -----------------------------------------------------------------------------------------------------------------------------
(S) For the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its
proportional share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If this fee had been
incurred by the fund, the net investment loss per share and the ratios would have been:
Net investment income $0.09^ $-- $-- $-- $--
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.03^ -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.56^ -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
^ The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on the shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEAR ENDED PERIOD ENDED
CLASS R1** 8/31/04 8/31/03*
Net asset value, beginning of period $13.96 $12.02
- -------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income (loss)(S) $0.02 $(0.00)+++
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency 1.33 1.94###
- ---------------------------------------------------------------------- -------- ------
Total from investment operations $1.35 $1.94
- ---------------------------------------------------------------------- -------- ------
Net asset value, end of period $15.31 $13.96
- ---------------------------------------------------------------------- -------- ------
Total return (%) 9.67^^ 16.14++
- -------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA(S):
Expenses## 1.49 1.74+
- -------------------------------------------------------------------------------------------------------
Net investment income 0.13 (0.04)+
- -------------------------------------------------------------------------------------------------------
Portfolio turnover 116 121
- -------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $3,030 $17
- -------------------------------------------------------------------------------------------------------
(S) For the year ended August 31, 2004, the investment adviser has voluntarily agreed to reimburse the fund
for its proportional share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If
this fee had been incurred by the fund, the net investment income per share and the ratios would have
been:
Net investment income $0.02^ $--
- -------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.49^ --
- -------------------------------------------------------------------------------------------------------
Net investment income 0.13^ --
- -------------------------------------------------------------------------------------------------------
* For the period from the inception of Class R1 shares, December 31, 2002, through August 31, 2003.
** Effective November 3, 2003, Class R shares have been renamed Class R1 shares.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
### The per share amount is not in accordance with the net realized and unrealized gain/loss for the period
because of the timing of sales of fund shares and the amount of per share realized and unrealized gains
and losses at such time.
^ The reimbursement impact per share amount and the ratios were less than $0.01 and 0.01%, respectively.
^^ The fund's net asset value and total return calculation include a non-recurring accrual recorded as a
result of an administrative proceeding regarding disclosure of brokerage allocation practices in
connection with fund sales, as described in the Legal Proceedings and Transactions with Affiliates
footnotes. The non-recurring accrual did not have a material impact on the net asset value per share based
on the shares outstanding on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
PERIOD ENDED
CLASS R2 8/31/04*
Net asset value, beginning of period $14.57
- ----------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.03
- ----------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency 0.69###
- ------------------------------------------------------------------ --------
Total from investment operations $0.72
- ------------------------------------------------------------------ --------
Net asset value, end of period $15.29
- ------------------------------------------------------------------ --------
Total return (%) 4.94++^^
- ----------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.80+
- ----------------------------------------------------------------------------
Net investment income 0.27+
- ----------------------------------------------------------------------------
Portfolio turnover 116
- ----------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $616
- ----------------------------------------------------------------------------
(S) For the year ended August 31, 2004, the investment adviser has voluntarily
agreed to reimburse the fund for its proportional share of Independent Chief
Compliance Officer service fees paid to Tarantino LLC. If this fee had been
incurred by the fund, the net investment income per share and the ratios
would have been:
Net investment income $0.03^
- ----------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.80^+
- ----------------------------------------------------------------------------
Net investment income 0.27^+
- ----------------------------------------------------------------------------
* For the period from the inception of Class R2 shares, October 31, 2003,
through August 31, 2004.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
### The per share amount is not in accordance with the net realized and
unrealized gain/loss for the period because of the timing of sales of fund
shares and the amount of per share realized and unrealized gains and losses
at such time.
^ The reimbursement impact per share amount and the ratios were less than
$0.01 and 0.01%, respectively.
^^ The fund's net asset value and total return calculation include a
non-recurring accrual recorded as a result of an administrative proceeding
regarding disclosure of brokerage allocation practices in connection with
fund sales, as described in the Legal Proceedings and Transactions with
Affiliates footnotes. The non-recurring accrual did not have a material
impact on the net asset value per share based on the shares outstanding on
the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(1) BUSINESS AND ORGANIZATION
MFS Core Equity Fund (the fund) is a diversified series of MFS Series Trust I
(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 U.S.
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. The fund
can invest in foreign securities. 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 in the fund's portfolio for which
market quotations are available are valued at the last sale or official closing
price as reported by an independent pricing service on the primary market or
exchange on which they are primarily traded, or at the last quoted bid price
for securities in which there were no sales during the day. Equity securities
traded over the counter are valued at the last sales price traded each day as
reported by an independent pricing service, or to the extent there are no sales
reported, such securities are valued on the basis of quotations obtained from
brokers and dealers. Short-term obligations with a remaining maturity in excess
of 60 days will be valued upon dealer-supplied valuations. All other short-term
obligations in the fund's portfolio are valued at amortized cost, which
constitutes market value as determined by the Board of Trustees. Money market
mutual funds are valued at net asset value. 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. When
pricing service information or market quotations are not readily available,
securities are priced at fair value as determined under the direction of the
Board of Trustees. For example, significant events (such as movement in the
U.S. securities market, or other regional and local developments) may occur
between the time that foreign markets close (where the security is principally
traded) and the time that the fund calculates its net asset value (generally,
the close of the NYSE) that may impact the value of securities traded in these
foreign markets. In these cases, the fund may utilize information from an
external vendor or other sources to adjust closing market quotations of foreign
equity securities to reflect what it believes to be the fair value of the
securities as of the fund's valuation time. Because the frequency of
significant events is not predictable, fair valuation of foreign equity
securities may occur on a frequent basis.
REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements with
institutions that the fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The fund requires
that the securities collateral in a repurchase transaction be transferred to
the custodian in a manner sufficient to enable the fund to obtain those
securities in the event of a default under the repurchase agreement. The fund
monitors, on a daily basis, the value of the collateral to ensure that its
value, including accrued interest, is greater than amounts owed to the fund
under each such repurchase agreement. The fund, along with other affiliated
entities of Massachusetts Financial Services Company (MFS), may utilize a joint
trading account for the purpose of entering into one or more repurchase
agreements.
FOREIGN CURRENCY TRANSLATION - 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.
SECURITY LOANS - State Street Bank and Trust Company ("State Street"), as
lending agent, may loan the securities of the fund to certain qualified
institutions (the "Borrowers") approved by the fund. The loans are
collateralized at all times by cash and/or U.S. Treasury securities in an
amount at least equal to the market value of the securities loaned. State
Street provides the fund with indemnification against Borrower default. The
fund bears the risk of loss with respect to the investment of cash collateral.
On loans collateralized by cash, the cash collateral is invested in a money
market fund or short-term securities. A portion of the income generated upon
investment of the collateral is remitted to the Borrowers, and the remainder is
allocated between the fund and the lending agent. On loans collateralized by
U.S. Treasury securities, a fee is received from the Borrower, and is allocated
between the fund and the lending agent. Income from securities lending is
included in interest income on the Statement of Operations. The dividend and
interest income earned on the securities loaned is accounted for in the same
manner as other dividend and interest income.
SHORT TERM FEES - For purchases made on or after July 1, 2004, the fund will
charge a 2% redemption fee (which is retained by the fund) on proceeds from
shares redeemed or exchanged within 5 business days following their acquisition
(either by purchase or exchange). The fund may change the redemption fee period
in the future, including changes in connection with pending Securities and
Exchange Commission rules. See the fund's prospectus for details. These fees
are accounted for as an addition to paid-in capital.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and discount is amortized or accreted for financial statement purposes in
accordance with U.S. generally accepted accounting principles. All discount is
accreted for tax reporting purposes as required by federal income tax
regulations. Dividends received in cash are recorded on the ex-dividend date.
FEES PAID INDIRECTLY - The fund's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by the
fund. During the year ended August 31, 2004, the fund's custodian fees were
reduced by $630 under this arrangement. The fund has entered into a commission
recapture agreement, under which certain brokers will credit the fund a portion
of the commissions generated, to offset certain expenses of the fund. For the
year ended August 31, 2004, the fund's miscellaneous expenses were reduced by
$1,491 under this agreement. These amounts are shown as a reduction of total
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 net 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 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. Common
types of book and tax differences that could occur include differences in
accounting for currency transactions, wash sales and capital losses.
The fund paid no distributions for the years ended August 31, 2004 and August
31, 2003.
During the year ended August 31, 2004, accumulated net investment loss
decreased by $261,954, accumulated net realized loss on investments and foreign
currency transactions increased by $2,487, and paid-in capital decreased by
$259,467 due to differences between book and tax accounting for currency
transactions. This change had no effect on the net assets or net asset value
per share.
As of August 31, 2004, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Capital loss carryforward $(10,383,451)
----------------------------------------------------------
Unrealized appreciation 11,657,609
----------------------------------------------------------
Other temporary differences (52,021)
----------------------------------------------------------
For federal income tax purposes, the capital loss carryforward may be applied
against any net taxable realized gains of each succeeding year until the
earlier of its utilization or expiration on August 31, 2011.
MULTIPLE CLASSES OF SHARES OF BENEFICIAL INTEREST - The fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the fund based on daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class. Differences in per share dividend rates are
generally due to differences in separate class expenses. Class B shares will
convert to Class A shares approximately eight years after purchase.
(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 the following annual
rates:
First $500 million of average net assets 0.65%
----------------------------------------------------------
Average net assets in excess of $500 million 0.55%
----------------------------------------------------------
The fund pays compensation to its Independent Trustees in the form of a
retainer, attendance fees, and additional compensation to Board and Committee
chairpersons, and 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). The fund has an
unfunded defined benefit plan for retired Independent Trustees and an unfunded
retirement benefit deferral plan for current Independent Trustees. Included in
Trustees' compensation is $4,204 as a result of the change in the fund's
unfunded retirement benefit deferral plan for certain current Independent
Trustees and a pension expense of $2,061 for retired Independent Trustees for
the year ended August 31, 2004.
The MFS funds, including this fund, have entered into a services agreement (the
"Agreement") which provides for payment of fees by the MFS funds to Tarantino
LLC in return for the provision of services of an Independent Chief Compliance
Officer (ICCO) for the MFS funds. The ICCO is an officer of the MFS funds and
the sole member of Tarantino LLC. MFS has agreed to reimburse each of the MFS
funds for a proportional share of substantially all of the payments made by the
MFS funds to Tarantino LLC and also to provide office space and other
administrative support and supplies to the ICCO. The MFS funds can terminate
the Agreement with Tarantino LLC at any time under the terms of the Agreement.
The fund's investment adviser, MFS, has been the subject of an administrative
proceeding regarding disclosure of brokerage allocation practices in connection
with fund sales, as described in the Legal Proceedings Footnote. Pursuant to
the SEC Order, MFS, on July 28, 2004, transferred $1.00 in disgorgement and $50
million in penalty to the SEC (the "Payments"). A plan for distribution of
these Payments has been submitted to the SEC. Contemporaneous with the
transfer, the fund accrued an estimate of the amount to be received upon final
approval of the plan of distribution. The non- recurring accrual in the amount
of $52,378 did not have a material impact on the net asset value per share
based on the shares outstanding on the day the proceeds were recorded.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment advisor. Under an administrative services
agreement between the funds and MFS, MFS is entitled to partial reimbursement
of the costs MFS incurs to provide these services, subject to review and
approval by the Board of Trustees. Each fund is allocated a portion of these
administrative costs based on its size and relative average net assets. Prior
to April 1, 2004, the fund paid MFS an administrative fee up to the following
annual percentage rates of the fund's average daily net assets:
First $2 billion 0.0175%
----------------------------------------------------------
Next $2.5 billion 0.0130%
----------------------------------------------------------
Next $2.5 billion 0.0005%
----------------------------------------------------------
In excess of $7 billion 0.0000%
----------------------------------------------------------
Effective April 1, 2004, the fund paid MFS an administrative fee up to the
following annual percentage rates of the fund's average daily net assets:
First $2 billion 0.01120%
----------------------------------------------------------
Next $2.5 billion 0.00832%
----------------------------------------------------------
Next $2.5 billion 0.00032%
----------------------------------------------------------
In excess of $7 billion 0.00000%
----------------------------------------------------------
For the year ended August 31, 2004, the fund paid MFS $13,450, equivalent to
0.0083% of average daily net assets, to partially reimburse MFS for the costs
of providing administrative services.
In addition to the administrative services provided by MFS to the fund as
described above, MFS is responsible for providing certain administrative
services with respect to Class R2 shares. These services include various
administrative, recordkeeping, and communication/educational services with
respect to the retirement plans which invest in Class R2 shares, and may be
provided directly by MFS or by a third party. The fund pays an annual 0.25%
administrative service fee solely from the assets of Class R2 shares to MFS for
the provision of these services.
DISTRIBUTOR - MFD, a wholly owned subsidiary of MFS, as distributor, received
$23,704 for the year ended August 31, 2004, as its portion of the sales charge
on sales of Class A shares of the fund.
The Trustees have adopted a distribution plan for Class A, Class B, Class C,
Class R1, and Class R2 shares pursuant to rule 12b-1 of the Investment Company
Act of 1940 as follows:
The fund's distribution plan provides that the fund will pay MFD an annual
percentage of its average daily net assets attributable to certain share
classes in order that MFD may pay expenses on behalf of the fund related to the
distribution and servicing of its shares. These expenses include a service fee
paid to each securities dealer that enters into a sales agreement with MFD
based on the average daily net assets of accounts attributable to such dealers.
The fees are calculated based on each class' average daily net assets. The
maximum distribution and service fees for each class of shares are as follows:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Distribution Fee 0.10% 0.75% 0.75% 0.25% 0.25%
- -----------------------------------------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25% 0.25% 0.25%
- -----------------------------------------------------------------------------------------------------------------
Total Distribution Plan 0.35% 1.00% 1.00% 0.50% 0.50%
- -----------------------------------------------------------------------------------------------------------------
MFD retains the service fee for accounts not attributable to a securities dealer, which for the year ended
August 31, 2004 amounted to:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Service Fee Retained by MFD $2,592 $832 $319 $8 $14
- -----------------------------------------------------------------------------------------------------------------
Fees incurred under the distribution plan during the year ended August 31, 2004 were as follows:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Effective Annual Percentage Rates 0.35% 1.00% 1.00% 0.50% 0.50%
- -----------------------------------------------------------------------------------------------------------------
Certain Class A, and Class C shares are subject to a contingent deferred sales
charge in the event of a shareholder redemption within, for Class A shares, 12
months following the purchase, and, for Class C shares, the first year from the
end of the calendar month of purchase. A contingent deferred sales charge is
imposed on shareholder redemptions of Class B shares in the event of a
shareholder redemption within six years from the end of the calendar month of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended August 31, 2004 were as
follows:
CLASS A CLASS B CLASS C
Contingent Deferred Sales Charges
Imposed $1,192 $130,526 $1,022
- -----------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT - Included in shareholder servicing costs is a fee
paid to MFSC, a wholly owned subsidiary of MFS, for its services as shareholder
servicing agent. The fee, which is calculated as a percentage of the fund's
average daily net assets is set periodically under the supervision of the
fund's Trustees. Prior to April 1, 2004, the fee was set at 0.11% of the fund's
average daily net assets. For the period April 1, 2004 through June 30, 2004,
the fee was set at 0.10% of the fund's average daily net assets. Effective July
1, 2004, the fund is charged up to 0.0861% of its average daily net assets. For
the year ended August 31, 2004, the fund paid MFSC a fee of $165,943 for
shareholder services which equated to 0.1025% of the fund's average daily net
assets. Also included in shareholder servicing costs are out-of-pocket
expenses, paid to MFSC, which amounted to $31,575 for the year ended August 31,
2004, as well as other expenses paid to unaffiliated vendors.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$181,710,351 and $182,942,896, 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 $157,272,873
----------------------------------------------------------
Gross unrealized appreciation $16,585,801
----------------------------------------------------------
Gross unrealized depreciation (4,927,993)
----------------------------------------------------------
Net unrealized appreciation $11,657,808
----------------------------------------------------------
(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:
Year ended 8/31/04 Year ended 8/31/03
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares sold 1,920,069 $28,691,770 1,098,510 $13,829,346
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (1,372,319) (21,034,291) (1,281,219) (15,706,599)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) 547,750 $7,657,479 (182,709) $(1,877,253)
- -----------------------------------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 1,298,612 $18,903,690 1,136,225 $13,674,207
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (1,875,435) (27,742,705) (1,594,020) (18,851,858)
- -----------------------------------------------------------------------------------------------------------
Net decrease (576,823) $(8,839,015) (457,795) $(5,177,651)
- -----------------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 241,139 $3,496,748 215,541 $2,588,515
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (291,465) (4,264,486) (522,037) (6,134,419)
- -----------------------------------------------------------------------------------------------------------
Net decrease (50,326) $(767,738) (306,496) $(3,545,904)
- -----------------------------------------------------------------------------------------------------------
CLASS I SHARES
Shares sold 7,449 $113,720 6,948 $87,434
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (6,092) (93,354) (12,684) (157,063)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) 1,357 $20,366 (5,736) $(69,629)
- -----------------------------------------------------------------------------------------------------------
Year ended 8/31/04 Year ended 8/31/03*
SHARES AMOUNT SHARES AMOUNT
CLASS R1 SHARES
Shares sold 431,299 $6,712,888 1,239 $16,256
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (234,601) (3,650,907) -- --
- -----------------------------------------------------------------------------------------------------------
Net increase 196,698 $3,061,981 1,239 $16,256
- -----------------------------------------------------------------------------------------------------------
Year ended 8/31/04**
SHARES AMOUNT
CLASS R2 SHARES
Shares sold 79,265 $1,178,842
- -------------------------------------------------------------------------
Shares reacquired (38,987) (578,698)
- -------------------------------------------------------------------------
Net increase 40,278 $600,144
- -------------------------------------------------------------------------
* For the period from the inception of Class R1 shares, December 31, 2002, through August 31, 2003.
** For the period from the inception of Class R2 shares, October 31, 2003, through August 31, 2004.
(6) LINE OF CREDIT
The fund and other affiliated funds participate in an $800 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the Federal
Reserve funds rate plus 0.50%. 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 calendar quarter. The commitment fee
allocated to the fund for the year ended August 31, 2004 was $796, and is
included in miscellaneous expense. The fund had no significant borrowings
during the year ended August 31, 2004.
(7) LEGAL PROCEEDINGS
On March 31, 2004, MFS settled an administrative proceeding with the Securities
and Exchange Commission ("SEC") regarding disclosure of brokerage allocation
practices in connection with MFS fund sales (the term "MFS funds" means the
open-end registered management investment companies sponsored by MFS). Under
the terms of the settlement, in which MFS neither admitted nor denied any
wrongdoing, MFS agreed to pay (one dollar) $1.00 in disgorgement and $50
million in penalty to certain MFS funds, pursuant to a plan developed by an
independent distribution consultant. The brokerage allocation practices which
were the subject of this proceeding were discontinued by MFS in November 2003.
The agreement with the SEC is reflected in an order of the SEC. Pursuant to the
SEC order, on July 28, 2004, MFS transferred these settlement amounts to the
SEC, and those MFS funds entitled to these settlement amounts accrued an
estimate of their pro rata portion of these amounts. Once the final
distribution plan is approved by the SEC, these amounts will be distributed by
the SEC to the affected MFS funds. The SEC settlement order states that MFS
failed to adequately disclose to the Boards of Trustees and to shareholders of
the MFS funds the specifics of its preferred arrangements with certain
brokerage firms selling MFS fund shares. The SEC settlement order states that
MFS had in place policies designed to obtain best execution of all MFS fund
trades. As part of the settlement, MFS retained an independent compliance
consultant to review the completeness of its current policies and practices
regarding disclosure to MFS fund trustees and to MFS fund shareholders of
strategic alliances between MFS or its affiliates and broker-dealers and other
financial advisers who support the sale of MFS fund shares.
In addition, in February, 2004, MFS reached agreement with the SEC, the New
York Attorney General ("NYAG") and the Bureau of Securities Regulation of the
State of New Hampshire ("NH") to settle administrative proceedings alleging
false and misleading information in certain MFS retail fund prospectuses
regarding market timing and related matters (the "February Settlements"). These
regulators alleged that prospectus language for certain MFS retail funds was
false and misleading because, although the prospectuses for those funds in the
regulators' view indicated that the MFS funds prohibited market timing, MFS did
not limit trading activity in 11 domestic large cap stock, high grade bond and
money market funds. MFS' former Chief Executive Officer, John W. Ballen, and
former President, Kevin R. Parke, also reached agreement with the SEC in which
they agreed to, among other terms, monetary fines and temporary suspensions
from association with any investment adviser or registered investment company.
Messrs. Ballen and Parke have resigned their positions with, and will not be
returning to, MFS and the MFS funds. Under the terms of the February
Settlements, MFS and the executives neither admit nor deny wrongdoing.
Under the terms of the February Settlements, a $225 million pool has been
established for distribution to shareholders in certain MFS retail funds, which
has been funded by MFS and of which $50 million is characterized as a penalty.
This pool will be distributed in accordance with a methodology developed by an
independent distribution consultant in consultation with MFS and the Board of
Trustees of the MFS retail funds, and acceptable to the SEC. MFS has further
agreed with NYAG to reduce its management fees in the aggregate amount of
approximately $25 million annually over the next five years, and not to
increase certain management fees during this period. MFS has also paid an
administrative fine to NH in the amount of $1 million, which will be used for
investor education purposes (NH retained $250,000 and $750,000 was contributed
to the North American Securities Administrators Association's Investor
Protection Trust). In addition, under the terms of the February Settlements,
MFS is in the process of adopting certain governance changes and reviewing its
policies and procedures.
Since December 2003, MFS, Sun Life Financial Inc., various MFS funds, the
Trustees of these MFS funds, and certain officers of MFS have been named as
defendants in multiple lawsuits filed in federal and state courts. The lawsuits
variously have been commenced as class actions or individual actions on behalf
of investors who purchased, held or redeemed shares of the MFS funds during
specified periods, as class actions on behalf of participants in certain
retirement plan accounts, or as derivative actions on behalf of the MFS funds.
The lawsuits relating to market timing and related matters have been
transferred to, and consolidated before, the United States District Court for
the District of Maryland, as part of a multi-district litigation of market
timing and related claims involving several other fund complexes (In re Mutual
Funds Investment Litigation (Alger, Columbia, Janus, MFS, One Group, Putnam,
PIMCO), No. 1:04-md-15863 (transfer began March 19, 2004)). Four lawsuits
alleging improper brokerage allocation practices and excessive compensation are
pending in the United States District Court for the District of Massachusetts
(Forsythe v. Sun Life Financial Inc., et al., No. 04cv10584 (GAO) (March 25,
2004); Eddings v. Sun Life Financial Inc., et al., No. 04cv10764 (GAO) (April
15, 2004); Marcus Dumond, et al. v. Massachusetts Financial Servs. Co., et al.,
No. 04cv11458 (GAO) (May 4, 2004); and Koslow v. Sun Life Financial Inc., et
al., No. 04cv11019 (GAO) (May 20, 2004)). The lawsuits generally allege that
some or all of the defendants (i) permitted or acquiesced in market timing
and/or late trading in some of the MFS funds, inadequately disclosed MFS'
internal policies concerning market timing and such matters, and received
excessive compensation as fiduciaries to the MFS funds, or (ii) permitted or
acquiesced in the improper use of fund assets by MFS to support the
distribution of MFS fund shares and inadequately disclosed MFS' use of fund
assets in this manner. The actions assert that some or all of the defendants
violated the federal securities laws, including the Securities Act of 1933 and
the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the
Investment Advisers Act of 1940, the Employee Retirement Income Security Act of
1974, as well as fiduciary duties and other violations of common law. The
lawsuits seek unspecified damages. Insofar as any of the actions is
appropriately brought derivatively on behalf of any of the MFS funds, any
recovery will inure to the benefit of the MFS funds. The defendants are
reviewing the allegations of the multiple complaints and will respond
appropriately. Additional lawsuits based on similar allegations may be filed in
the future.
Any potential resolution of these matters may include, but not be limited to,
judgments or settlements for damages against MFS, the MFS funds, or any other
named defendant. As noted above, as part of the regulatory settlements, MFS has
established a restitution pool in the amount of $225 million to compensate
certain shareholders of the MFS retail funds for damages that they allegedly
sustained as a result of market timing or late trading in certain of the MFS
retail funds, and transferred $50 million for distribution to affected MFS
funds to compensate those funds based upon the amount of brokerage commissions
allocated in recognition of MFS fund sales. It is not clear whether these
amounts will be sufficient to compensate shareholders for all of the damage
they allegedly sustained, whether certain shareholders or putative class
members may have additional claims to compensation, or whether the damages that
may be awarded in any of the actions will exceed these amounts. In the event
the MFS funds incur any losses, costs or expenses in connection with such
lawsuits, the Boards of Trustees of the affected MFS funds may pursue claims on
behalf of such funds against any party that may have liability to the funds in
respect thereof.
Review of these matters by the independent Trustees of the MFS funds and their
counsel is continuing. There can be no assurance that these regulatory actions
and lawsuits, or the adverse publicity associated with these developments, will
not result in increased fund redemptions, reduced sales of fund shares, or
other adverse consequences to the MFS funds.
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------------------------------
To the Trustees of MFS Series Trust I and Shareholders of MFS Core Equity Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Core Equity Fund (formerly MFS Research Growth and Income Fund) (the Fund) (one
of the portfolios comprising MFS Series Trust I), including the portfolio of
investments, as of August 31, 2004, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of
the periods indicated therein. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 and financial
highlights. Our procedures included confirmation of securities owned at August
31, 2004, by correspondence with the custodian and brokers or by other
appropriate auditing procedures where replies from brokers were not received.
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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Core Equity Fund at August 31, 2004, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended, and its financial highlights for each of the periods
indicated therein, in conformity with U.S. generally accepted accounting
principles.
ERNST & YOUNG LLP
Boston, Massachusetts
October 8, 2004
- ------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
- ------------------------------------------------------------------------------------------------------
The Trustees and officers of the Trust, as of October 10, 2004, are listed below, together with their
principal occupations during the past five years. (Their titles may have varied during that period.)
The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
PRINCIPAL OCCUPATIONS & OTHER
POSITION(s) HELD TRUSTEE/OFFICER DIRECTORSHIPS(2) DURING
NAME, DATE OF BIRTH WITH FUND SINCE(1) THE PAST FIVE YEARS
- ------------------- ---------------- --------------- -----------------------------
INTERESTED TRUSTEES
Robert J. Manning(3) Trustee and February 2004 Massachusetts Financial
(born 10/20/63) President Services Company, Chief
Executive Officer, President,
Chief Investment Officer and
Director
Robert C. Pozen(3) Trustee February 2004 Massachusetts Financial
(born 08/08/46) Services Company, Chairman
(since February 2004); Harvard Law
School (education), John Olin
Visiting Professor (since July
2002); Secretary of Economic
Affairs, The Commonwealth of
Massachusetts (January 2002 to
December 2002); Fidelity
Investments, Vice Chairman (June
2000 to December 2001); Fidelity
Management & Research Company
(investment adviser), President
(March 1997 to July 2001); The Bank
of New York (financial services),
Director; Bell Canada Enterprises
(telecommunications), Director;
Telesat (satellite communications),
Director
INDEPENDENT TRUSTEES
J. Atwood Ives Trustee and Chair of February 1992 Private investor; Eastern
(born 05/01/36) Trustees Enterprises (diversified
services company), Chairman,
Trustee and Chief Executive
Officer (until November 2000)
Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital,
(born 03/11/37) Chief of Cardiac Surgery;
Harvard Medical School,
Professor of Surgery
David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining
(born 05/30/42) products and service
provider), Vice Chairman/ Director
(since April 2001); Encinitos
Ventures (private investment
company), Principal (1997 to April
2001); Lincoln Electric Holdings,
Inc. (welding equipment
manufacturer), Director; Southwest
Gas Corporation (natural gas
distribution company), Director
William R. Gutow Trustee December 1993 Private investor and real
(born 09/27/41) estate consultant; Capitol
Entertainment Management
Company (video franchise),
Vice Chairman
Amy B. Lane Trustee January 2004 Retired; Merrill Lynch & Co.,
(born 02/08/53) Inc., Managing Director,
Investment Banking Group
(1997 to February 2001);
Borders Group, Inc. (book and
music retailer), Director;
Federal Realty Investment
Trust (real estate investment
trust), Trustee
Lawrence T. Perera Trustee July 1981 Hemenway & Barnes
(born 06/23/35) (attorneys), Partner
William J. Poorvu Trustee August 1982 Private investor; Harvard
(born 04/10/35) University Graduate School of
Business Administration,
Class of 1961 Adjunct
Professor in Entrepreneurship
Emeritus; CBL & Associates
Properties, Inc. (real estate
investment trust), Director
J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 09/23/38) (acquisition planning
specialists), President; Wellfleet
Investments (investor in health
care companies), Managing General
Partner (since 1993); Cambridge
Nutraceuticals (professional
nutritional products), Chief
Executive Officer (until May 2001)
Elaine R. Smith Trustee February 1992 Independent health care
(born 04/25/46) industry consultant
OFFICERS
Robert J. Manning(3) President and February 2004 Massachusetts Financial
(born 10/20/63) Trustee Services Company, Chief
Executive Officer, President,
Chief Investment Officer and
Director
James R. Bordewick, Jr.(3) Assistant Secretary September 1990 Massachusetts Financial
(born 03/06/59) and Assistant Clerk Services Company, Senior Vice
President and Associate
General Counsel
Jeffrey N. Carp(3) Secretary and Clerk September 2004 Massachusetts Financial
(born 12/01/56) Services Company, Senior Vice
President, General Counsel and
Secretary (since April 2004); Hale
and Dorr LLP (law firm) (prior to
April 2004)
James F. DesMarais(3) Assistant Secretary September 2004 Massachusetts Financial
(born 03/09/61) and Assistant Clerk Services Company, Assistant
General Counsel
Stephanie A. DeSisto(3) Assistant Treasurer May 2003 Massachusetts Financial
(born 10/01/53) Services Company, Vice
President (since April 2003);
Brown Brothers Harriman &
Co., Senior Vice President
(November 2002 to April
2003); ING Groep N.V./Aeltus
Investment Management, Senior
Vice President (prior to
November 2002)
Robert R. Flaherty(3) Assistant Treasurer August 2000 Massachusetts Financial
(born 09/18/63) Services Company, Vice
President (since August
2000); UAM Fund Services,
Senior Vice President (prior
to August 2000)
Richard M. Hisey(3) Treasurer August 2002 Massachusetts Financial
(born 08/29/58) Services Company, Senior Vice
President (since July 2002); The
Bank of New York, Senior Vice
President (September 2000 to July
2002); Lexington Global Asset
Managers, Inc., Executive Vice
President and Chief Financial
Officer (prior to September 2000);
Lexington Funds, Chief Financial
Officer (prior to September 2000)
Brian T. Hourihan(3) Assistant Secretary September 2004 Massachusetts Financial
(born 11/11/64) and Assistant Clerk Services Company, Vice
President, Senior Counsel and
Assistant Secretary (since
June 2004); Affiliated
Managers Group, Inc., Chief
Legal Officer/Centralized
Compliance Program (January
to April 2004); Fidelity
Research & Management
Company, Assistant General
Counsel (prior to January
2004)
Ellen Moynihan(3) Assistant Treasurer April 1997 Massachusetts Financial
(born 11/13/57) Services Company, Vice
President
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of
(born 03/07/44) Compliance Officer compliance services),
Principal (since June 2004);
CRA Business Strategies Group
(consulting services),
Executive Vice President
(April 2003 to June 2004);
David L. Babson & Co.
(investment adviser),
Managing Director, Chief
Administrative Officer and
Director (February 1997 to
March 2003)
James O. Yost(3) Assistant Treasurer September 1990 Massachusetts Financial
(born 06/12/60) Services Company, Senior Vice
President
- ----------------
(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously
since appointment unless indicated otherwise.
(2) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission
(i.e., "public companies").
(3) "Interested person" of MFS within the meaning of the Investment Company Act of 1940 (referred to as the
1940 Act), which is the principle federal law governing investment companies like the fund. The address of
MFS is 500 Boylston Street, Boston, Massachusetts 02116.
The Trust does not hold annual shareholder meetings for the purpose of electing Trustees, and Trustees are not
elected for fixed terms. The Trust will hold a shareholders' meeting in 2005 and at least once every five
years thereafter to elect Trustees. Each Trustee and officer holds office until his or her successor is chosen
and qualified or until his or her earlier death, resignation, retirement or removal.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or
a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain
affiliates of MFS. Each Trustee serves as a board member of 109 funds within the MFS Family of Funds.
The Statement of Additional Information contains further information about the Trustees and is available
without charge upon request by calling 1-800-225-2606.
- -----------------------------------------------------------------------------------------------------
INVESTMENT ADVISER CUSTODIAN
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 02116-3741 225 Franklin Street, Boston, MA 02110
DISTRIBUTOR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
MFS Fund Distributors, Inc. Ernst & Young LLP
500 Boylston Street, Boston, MA 02116-3741 200 Clarendon Street, Boston, MA 02116
DIRECTOR OF GLOBAL EQUITY RESEARCH
David A. Antonelli
QUARTERLY PORTFOLIO DISCLOSURE
Beginning with the fund's first and third fiscal quarters following this report, the fund will file a complete
schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and
third quarters of each fiscal year on Form N-Q. The fund's Form N-Q may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-0102
Information on the operation of the Public Reference Room may be obtained by calling the Commission at
1-800-SEC-0330. The fund's Form N-Q is available on the EDGAR database on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference
Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at www.mfs.com.
- -------------------------------------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS
- -------------------------------------------------------------------------------
YOUR GOALS ARE IMPORTANT
MFS offers a complete range of investments and investment services to address
specific financial needs over time. When your investing goals change, you can
easily stay with MFS for the products you need, when you need them. Whether
you're investing for college or retirement expenses or for tax management or
estate planning, MFS will be there.
Ask your investment professional how MFS can help you move toward the goals
you've set.
MFS FAMILY OF FUNDS(R)
More than 50 portfolios offer domestic and international equity and
fixed-income investments across the full risk spectrum
VARIABLE ANNUITIES
A selection of annuity products with advantages for
building and preserving wealth
MFS 401(k) AND IRA SUITES
Retirement plans for businesses and individuals
MFS COLLEGE SAVINGS PLANS
Investment products to help meet education expenses
MFS PRIVATE PORTFOLIO SERVICES
Investment advisory services that provide custom products
for high-net-worth individuals
Variable annuities are offered through MFS/Sun Life Financial Distributors, Inc.
- ------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED)
In January 2005, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 2004.
The fund has the option to use equalization, which is a tax basis dividends paid
deduction from earnings and profits distributed to shareholders upon redemption
of shares.
- --------------------------------------------------------------------------------
CONTACT INFORMATION
INVESTOR INFORMATION
For information on MFS mutual funds, call your investment professional or, for
an information kit, call toll free: 1-800-225-2606 any business day from 8 a.m.
to 8 p.m. Eastern time.
A general description of the MFS funds' proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the About MFS section of mfs.com or by visiting the SEC's Web site at
http://www.sec. gov.
Information regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is
available without charge by visiting the Proxy Voting section of mfs.com or by
visiting the SEC's Web site at http://www.sec.gov.
INVESTOR SERVICE
Write to us at: MFS Service Center, Inc.
P.O. Box 55824
Boston, MA 02205-5824
Type of Information Phone number Hours, Eastern Time
- --------------------------------------------------------------------------------
General information 1-800-225-2606 8 a.m. to 8 p.m., any
business day
- --------------------------------------------------------------------------------
Speech- or hearing-impaired 1-800-637-6576 9 a.m. to 5 p.m., any
business day
- --------------------------------------------------------------------------------
Shares prices, account 1-800-MFS-TALK
balances exchanges (1-800-637-8255) 24 hours a day, 365 days a
or stock and bond outlooks touch-tone required year
- --------------------------------------------------------------------------------
WORLD WIDE WEB
Go to MFS.COM for a clear view of market events, investor education, account
access, and product and performance insights.
Go paperless with EDELIVERY: Join your fellow shareholders who are already
taking advantage of this great new benefit from MFS. With eDelivery, we send
you prospectuses, reports, and proxies electronically. You get timely
information without mailbox clutter (and help your fund save printing and
postage costs).
SIGN-UP instructions: If your account is registered with us, go to mfs.com, log
in to your account via MFS Access, and select the eDelivery sign up options.
If you own your MFS fund shares through a financial institution or through a
retirement plan, MFS TALK, MFS Access, and eDelivery may not be available to
you.
[logo] M F S(R)
INVESTMENT MANAGEMENT
(C) 2004 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116.
RGI-ANN-10/04 26M
ITEM 2. CODE OF ETHICS.
The Registrant has adopted a Code of Ethics pursuant to Section 406 of the
Sarbanes-Oxley Act and as defined in the instructions to Form N-CSR that
applies to the Registrant's principal executive officer and principal financial
and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Mr. J. Atwood Ives and Ms. Amy B. Lane, members of the Audit Committee, have
been determined by the Board of Trustees in their reasonable business judgment
to meet the definition of "audit committee financial expert" as such term is
defined in the instructions to Form N-CSR. In addition, Mr. Ives and Ms. Lane
are "independent" members of the Audit Committee as defined in the instructions
to Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
ITEMS 4(A) THROUGH 4(D) AND 4(G):
The Board of Trustees has appointed Deloitte & Touche LLP ("Deloitte") to serve
as independent accountants to certain series of the Registrant ("Funds"), and
Ernst & Young LLP ("E&Y") to serve in this capacity for other Funds of the
Registrant. In addition, Deloitte and E&Y may provide non-audit related
services to the Funds and/or to the Funds' investment adviser, Massachusetts
Financial Services Company ("MFS") and to various entities either controlling,
controlled by, or under common control with MFS that provide ongoing services
to the Funds ("MFS Related Entities").
For the fiscal years ended August 31, 2004 and 2003, audit fees billed to the
Funds by Deloitte were as follows:
Registrant's
Audit Fees
Fees billed by Deloitte: 2004 2003
---- ----
MFS Cash Reserve Fund $21,400 $20,600
MFS Managed Sectors Fund 32,300 31,100
------- -------
TOTAL $53,700 $51,700
For the fiscal years ended August 31, 2004 and 2003, audit fees billed to the
Funds by E&Y were as follows:
Registrant's
Audit Fees
Fees billed by E&Y: 2004 2003
---- ----
MFS Core Growth Fund $30,600 $28,850
MFS New Discovery Fund 30,600 28,850
MFS Core Equity Fund 30,600 28,850
MFS Research International Fund 32,600 30,720
MFS Strategic Growth Fund 30,600 28,850
MFS Technology Fund 30,600 28,850
MFS Value Fund 30,600 28,850
-------- --------
Total $216,200 $203,820
For the fiscal years ended August 31, 2004 and 2003, fees billed by Deloitte
for audit-related, tax and other services provided to the Funds, MFS and MFS
Related Entities were as follows:
Total
Audit-Related Fees(1) Tax Fees(2) All Other Fees(3) Non-Audit Fees
Fees billed by Deloitte: 2004 2003 2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ---- ---- ----
MFS Cash Reserve Fund $0 $0 $3,000 $2,200 $0 $0 $3,000 $2,200
MFS Managed Sectors Fund 0 0 5,900 4,900 0 0 5,900 4,900
- - ----- ----- - - ----- -----
TOTAL FEES BILLED BY DELOITTE TO FUNDS $0 $0 $8,900 $7,100 $0 $0 $8,900 $7,100
To MFS and MFS Related Entities 759,500 181,500 35,000 37,629 $96,815 133,933 891,315 353,062
-------- -------- ------- ------- ------- -------- -------- --------
TOTAL FEES BILLED $759,500 $181,500 $43,900 $44,729 $96,815 $133,933 $900,215 $360,162
For the fiscal years ended August 31, 2004 and 2003, fees billed by E&Y for audit-related, tax and other services provided
to the Registrant, MFS and MFS Related Entities were as follows:
Audit-Related All Other Total
Fees(1) Tax Fees(2) Fees(3) Non-Audit Fees
2004 2003 2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ---- ---- ----
Fees billed by E&Y:
MFS Core Growth Fund $0 $0 $5,390 $5,245 $0 $0 $5,390 $5,245
MFS New Discovery Fund 0 0 5,390 5,245 0 0 5,390 5,245
MFS Core Equity Fund 0 0 5,390 5,245 0 0 5,390 5,245
MFS Research International Fund 0 0 5,690 5,575 0 0 5,690 5,575
MFS Strategic Growth Fund 0 0 5,390 5,245 0 0 5,390 5,245
MFS Technology Fund 0 0 5,390 5,245 0 0 5,390 5,245
MFS Value Fund 0 0 5,390 5,245 0 0 5,390 5,245
---- ---- ------- ------- ---- ---- ------- -------
TOTAL FEES BILLED BY E&Y TO FUND $0 $0 $38,030 $37,045 $0 $0 $38,030 $37,045
To MFS and MFS Related Entities 0 0 7,000 0 0 0 7,000 0
---- ---- ------- ------- ---- ---- ------- -------
TOTAL FEES BILLED $0 $0 $45,030 $37,045 $0 $0 $45,030 $37,045
---- ---- ------- ------- ---- ---- ------- -------
(1) There were no Audit-Related services provided to the Funds by either Deloitte or E&Y for the fiscal years ended August
31, 2004 and 2003. Audit-Related Fees paid to Deloitte for MFS and MFS Related Entities includes fees for internal
control reviews. There were no Audit-Related services provided to MFS and MFS Related Entities by E&Y.
(2) Fees included in the Tax Fees category comprise all services performed by professional staff in the independent
accountant's tax division except those services related to the audit. For both Deloitte and E&Y this category includes
fees for tax compliance, tax planning, and tax advice. For Deloitte, tax compliance, tax advice, and tax planning
services include preparation of original and amended tax returns, and tax advice related to income recognition and
distribution policies. For E&Y, tax compliance, tax advice, and tax planning services include preparation of original
and amended tax returns, tax advice, and sales tax training.
(3) For Deloitte, All Other Fees include fees for services related to financial information system implementation,
consultation on internal cost allocations, consultation on allocation of monies pursuant to an administrative proceeding
regarding disclosure of brokerage allocation practices in connection with fund sales, and analysis of certain portfolio
holdings verses investment styles. For E&Y, there were no All Other Fee services provided to the Fund, MFS or MFS
Related Entities for the fiscal years ended August 31, 2004 and 2003.
ITEM 4(E)(1):
Set forth below are the policies and procedures established by the Audit
Committee of the Board of Trustees relating to the pre-approval of audit and
non-audit related services:
Pre-approval is needed for all planned and anticipated audit and
permissible non-audit services rendered to the Funds and all
permissible non-audit services rendered to MFS or MFS Related Entities
if the services relate directly to the operations and/or financial
reporting of the Registrant. In the event such services arise between
regular meetings of the Audit Committee and it is not practical to
seek pre-approval at the next regular meeting of the Audit Committee,
such services may be referred to the Chair of the Audit Committee for
approval; provided that, the Chair may not approve any individual
engagement for such services exceeding $50,000 or multiple engagements
for such services in the aggregate exceeding $100,000 between such
regular meetings of the Audit Committee. Any engagement approved by
the Chair between regular meetings of the Audit Committee shall be
presented for ratification by the entire Audit Committee at its next
regularly scheduled meeting.
ITEM 4(E)(2):
None, or 0%, of the services relating to the Audit-Related Fees, Tax Fees and
All Other Fees paid by the Funds and MFS and MFS Related Entities disclosed
above were approved by the audit committee pursuant to paragraphs (c)(7)(i)(C)
or (c)(7)(ii) of Rule 2-01 of Regulation S-X (which permits audit committee
approval after the start of the engagement with respect to services other than
audit review or attest services, if certain conditions are satisfied).
ITEM 4(f): Not applicable.
ITEM 4(h): Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to the Registrant.
ITEM 6. SCHEDULE OF INVESTMENTS
The schedule of investments for each series of the Registrant is included as
part of the report to stockholders of such series under Item 1 of this Form
N-CSR.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to the Registrant.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable to the Registrant.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable to the Registrant.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Board of Trustees of the Registrant has adopted procedures by which
shareholders may send communications, including recommendations for nominees to
the Registrant's Board, to the Board. Shareholders may mail written
communications to the Board to the attention of the Board of Trustees, MFS
Series Trust I, Massachusetts Financial Services Company, 500 Boylston Street,
Boston, MA 02116, c/o Frank Tarantino, Independent Chief Compliance Officer of
the Fund. Shareholder communications must (i) be in writing and be signed by
the shareholder, (ii) identify the series of the Registrant to which they
relate, and (iii) identify the class and number of shares held by the
shareholder.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and
procedures (as defined in Rule 30a -3(c) under the Act) as conducted within
90 days of the filing date of this Form N-CSR, the registrant's principal
financial officer and principal executive officer have concluded that those
disclosure controls and procedures provide reasonable assurance that the
material information required to be disclosed by the registrant on this
report is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and
forms.
(b) There were no changes in the registrant's internal controls over financial
reporting (as defined in Rule 30a-3(d) under the Act) that occurred during
the registrant's last fiscal half-year (the registrant's second fiscal
half-year in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the registrant's internal
control over financial reporting.
ITEM 12. EXHIBITS.
(a) File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant
intends to satisfy the Item 2 requirements through filing of an
exhibit: Code of Ethics attached hereto.
(2) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule
30a-2 under the Act (17 CFR 270.30a-2): Attached hereto.
(b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act,
provide the certifications required by Rule 30a-2(b) under the Act (17 CFR
270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17
CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title
18 of the United States Code (18 U.S.C. 1350) as an exhibit. A
certification furnished pursuant to this paragraph will not be deemed
"filed" for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r),
or otherwise subject to the liability of that section. Such certification
will not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933 or the Exchange Act, except to the extent that
the registrant specifically incorporates it by reference: Attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) MFS SERIES TRUST I
By (Signature and Title)* ROBERT J. MANNING
------------------------------------------------
Robert J. Manning, President
Date: October 25, 2004
----------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* ROBERT J. MANNING
------------------------------------------------
Robert J. Manning, President
(Principal Executive Officer)
Date: October 25, 2004
----------------
By (Signature and Title)* RICHARD M. HISEY
------------------------------------------------
Richard M. Hisey, Treasurer (Principal Financial
Officer and Accounting Officer)
Date: October 25, 2004
----------------
* Print name and title of each signing officer under his or her signature.