<PAGE>
<TABLE>
<CAPTION>
<S> <C>
MASSACHUSETTS INVESTORS TRUST MFS(R) WORLD TOTAL RETURN FUND
MASSACHUSETTS INVESTORS GROWTH STOCK FUND MFS(R) MUNICIPAL BOND FUND
MFS(R) CAPITAL GROWTH FUND MFS(R) MUNICIPAL HIGH INCOME FUND
MFS(R) EMERGING GROWTH FUND MFS(R) MUNICIPAL INCOME FUND
MFS(R) GOLD & NATURAL RESOURCES FUND MFS(R) ALABAMA MUNICIPAL BOND FUND
MFS(R) GROWTH OPPORTUNITIES FUND MFS(R) ARKANSAS MUNICIPAL BOND FUND
MFS(R) MANAGED SECTORS FUND MFS(R) CALIFORNIA MUNICIPAL BOND FUND
MFS(R) OTC FUND MFS(R) FLORIDA MUNICIPAL BOND FUND
MFS(R) RESEARCH FUND MFS(R) GEORGIA MUNICIPAL BOND FUND
MFS(R) VALUE FUND MFS(R) LOUISIANA MUNICIPAL BOND FUND
MFS(R) TOTAL RETURN FUND MFS(R) MARYLAND MUNICIPAL BOND FUND
MFS(R) UTILITIES FUND MFS(R) MASSACHUSETTS MUNICIPAL BOND FUND
MFS(R) BOND FUND MFS(R) MISSISSIPPI MUNICIPAL BOND FUND
MFS(R) GOVERNMENT MORTGAGE FUND MFS(R) NEW YORK MUNICIPAL BOND FUND
MFS(R) GOVERNMENT SECURITIES FUND MFS(R) NORTH CAROLINA MUNICIPAL BOND FUND
MFS(R) HIGH INCOME FUND MFS(R) PENNSYLVANIA MUNICIPAL BOND FUND
MFS(R) INTERMEDIATE INCOME FUND MFS(R) SOUTH CAROLINA MUNICIPAL BOND FUND
MFS(R) STRATEGIC INCOME FUND MFS(R) TENNESSEE MUNICIPAL BOND FUND
MFS(R) GOVERNMENT LIMITED MATURITY FUND MFS(R) TEXAS MUNICIPAL BOND FUND
MFS(R) LIMITED MATURITY FUND MFS(R) VIRGINIA MUNICIPAL BOND FUND
MFS(R) MUNICIPAL LIMITED MATURITY FUND MFS(R) WASHINGTON MUNICIPAL BOND FUND
MFS(R) WORLD EQUITY FUND MFS(R) WEST VIRGINIA MUNICIPAL BOND FUND
MFS(R) WORLD GOVERNMENTS FUND MFS(R) WORLD ASSET ALLOCATION FUND
MFS(R) World Growth Fund
</TABLE>
SUPPLEMENT TO THE CURRENT PROSPECTUS
During the period from February 1, 1995 through April 14, 1995 (the "Sales
Period") (unless extended by MFS Fund Distributors, Inc. ("MFD"), the Funds'
distributor), MFD will pay Corelink Financial Inc. ("Corelink") an additional
commission equal to O.10% of the gross commissonable sales for Class A shares
and Class B shares and the net asset value for Class C shares (if applicable) of
the Funds sold by Corelink during the Sales Period.
THE DATE OF THIS SUPPLEMENT IS FEBRUARY 1, 1995.
MFS-16CL-2/95/5M
<PAGE>
PROSPECTUS
February 1, 1995
Class A Shares of Beneficial
Interest
Class B Shares of Beneficial
MFS(R) TOTAL Interest
RETURN FUND Class C Shares of Beneficial
(A member of the MFS Family of Funds(R)) Interest
- ------------------------------------------------------------------------------
Page
----
1. Expense Summary ................................................. 2
2. The Fund ........................................................ 3
3. Condensed Financial Information ................................. 4
4. Investment Objectives and Policies .............................. 5
5. Management of the Fund .......................................... 13
6. Information Concerning Shares of the Fund ....................... 14
Purchases ................................................... 14
Exchanges ................................................... 20
Redemptions and Repurchases ................................. 20
Distribution Plans .......................................... 22
Distributions ............................................... 24
Tax Status .................................................. 24
Net Asset Value ............................................. 25
Description of Shares, Voting Rights and Liabilities ........ 25
Performance Information ..................................... 25
7. Shareholder Services ............................................ 26
Appendix A ...................................................... 28
Appendix B ...................................................... 31
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS TOTAL RETURN FUND
500 Boylston Street,
Boston, Massachusetts 02116 (617) 954-5000
The primary investment objective of the MFS Total Return Fund (the "Fund") is to
obtain above-average income (compared to a portfolio entirely invested in equity
securities) consistent with prudent employment of capital. The Fund's secondary
objective is to take advantage of opportunities for growth of capital and
income. The Fund is a diversified series of MFS Series Trust V (the "Trust"), an
open-end investment company. Generally, at least 40% of the Fund's assets are
invested in equity securities (see "Investment Objectives and Policies"). The
minimum initial investment generally is $1,000 per account (see "Purchases").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS") and MFS Fund Distributors, Inc. ("MFD"), respectively,
both of which are located at 500 Boylston Street, Boston, Massachusetts 02116.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
This Prospectus sets forth concisely the information concerning the Trust and
the Fund that a prospective investor ought to know before investing. The Trust,
on behalf of the Fund, has filed with the Securities and Exchange Commission
(the "SEC") a Statement of Additional Information, dated February 1, 1995, which
contains more detailed information about the Trust and the Fund and is
incorporated into this Prospectus by reference. See page 27 for a further
description of the information set forth in the Statement of Additional
Information. A copy of the Statement of Additional Information may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Initial Sales Charge Imposed on Purchases of Fund Shares
(as a percentage of offering price) ............................. 4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as applicable) .. See Below<F1> 4.00% 0.00%
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ................................................... 0.37% 0.37% 0.37%
Rule 12b-1 Fees ................................................... 0.25%<F2> 1.00%<F3> 1.00%<F3>
Other Expenses .................................................... 0.23% 0.33% 0.26%<F4>
--- --- ---
Total Operating Expenses .......................................... 0.85% 1.70% 1.63%
<FN>
- ---------
<F1> Purchases of $1 million or more are not subject to an initial sales charge;
however, a CDSC of 1% will be imposed on such purchases in the event of
certain redemption transactions within 12 months following such purchases
(see "Purchases").
<F2> The Fund has adopted a Distribution Plan for its Class A shares in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act"), which provides that it will pay distribution/
service fees aggregating up to (but not necessarily all of) 0.35% per annum
of the average daily net assets attributable to the Class A shares (see
"Distribution Plans"). Currently, the service fee is reduced to 0.15% per
annum for shares sold prior to October 1, 1989 and the 0.10% per annum
distribution fee is being waived. After a substantial period of time,
distribution expenses paid under this Plan, together with the initial sales
charge, may total more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge.
<F3> The Fund has adopted separate Distribution Plans for its Class B and its
Class C shares in accordance with Rule 12b-1 under the 1940 Act, which
provide that it will pay distribution/service fees aggregating up to (but
not necessarily all of) 1.00% per annum of the average daily net assets
attributable to the Class B shares under the Class B Distribution Plan and
the Class C shares under the Class C Distribution Plan (see "Distribution
Plans"). After a substantial period of time, distribution expenses paid
under these Plans, together with any CDSC payable upon redemption of Class
B shares, may total more than the maximum sales charge that would have been
permissibie if imposed entirely as an initial sales charge.
<F4> Except for the shareholder servicing agent fee component, "Other Expenses"
is based on Class A expenses incurred during the fiscal year ended
September 30, 1994. The shareholder servicing agent fee component of "Other
Expenses" is a predetermined percentage based upon the Fund's net assets
attributable to each class.
</TABLE>
EXAMPLE OF EXPENSES
-------------------
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) 5% annual return and (b) redemption at the
end of each of the time periods indicated (unless otherwise noted):
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------ ------- ---------------------------- -------
<S> <C> <C> <C> <C>
<F1>
1 year ...... . $ 56 $ 57 $ 17 $ 17
3 years ........ 73 84 54 51
5 years ........ 92 112 92 89
10 years ........ 147 178<F2> 178<F2> 193
<FN>
- ---------
<F1> Assumes no redemption.
<F2> Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
</TABLE>
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Fund will bear directly
or indirectly. More complete descriptions of the following Fund expenses are set
forth in the following sections of the Prospectus: (i) varying sales charges on
share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii)
management fees -- "Investment Adviser"; and (iv) Rule 12b-1 (i.e., distribution
plan) fees -- "Distribution Plans."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
2. THE FUND
MFS Total Return Fund (the "Fund") is a diversified series of MFS
Series Trust V (the "Trust"), an open-end management investment company which
was organized as a business trust under the laws of The Commonwealth of
Massachusetts in 1984. The Fund and its predecessor have been in business since
1970. The Trust presently consists of two series, each of which represents a
portfolio with separate investment policies. Shares of the Fund are continuously
sold to the public and the Fund buys securities (stocks, bonds and other
instruments) for its portfolio. Three classes of shares of the Fund currently
are offered to the general public. Class A shares are offered at net asset value
plus an initial sales charge (or a contingent deferred sales charge (a "CDSC")
in the case of certain purchases of $1 million or more) and subject to a
Distribution Plan, providing for an annual distribution fee and a service fee.
Class B shares are offered at net asset value without an initial sales charge
but subject to a CDSC and a Distribution Plan providing for an annual
distribution fee and service fee which are greater than the Class A distribution
fee and service fee; Class B shares will convert to Class A shares approximately
eight years after purchase. Class C shares are offered at net asset value
without an initial sales charge or a CDSC but subject to a Distribution Plan
providing for an annual distribution fee and service fee which are equal to the
Class B distribution fee and service fee. Class C shares do not convert to any
other class of shares of the Fund.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. Massachusetts Financial Services Company, a Delaware corporation ("MFS" or
the "Adviser"), is the Fund's investment adviser. The Adviser is responsible for
the management of the Fund's assets and the officers of the Trust are
responsible for the Fund's operations. The Adviser manages the portfolio from
day to day in accordance with the Fund's investment objectives and policies. The
selection of investments and the way they are managed depend on conditions and
trends in the economy and the financial marketplaces. The Trust also offers to
buy back (redeem) shares of the Fund from Fund shareholders at any time at net
asset value, less any applicable CDSC.
3. CONDENSED FINANCIAL INFORMATION -- PER SHARE INCOME AND CAPITAL CHANGES
The following information should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the Statement of Additional Information in
reliance upon the report of Deloitte & Touche LLP, independent certified public
accountants, as experts in accounting and auditing.
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
CLASS A, CLASS B AND CLASS C SHARES
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988
CLASS A
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period $13.70 $12.42 $11.82 $10.25 $11.58 $10.13 $11.47
------ ------ ------ ------ ------ ------ ------
Income from investment operations<F2> --
Net investment income $ 0.54 $ 0.45 $ 0.65 $ 0.67 $ 0.64 $ 0.65 $ 0.62
Net realized and unrealized gain
(loss) on investments (0.69) 1.74 0.75 1.57 (1.25) 1.71 (1.07)
------ ------ ------ ------ ------ ------ ------
Total from investment operations $(0.15) $ 2.19 $ 1.40 $ 2.24 $(0.61) $ 2.36 $(0.45)
Less distributions declared to shareholders --
From net investment income<F4> (0.54) $(0.59) $(0.66) $(0.61) $(0.66) $(0.63) $(0.60)
In excess of net investment income<F2> -- -- -- -- -- -- --
From net realized gain on investments
and foreign currency transactions (0.10) (0.32) (0.14) (0.06) (0.06) (0.28) (0.08)
In excess of net realized gain on
investments and foreign currency
transactions (0.11) -- -- -- -- -- --
From paid-in capital -- -- -- -- -- -- (0.21)
------ ------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.75) $(0.91) $(0.80) $(0.67) $(0.72) $(0.91) $(0.89)
------ ------ ------ ------ ------ ------ ------
Net asset value -- end of period $12.80 $13.70 $12.42 $11.82 $10.25 $11.58 $10.13
====== ====== ====== ====== ====== ====== ======
TOTAL RETURN<F1> (1.07)% 18.32% 12.26% 22.25% (5.59)% 23.46% (3.93)%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses 0.85% 0.84% 0.84% 0.87% 0.85% 0.72% 0.71%
Net investment income 4.26% 4.51% 5.40% 5.89% 5.71% 5.97% 6.06%
PORTFOLIO TURNOVER 91% 95% 84% 74% 50% 53% 52%
NET ASSETS AT END OF PERIOD
(000,000 OMITTED) $1,857 $1,702 $1,198 $ 909 $ 707 $ 628 $ 508
The distributor waived a portion of its distribution fee for the period
indicated. If the fee had been incurred by the Fund, the net investment income
per share and ratios would have been:
Net investment income $ 0.52 -- -- -- -- -- --
Ratios (to average net assets):
Expenses 0.95% -- -- -- -- -- --
Net investment income 4.16% -- -- -- -- -- --
<FN>
- ---------
<F1> Total returns for Class A shares do not include the sales charge (except
for reinvested dividends prior to October 1, 1989). If the sales charge had
been included, the results would have been lower.
<F2> Per share data for the period subsequent to September 30, 1993 is based on
average shares outstanding.
<F3> For the year ended September 30, 1993, the per share distribution in excess
of net investment income on Class A shares was $0.0035.
<F4> For the years ended September 30, 1992 and 1991, $0.0508 and $0.0596,
respectively, of the per share distributions from net investment income
have been redesignated as distributions from capital gains.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<CAPTION>
YEAR/PERIOD ENDED SEPTEMBER 30,
------------------------------------------------------------------
1987 1986 1985 1994 1993<F1> 1994
------ ------ ------ ------ ------ ------
CLASS A CLASS B CLASS C<F2>
------------------------------ ------------------ -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period $ 9.77 $ 8.73 $ 8.33 $13.70 $13.53 $12.92
------ ------ ------ ------ ------ ------
Income from investment operations<F5> --
Net investment income $ 0.56 $ 0.60 $ 0.61 $ 0.39 $0.06 $ 0.08
Net realized and unrealized gain
(loss) on investments 2.07 1.91 0.97 (0.65) 0.16 (0.13)
------ ------ ------ ------ ------ ------
Total from investment operations $ 2.63 $ 2.51 $ 1.58 $(0.26) $ 0.22 $(0.05)
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income $(0.56) $(0.59) $(0.62) $(0.43) $(0.05) $(0.07)
From net realized gain on investments
and foreign currency transactions (0.36) (0.88) (0.56) (0.10) -- --
In excess of net realized gain on
invesmtents and foreign currency
transactions -- -- -- (0.11) -- --
From paid-in capital<F6> (0.01) -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.93) $(1.47) $(1.18) $(0.64) $(0.05) $(0.07)
------ ------ ------ ------ ------ ------
Net asset value at end of period $11.47 $ 9.77 $ 8.73 $12.80 $13.70 $12.80
====== ====== ====== ====== ====== ======
TOTAL RETURN<F4> 26.81% 28.45% 18.58% (1.93)% 15.24% (0.41)%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses 0.63% 0.67% 0.78% 1.70% 1.75%<F3> 1.76%<F3>
Net investment income 5.05% 5.67% 6.73% 3.45% 3.98%<F3> 4.08%<F3>
PORTFOLIO TURNOVER 58% 94% 71% 91% 95% 91%
NET ASSETS AT END OF PERIOD (000 OMITTED) $ 551 $ 309 $ 216 $ 843 $ 532 $ 1
<FN>
- ---------
<F1> For the period from the commencement of offering of Class B shares, August
23, 1993 to September 30, 1993.
<F2> For the period from the commencement of offering of Class C shares, August
1, 1994 to September 30, 1994.
<F3> Annualized.
<F4> Total returns for Class A shares do not include the sales charge (except
for reinvested dividends prior to October 1, 1989). If the sales charge had
been included, the results would have been lower.
<F5> Per share data for the period subsequent to September 30, 1993 is based on
average shares outstanding.
<F6> For the years ended September 30, 1986, 1985 and 1984, the per share
distributions from paid-in capital were $0.0037, $0.0016 and $0.0008,
respectively.
</TABLE>
4. INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES -- The Fund's primary investment objective is to obtain
above-average income (compared to a portfolio entirely invested in equity
securities) consistent with the prudent employment of capital. While current
income is the primary objective, the Fund believes that there should also be a
reasonable opportunity for growth of capital and income, since many securities
offering a better than average yield may also possess growth potential. Thus, in
selecting securities for its portfolio, the Fund considers each of these
objectives. Generally, at least 40% of the Fund's assets are invested in equity
securities. Any investment involves risk and there can be no assurance that the
Fund will achieve its investment objectives.
INVESTMENT POLICIES -- The Fund's policy is to invest in a broad list of
securities, including short-term obligations. The list may be diversified not
only by companies and industries, but also by type of security. Fixed income
securities and equity securities (which include: common and preferred stocks;
securities such as bonds, warrants or rights that are convertible into stock;
and depositary receipts for those securities) may be held by the Fund. Some
fixed income securities may also have a call on common stock by means of a
conversion privilege or attached warrants. The Fund may vary the percentage of
assets invested in any one type of security in accordance with the Adviser's
interpretation of economic and money market conditions, fiscal and monetary
policy and underlying security values. The Fund's debt investments may consist
of both "investment grade" securities (rated Baa or better by Moody's Investors
Service, Inc. ("Moody's") or BBB or better by Standard and Poor's Ratings Group
("S&P") or Fitch Investors Service, Inc. ("Fitch")) and securities that are
unrated or are in the lower rating categories (rated Ba or lower by Moody's or
BB or lower by S&P or Fitch) (commonly known as "junk bonds") including up to
20% of its assets in nonconvertible fixed income securities that are in these
lower rating categories and comparable unrated securities (see "Risk Factors --
Lower Rated Bonds" below). Generally, most of the Fund's long-term debt
investments will consist of "investment grade" securities. See Appendix A to
this Prospectus for a description of these ratings and Appendix B for a chart
showing the Fund's holdings of fixed-income securities broken down by rating
category as of the end of its most recent fiscal year. It is not the Fund's
policy to rely exclusively on ratings issued by established credit rating
agencies but rather to supplement such ratings with the Adviser's own
independent and ongoing review of credit quality.
U.S. GOVERNMENT SECURITIES: The Fund may also invest in U.S. Government
securities, including: (1) U.S. Treasury obligations, which differ only in their
interest rates, maturities and times of issuance: U.S. Treasury bills
(maturities of one year or less); U.S. Treasury notes (maturities of one to ten
years); and U.S. Treasury bonds (generally maturities of greater than ten
years), all of which are backed by the full faith and credit of the U.S.
Government; and (2) obligations issued or guaranteed by U.S. Government agencies
or instrumentalities, some of which are backed by the full faith and credit of
the U.S. Treasury, e.g., direct pass-through certificates of the Government
National Mortgage Association ("GNMA"); some of which are supported by the right
of the issuer to borrow from the U.S. Government, e.g., obligations of Federal
Home Loan Banks; and some of which are backed only by the credit of the issuer
itself, e.g., obligations of the Student Loan Marketing Association.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage pass-through
securities. Mortgage pass-through securities are securities representing
interests in "pools" of mortgage loans. Monthly payments of interest and
principal by the individual borrowers on mortgages are passed through to the
holders of the securities (net of fees paid to the issuer or guarantor of the
securities) as the mortgages in the underlying mortgage pools are paid off.
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (in the case of securities guaranteed by
GNMA); or guaranteed by U.S. Government-sponsored corporations (such as the
Federal National Mortgage Association or the Federal Home Loan Mortgage
Corporation, which are supported only by the discretionary authority of the U.S.
Government to purchase the agency's obligations). Mortgage pass-through
securities may also be issued by non-governmental issuers (such as commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers). See the Statement of
Additional Information for a further discussion of these securities.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: Fixed income
securities that the Fund may invest in also include zero coupon bonds, deferred
interest bonds and bonds on which the interest is payable in kind ("PIK bonds").
Zero coupon and deferred interest bonds are debt obligations which are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. PIK bonds are debt obligations which provide that the issuer thereof
may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value due to changes in
interest rates than debt obligations which make regular payments of interest.
The Fund will accrue income on such investments for tax and accounting purposes,
as required, which is distributable to shareholders and which, because no cash
is received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Fund's distribution obligations.
FOREIGN SECURITIES: The Fund may invest up to 20% (and generally expects to
invest between 10% and 20%) of its total assets in foreign securities which are
not traded on a U.S. exchange (not including American Depositary Receipts).
Investing in securities of foreign issuers generally involves risks not
ordinarily associated with investing in securities of domestic issuers. These
include changes in currency rates, exchange control regulations, governmental
administration or economic or monetary policy (in the United States or abroad)
or circumstances in dealings between nations. Costs may be incurred in
connection with conversions between various currencies. Special considerations
may also include more limited information about foreign issuers, higher
brokerage costs, different accounting standards and thinner trading markets.
Foreign securities markets may also be less liquid, more volatile and less
subject to government supervision than in the United States. Investments in
foreign countries could be affected by other factors including expropriation,
confiscatory taxation and potential difficulties in enforcing contractual
obligations and could be subject to extended settlement periods. The Fund may
hold foreign currency received in connection with investments in foreign
securities when, in the judgment of the Adviser, it would be beneficial to
convert such currency into U.S. dollars at a later date, based on anticipated
changes in the relevant exchange rate. The Fund may also hold foreign currency
in anticipation of purchasing foreign securities. See the Statement of
Additional Information for further discussion of foreign securities and the
holding of foreign currency, as well as the associated risks.
EMERGING MARKET SECURITIES: The Fund may invest in countries or regions with
relatively low gross national product per capita compared to the world's major
economies, and in countries or regions with the potential for rapid economic
growth (emerging markets). Emerging markets will include any country: (i) having
an "emerging stock market" as defined by the International Finance Corporation;
(ii) with low- to middle-income economies according to the International Bank
for Reconstruction and Development (the "World Bank"); (iii) listed in World
Bank publications as developing; or (iv) determined by the Adviser to be an
emerging market as defined above. The Fund may invest in securities of: (i)
companies the principal securities trading market for which is an emerging
market country; (ii) companies organized under the laws of, and with a principal
office in, an emerging market country; (iii) companies whose principal
activities are located in emerging market countries; (iv) companies traded in
any market that derive 50% or more of their total revenue from either goods or
services produced in an emerging market or sold in an emerging market.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. Because ADRs trade on
United States securities exchanges, the Adviser does not treat them as foreign
securities. However, they are subject to many of the risks of foreign securities
such as changes in exchange rates and more limited information about foreign
issuers.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn additional income on available cash or as a temporary defensive measure.
Under a repurchase agreement, the Fund acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Fund's right to liquidate the securities
may be restricted (during which time the value of the securities could decline).
As discussed in the Statement of Additional Information, the Fund has adopted
certain procedures intended to minimize any risk.
LENDING OF SECURITIES: The Fund may seek to increase its income by lending
portfolio securities. Such loans will usually be made only to member firms (and
subsidiaries thereof) of the New York Stock Exchange and to member banks of the
Federal Reserve System, and would be required to be secured continuously by
collateral in cash, cash equivalents or U.S. Government securities maintained on
a current basis at an amount at least equal to the market value of the
securities loaned. The Fund will continue to collect the equivalent of interest
on the securities loaned and will also receive either interest (through
investment of cash collateral) or a fee (if the collateral is U.S. Government
securities).
"WHEN-ISSUED" SECURITIES: The Fund may purchase securities on a "when-issued" or
on a "forward delivery" basis, which means that the securities will be delivered
to the Fund at a future date usually beyond customary settlement time. The
commitment to purchase a security for which payment will be made on a future
date may be deemed a separate security. The Fund does not pay for the securities
until received, and does not start earning interest on the securities until the
contractual settlement date. In order to invest its assets immediately, while
awaiting delivery of securities purchased on such bases, the Fund will normally
invest in cash, short-term money market instruments and high quality debt
securities.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices, or other
financial indicators. Most indexed securities are short to intermediate term
fixed-income securities whose values at maturity or interest rates rise or fall
according to the change in one or more specified underlying instruments. Indexed
securities may include securities that have embedded swaps (see "Swaps and
Related Transactions"). Indexed securities may be positively or negatively
indexed (i.e., their value may increase or decrease if the underlying instrument
appreciates), and may have return characteristics similar to direct investments
in the underlying instrument or to one or more options on the underlying
instrument. Indexed securities may be more volatile than the underlying
instrument itself.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities for delivery in the future (generally
within 30 days) and simultaneously contracts to repurchase substantially similar
(same type, coupon and maturity) securities on a specified future date. The Fund
will only enter into covered rolls. A "covered roll" is a specific type of
dollar roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion
of its assets in "loan participations." By purchasing a loan participation, the
Fund acquires some or all of the interest of a bank or other lending institution
in a loan to a corporate borrower. Many such loans are secured, and most impose
restrictive covenants which must be met by the borrower. These loans are made
generally to finance internal growth, mergers, acquisitions, stock repurchases,
leveraged buy-outs and other corporate activities. Such loans may be in default
at the time of purchase. The Fund may also purchase trade or other claims
against companies, which generally represent money owed by the company to a
supplier of goods or services. These claims may also be purchased at a time when
the company is in default. Certain of the loan participations acquired by the
Fund may involve revolving credit facilities or other standby financing
commitments which obligate the Fund to pay additional cash on a certain date or
on demand.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loan
participations and other direct investments may not be in the form of securities
or may be subject to restrictions on transfer, and only limited opportunities
may exist to resell such instruments. As a result, the Fund may be unable to
sell such investments at an opportune time or may have to resell them at less
than fair market value. For a further discussion of loan participations and the
risks related to transactions therein, see the Statement of Additional
Information.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to different
types of investments, the Fund may enter into interest rate swaps, currency
swaps and other types of available swap agreements, such as caps, collars and
floors. Swaps involve the exchange by the Fund with another party of cash
payments based upon different interest rate indices, currencies, or other prices
or rates, such as the value of mortgage prepayment rates. For example, in the
typical interest rate swap, the Fund might exchange a sequence of cash payments
based on a floating rate index for cash payments based on a fixed rate. Payments
made by both parties to a swap transaction are based on a principal amount
determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swap agreements will tend to shift a Fund investment exposure from one type of
investment to another. For example, if a Fund agreed to exchange payments in
dollars for payments in foreign currency, in each case based on a fixed rate,
the swap agreement would tend to decrease a Fund's exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates. Caps and
floors have an effect similar to buying or writing options. Depending on how
they are used, swap agreements may increase or decrease the overall volatility
of a Fund's investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on a
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. A Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the Statement of Additional Information on the risks involved
in these activities.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933 ("1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a continuing
review of the trading markets for a specific Rule 144A security, whether such
security is illiquid and thus subject to the Fund's limitation on investing not
more than 15% of its net assets in illiquid investments, or liquid and thus not
subject to such limitation. The Board of Trustees has adopted guidelines and
delegated to MFS the daily function of determining and monitoring the liquidity
of Rule 144A securities. The Board, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Board will carefully
monitor the Fund's investments in Rule 144A securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in a Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing Rule 144A securities held in the
Fund's portfolio. Subject to the Fund's 15% limitation on investments in
illiquid investments, the Fund may also invest in restricted securities that may
not be sold under Rule 144A, which presents certain risks. As a result, the Fund
might not be able to sell these securities when the Adviser wishes to do so, or
might have to sell them at less than fair value. In addition, market quotations
are less readily available. Therefore, judgment may at times play a greater role
in valuing these securities than in the case of unrestricted securities.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card or automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. See the Statement of Additional
Information for further information on these securities.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call options on
securities and purchase put and call options on securities. The Fund will write
such options for the purpose of increasing its return and/or to protect the
value of its portfolio. In particular, where the Fund writes an option which
expires unexercised or is closed out by the Fund at a profit, it will retain the
premium paid for the option, which will increase its gross income and will
offset in part the reduced value of a portfolio security in connection with
which the option may have been written or the increased cost of portfolio
securities to be acquired. In contrast, however, if the price of the security
underlying the option moves adversely to the Fund's position, the option may be
exercised and the Fund will be required to purchase or sell the security at a
disadvantageous price, resulting in losses which may only be partially offset by
the amount of the premium. The Fund may also write combinations of put and call
options on the same security, known as "straddles." Such transactions can
generate additional premium income but also present increased risk.
The Fund may purchase put or call options in anticipation of declines in the
value of portfolio securities or increases in the value of securities to be
acquired. In the event that such declines or increases occur, the Fund may be
able to offset the resulting adverse effect on its portfolio, in whole or in
part, through the options purchased. The risk assumed by the Fund in connection
with such transactions is limited to the amount of the premium and related
transaction costs associated with the option, although the Fund may be required
to forfeit such amounts in the event that the prices of securities underlying
the options do not move in the direction or to the extent anticipated.
The Fund may also enter into options on the yield "spread," or yield
differential, between two securities, a transaction referred to as a "yield
curve" option, for hedging and non-hedging (an effort to increase current
income) purposes. In contrast to other types of options, a yield curve option is
based on the difference between the yields of designated securities rather than
the actual prices of the individual securities, and is settled through cash
payments. Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease. Yield curve options written by the Fund will be covered as described
in the Statement of Additional Information. The trading of yield curve options
is subject to all the risks associated with trading other types of options, as
discussed below under "Risk Factors" and in the Statement of Additional
Information. In addition, such options present risks of loss even if the yield
on one of the underlying securities remains constant, if the spread moves in a
direction or to an extent which was not anticipated.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put options
and purchase call and put options on stock indices. The Fund may write options
on stock indices for the purpose of increasing its gross income and to protect
its portfolio against declines in the value of securities it owns or increases
in the value of securities to be acquired. When the Fund writes an option on a
stock index, and the value of the index moves adversely to the holder's
position, the option will not be exercised, and the Fund will either close out
the option at a profit or allow it to expire unexercised. The Fund will thereby
retain the amount of the premium, which will increase its gross income and
offset part of the reduced value of portfolio securities or the increased cost
of securities to be acquired. Such transactions, however, will constitute only
partial hedges against adverse price fluctuations, since any such fluctuations
will be offset only to the extent of the premium received by the Fund for the
writing of the option. In addition, if the value of an underlying index moves
adversely to the Fund's option position, the option may be exercised, and the
Fund will experience a loss which may only be partially offset by the amount of
the premium received.
The Fund may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. The Fund's
possible loss in either case will be limited to the premium paid for the option,
plus related transaction costs.
OPTIONS ON FOREIGN CURRENCIES: The Fund may also purchase and write options on
foreign currencies ("Options on Foreign Currencies") for the purpose of
protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. As in the
case of other types of options, however, the writing of an Option on Foreign
Currency will constitute only a partial hedge, up to the amount of the premium
received, and the Fund may be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
Option on Foreign Currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to the Fund's position, it may forfeit the entire amount of the premium paid for
the option plus related transaction costs. The Fund may also choose to, or be
required to, receive delivery of the foreign currencies underlying Options on
Foreign Currencies it has entered into. Under certain circumstances, such as
where the Adviser believes that the applicable exchange rate is unfavorable at
the time the currencies are received or the Adviser anticipates, for any other
reason, that the exchange rate will improve, the Fund may hold such currencies
for an indefinite period of time. See "Investment Objectives and Policies --
Foreign Securities" in the Statement of Additional Information for information
on the risks associated with holding foreign currency.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities or foreign currencies or
contracts based on indices of securities or currencies (including any index of
U.S. or foreign securities) as such instruments become available for trading
("Futures Contracts"). Such transactions will be entered into for hedging
purposes, in order to protect the Fund's current or intended investments from
the effects of changes in interest or exchange rates or declines in a securities
market, as well as for non-hedging purposes, to the extent permitted by
applicable law. The Fund will incur brokerage fees when it purchases and sells
Futures Contracts, and will be required to maintain margin deposits. In
addition, Futures Contracts entail risks. Although the Adviser believes that use
of such contracts will benefit the Fund, if its investment judgment about the
general direction of interest or exchange rates or a securities market is
incorrect, the Fund's overall performance may be poorer than if it had not
entered into any such contract and the Fund may realize a loss. The Fund will
not enter into any Futures Contract if immediately thereafter the value of all
such Futures Contracts would exceed 50% of the value of its total assets.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options on Futures
Contracts ("Options on Futures Contracts") for hedging purposes or for
non-hedging purposes to the extent permitted by applicable law. Purchases of
Options on Futures Contracts may present less risk in hedging the Fund's
portfolio than the purchase or sale of the underlying Futures Contracts since
the potential loss is limited to the amount of the premium plus related
transaction costs, although it may be necessary to exercise the option to
realize any profit, which results in the establishment of a futures position.
The writing of Options on Futures Contracts, however, does not present less risk
than the trading of Futures Contracts and will constitute only a partial hedge,
up to the amount of the premium received. In addition, if an option is
exercised, the Fund may suffer a loss on the transaction.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a fixed quantity of a foreign currency at
a future date ("Forward Contracts"). The Fund may enter into Forward Contracts
for hedging purposes as well as for non-hedging purposes (i.e., speculative
purposes). By entering into transactions in Forward Contracts, for hedging
purposes, the Fund may be required to forego the benefits of advantageous
changes in exchange rates and, in the case of Forward Contracts entered into for
non-hedging purposes, the Fund may sustain losses which will reduce its gross
income. Such transactions, therefore, could be considered speculative. Forward
Contracts are traded over-the-counter and not on organized commodities or
securities exchanges. As a result, Forward Contracts operate in a manner
distinct from exchange-traded instruments, and their use involves certain risks
beyond those associated with transactions in Futures Contracts or options traded
on exchanges. The Fund may choose to, or be required to, receive delivery of the
foreign currencies underlying Forward Contracts it has entered into. Under
certain circumstances, such as where the Adviser believes that the applicable
exchange rate is unfavorable at the time the currencies are received or the
Adviser anticipates, for any other reason, that the exchange rate will improve,
the Fund may hold such currencies for an indefinite period of time. The Fund may
also enter into a Forward Contract on one currency to hedge against risk of loss
arising from fluctuations in the value of a second currency (referred to as a
"cross hedge") if, in the judgment of the Adviser, a reasonable degree of
correlation can be expected between movements in the values of the two
currencies. The Fund has established procedures consistent with statements of
the SEC and its staff regarding the use of Forward Contracts by registered
investment companies, which requires use of segregated assets or "cover" in
connection with the purchase and sale of such contracts. See "Investment
Objective and Policies -- Foreign Securities" in the Statement of Additional
Information for information on the risks associated with holding foreign
currency.
RISK FACTORS --
LOWER RATED BONDS: The Fund may invest in fixed income securities rated Baa
by Moody's or BBB by S&P or Fitch and comparable unrated securities. These
securities, while normally exhibiting adequate protection parameters, have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade fixed income securities.
The Fund may also invest in securities rated Ba or lower by Moody's or BB or
lower by S&P or Fitch and comparable unrated securities (commonly known as "junk
bonds") to the extent described above. No minimum rating standard is required by
the Fund.These securities are considered speculative and, while generally
providing greater income than investments in higher rated securities, will
involve greater risk of principal and income (including the possibility of
default or bankruptcy of the issuers of such securities) and may involve greater
volatility of price (especially during periods of economic uncertainty or
change) than securities in the higher rating categories. However, since yields
vary over time, no specific level of income can ever be assured. These lower
rated high yielding fixed income securities generally tend to reflect economic
changes and short-term corporate and industry developments to a greater extent
than higher rated securities which react primarily to fluctuations in the
general level of interest rates (although these lower rated fixed income
securities are also affected by changes in interest rates, the market's
perception of their credit quality, and the outlook for economic growth). In the
past, economic downturns or an increase in interest rates have, under certain
circumstances, caused a higher incidence of default by the issuers of these
securities and may do so in the future, especially in the case of highly
leveraged issuers. During certain periods, the higher yields on the Fund's lower
rated high yielding fixed income securities are paid primarily because of the
increased risk of loss of principal and income, arising from such factors as the
heightened possibility of default or bankruptcy of the issuers of such
securities. Due to the fixed income payments of these securities, the Fund may
continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Fund's yield despite the actual loss of principal. The market for these lower
rated fixed income securities may be less liquid than the market for investment
grade fixed income securities, and judgment may at times play a greater role in
valuing these securities than in the case of investment grade fixed income
securities. Changes in the value of securities subsequent to their acquisition
will not affect cash income or yield to maturity to the Fund but will be
reflected in the net asset value of shares of the Fund. For a chart indicating
the composition of the bond portion of the Fund's portfolio for the fiscal year
ended September 30, 1994, with the debt securities separated into rating
categories, see Appendix B to this Prospectus. See the Statement of Additional
Information for more information on lower rated securities.
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although the Fund will
enter into transactions in options, Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies for hedging purposes, such
transactions nevertheless involve certain risks. For example, a lack of
correlation between the instrument underlying an option or Futures Contract and
the assets being hedged, or unexpected adverse price movements, could render the
Fund's hedging strategy unsuccessful and could result in losses. The Fund also
may enter into transactions in options, Futures Contracts, Options on Futures
Contracts and Forward Contracts for other than hedging purposes, which involves
greater risk. In particular, such transactions may result in losses for the Fund
which are not offset by gains on other portfolio positions, thereby reducing
gross income. In addition, foreign currency markets may be extremely volatile
from time to time. There also can be no assurance that a liquid secondary market
will exist for any contract purchased or sold, and the Fund may be required to
maintain a position until exercise or expiration, which could result in losses.
The Statement of Additional Information contains a description of the nature and
trading mechanics of options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and Options on Foreign Currencies, and includes a discussion
of the risks related to transactions therein.
Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities underlying
options, Futures Contracts and Options on Futures Contracts traded by the Fund
will include both domestic and freign securities.
The risks of investing in foreign securities may be intensified in the case of
investments in emerging markets. Securities prices in emerging markets can be
significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
of assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be predominantly
based on only a few industries, may be highly vulnerable to changes in local or
global trade conditions, and may suffer from extreme and volatile debt burdens
or inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of substantial holdings difficult
or impossible at times. Securities of issuers located in countries with emerging
markets may have limited marketability and may be subject to more abrupt or
erratic price movements.
--------------
PORTFOLIO TRADING: The primary consideration in placing portfolio security
transactions with broker-dealers for execution is to obtain and maintain the
availability of execution at the most favorable prices and in the most effective
manner possible. Consistent with the foregoing primary consideration, the Rules
of Fair Practice of the National Association of Securities Dealers, Inc. ("the
NASD"), and such other policies as the Trustees may determine, the Adviser may
consider sales of shares of the Fund and of the other investment company clients
of MFD, the Fund's distributor, as a factor in the selection of broker-dealers
to execute the Fund's portfolio transactions. From time to time, the Adviser may
direct certain portfolio transactions to broker-dealer firms which, in turn,
have agreed to pay a portion of the Fund's operating expenses (e.g., fees
charged by the custodian of the Fund's assets). For a further discussion of
portfolio trading, see "Portfolio Transactions and Brokerage Commissions" in the
Statement of Additional Information.
The Fund does not intend to trade in securities for short-term profits and
anticipates that portfolio securities ordinarily will be held for one year or
longer. However, the Fund will effect trades whenever it believes that changes
in its portfolio securities are appropriate.
--------------
The investment objectives and policies described above, including Options,
Options on Foreign Currency, Futures Contracts, Options on Futures Contracts and
Forward Contracts, are not fundamental and may be changed without shareholder
approval. A change in the Fund's investment objectives may result in the Fund
having investment objectives different from the objectives which the shareholder
considered appropriate at the time of investment in that Fund.
The Statement of Additional Information includes a discussion of other
investment policies and a listing of specific investment restrictions which
govern the Fund's investment policies. The specific investment restrictions
listed in the Statement of Additional Information may not be changed without
shareholder approval (see "Investment Restrictions" in the Statement of
Additional Information). The Fund's investment limitations, policies and rating
standards are adhered to at the time of purchase or utilization of assets; a
subsequent change in circumstances will not be considered to result in a
violation of policy.
5. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement, dated January 18, 1985 (the "Advisory Agreement"). The
Adviser provides the Fund with overall investment advisory and administrative
services, as well as general office facilities. Richard E. Dahlberg has been the
Fund's portfolio manager since June, 1985. Mr. Dahlberg has been employed by the
Adviser since 1968. Subject to such policies as the Trustees may determine, the
Adviser makes investment decisions for the Fund. For these services and
facilities, the Adviser receives a management fee, computed and paid monthly,
fixed by a formula based upon a percentage of the Fund's average daily net
assets plus a percentage of the Fund's gross income other than gains from the
sale of securities. The applicable percentages are reduced as assets and income
reach the following levels:
<TABLE>
<CAPTION>
ANNUAL RATE OF MANAGEMENT FEE ANNUAL RATE OF MANAGEMENT FEE
BASED ON AVERAGE DAILY NET ASSETS BASED ON GROSS INCOME
- ------------------------------------------------------------------- ----------------------------------------------
<S> <C>
.25% of the first $200 million 3.57% of the first $14 million
.212% of average daily net assets in excess of $200 million 3.04% of gross income in excess of $14 million
</TABLE>
For the Fund's fiscal year ended September 30, 1994, MFS received management
fees under the Advisory Agreement of $9,315,310 (of which $5,365,312 was based
on average daily net assets and $3,949,998 on gross income), equivalent, on an
annualized basis, to 0.37% of the Fund's average daily net assets.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R)/Sun Life Series Trust, MFS
Institutional Trust, MFS Union Standard Trust, MFS Variable Insurance Trust, MFS
Municipal Income Trust, MFS Government Markets Income Trust, MFS Multimarket
Income Trust, MFS Intermediate Income Trust, MFS Charter Income Trust, MFS
Special Value Trust, Sun Growth Variable Annuity Fund, Inc. and seven variable
accounts, each of which is a registered investment company established by Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)") in
connection with the sale of Compass-2 and Compass-3 combination fixed/variable
annuity contracts. MFS and its wholly-owned subsidiary, MFS Asset Management,
Inc., provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $33.4 billion on behalf of approximately 1.5 million investor
accounts as of December 30, 1994. As of such date, the MFS organization managed
approximately $18.4 billion of assets in fixed income securities. MFS is a
subsidiary of Sun Life of Canada (U.S.) which in turn is a subsidiary of Sun
Life Assurance Company of Canada ("Sun Life"). The Directors of MFS are A. Keith
Brodkin, Jeffrey L. Shames, John R. Gardner, John D. McNeil and Arnold D. Scott.
Mr. Brodkin is the Chairman, Mr. Shames is the President and Mr. Scott is the
Secretary and a Senior Executive Vice President of MFS. Messrs. McNeil and
Gardner are the Chairman and the President, respectively, of Sun Life. Sun Life,
a mutual life insurance company, is one of the largest international life
insurance companies and has been operating in the U.S. since 1895, establishing
a headquarters office here in 1973. The executive officers of MFS report to the
Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a director of MFS, is the Chairman, President
and a Trustee of the Trust. W. Thomas London, Stephen E. Cavan, James O. Yost
and James R. Bordewick, Jr., all of whom are officers of MFS, are officers of
the Trust.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and certain other services for the Fund.
6. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
securities dealer, certain banks and other financial institutions having selling
agreements with MFD. Non-securities dealer financial institutions will receive
transaction fees that are the same as commission fees to dealers. Securities
dealers and other financial institutions also may charge their customers fees
relating to investments in the Fund.
The Fund offers three classes of shares which bear sales charges and
distribution fees in different forms and amounts:
CLASS A SHARES. Class A shares are offered at net asset value per share plus an
initial sales charge (or CDSC in the case of certain purchases of $1 million or
more) as follows:
<PAGE>
<TABLE>
<CAPTION>
SALES CHARGE AS<F1>
PERCENTAGE OF:
-------------------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
<S> <C> <C> <C>
Less than $100,000 ..................................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000 ........................ 4.00 4.17 3.20
$250,000 but less than $500,000 ........................ 2.95 3.04 2.25
$500,000 but less than $1,000,000 ...................... 2.20 2.25 1.70
$1,000,000 or more ..................................... None<F2> None<F2> See Below<F2>
<FN>
- ---------
<F1> Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above.
<F2> A CDSC may apply in certain circumstances. MFD, on behalf of the Fund, will
pay a commission on purchases of $1 million or more.
</TABLE>
No sales charge is payable at the time of purchase of Class A shares on
investments of $1 million or more. However, a CDSC shall be imposed on such
investments in the event of a share redemption within 12 months following the
share purchase, at the rate of 1% on the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares.
In determining whether a CDSC on such Class A shares is payable, and, if so, the
amount of the charge, it is assumed that shares not subject to the CDSC are the
first redeemed followed by other shares held for the longest period of time. All
investments made during a calendar month, regardless of when during the month
the investment occurred, will age one month on the last day of that month and
each subsequent month. Except as noted below, the CDSC on Class A shares will be
waived in the case of: (i) exchanges (except that if the shares acquired by
exchange were then redeemed within 12 months of the initial purchase (other than
in connection with subsequent exchanges to other MFS Funds), the charge would
not be waived); (ii) distributions to participants from a retirement plan
qualified under section 401(a) of the Internal Revenue Code of 1986, as amended
(the "Code") (a "Retirement Plan"), due to: (a) a loan from the plan (repayments
of loans, however, will constitute new sales for purposes of assessing the CDSC;
(b) "financial hardship" of the participant in the plan, as that term is defined
in Treasury Regulation Section 1.401(k)-1(d)(2), as amended from time to time;
or (c) the death of a participant in such a plan; (iii) distributions from a
403(b) plan or an Individual Retirement Account ("IRA") due to death,
disability, or attainment of age 59 1/2; (iv) tax-free returns of excess
contributions to an IRA; (v) distributions by other employee benefit plans to
pay benefits; and (vi) certain involuntary redemptions and redemptions in
connection with certain automatic withdrawals from a qualified retirement plan.
The CDSC on Class A shares will not be waived, however, if the retirement plan
withdraws from the Fund except if the Retirement Plan has invested its assets in
Class A shares of one or more of the MFS Funds for more than 10 years from the
later to occur of (i) January 1, 1993 or (ii) the date such Retirement Plan
first invests its assets in Class A shares of one or more of the MFS Funds, the
CDSC on Class A shares will be waived in the case of a redemption of all of the
Retirement Plan's shares (including shares of any other class) in all MFS Funds
(i.e., all the assets of the Retirement Plan invested in the MFS Funds are
withdrawn), unless, immediately prior to the redemption, the aggregate amount
invested by the Retirement Plan in Class A shares of the MFS Funds (excluding
the reinvestment of distributions) during the prior four year period equals 50%
or more of the total value of the Retirement Plan's assets in the MFS Funds, in
which case the CDSC will not be waived. The CDSC on Class A shares will be
waived upon redemption by a Retirement Plan where the redemption proceeds are
used to pay expenses of the Retirement Plan or certain expenses of participants
under the Retirement Plan (e.g., participant account fees), provided that the
Retirement Plan's sponsor subscribes to the MFS Fundamental 401(k) Plan(sm) or
another similar recordkeeping system made available by the Shareholder Servicing
Agent. The CDSC on Class A shares will be waived upon the transfer of
registration from shares held by a Retirement Plan through a single account
maintained by the Shareholder Servicing Agent to multiple Class A share accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants in the Retirement Plan, provided that the Retirement Plan's sponsor
subscribes to the MFS Fundamental 401(k) Plan(sm) or another similar
recordkeeping system made available by the Shareholder Servicing Agent. Any
applicable CDSC will be deferred upon an exchange of Class A shares of the Fund
for units of participation of the MFS Fixed Fund (a bank collective investment
fund) (the "Units"), and the CDSC will be deducted from the redemption proceeds
when such Units are subsequently redeemed (assuming the CDSC is then payable).
No CDSC will be assessed upon an exchange of Units for Class A shares of the
Fund. For purposes of calculating the CDSC payable upon redemption of Class A
shares of the Fund or Units acquired pursuant to one or more exchanges, the
period during which the Units are held will be aggregated with the period during
which the Class A shares are held. MFD shall receive all CDSCs which it intends
to apply for the benefit of the Fund.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price as shown in the above table. In the case of the
maximum sales charge, the dealer retains 4% and MFD retains approximately 3/4 of
1% of the public offering price. The sales charge may vary depending on the
number of shares of the Fund as well as certain MFS Funds and other funds owned
or being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or a 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchases privileges by which the sales
charge may be reduced is set forth in the Statement of Additional Information.
In addition, MFD, on behalf of the Fund and pursuant to the Fund's Class A
Distribution Plan, will pay commissions to dealers who initiate and are
responsible for purchases of $1 million or more as follows: 1.00% on sales up to
$5 million, plus 0.25% on the amount in excess of $5 million; provided, however,
that MFD may pay a commission, on sales in excess of $5 million to certain
retirement plans, of 1.00% to certain dealers which, at MFD's invitation, enter
into an agreement with MFD in which the dealer agrees to return any commission
paid to it on the sale (or on a pro rata portion thereof) if the shareholder
redeems his or her shares within a period of time after purchase as specified by
MFD. Purchases of $1 million or more for each shareholder account will be
aggregated over a 12-month period (commencing from the date of the first such
purchase) for purposes of determining the level of commissions to be paid during
that period with respect to such account.
Class A shares of the Fund may be sold at their net asset value to the officers
of the Trust, to any of the subsidiary companies of Sun Life, to eligible
Directors, officers, employees (including retired employees) and agents of MFS,
Sun Life or any of their subsidiary companies, to any trust, pension,
profit-sharing or any other benefit plan for such persons, to any trustees and
retired trustees of any investment company for which MFD serves as distributor
or principal underwriter, and to certain family members of such individuals and
their spouses, provided the shares will not be resold except to the Fund. Class
A shares of the Fund may be sold at net asset value to any employee, partner,
officer or trustee of any sub-adviser to any MFS Fund and to certain family
members of such individuals and their spouses, or to any trust, pension,
profit-sharing or other retirement plan for the sole benefit of such employee or
representative, provided such shares will not be resold except to the Fund.
Class A shares of the Fund may also be sold at their net asset value to any
employee or registered representative of any dealer or other financial
institution which has a sales agreement with MFD or its affiliates, to certain
family members of such employees or representatives and their spouses, or to any
trust, pension, profit-sharing or other retirement plan for the sole benefit of
such employee or representative, as well as to clients of MFS Asset Management,
Inc. Class A shares may be sold at net asset value, subject to appropriate
documentation, through a dealer where the amount invested represents redemption
proceeds from a registered open-end management investment company not
distributed or managed by MFD or its affiliates if: (i) the redeemed shares were
subject to an initial sales charge or a deferred sales charge (whether or not
actually imposed); (ii) such redemption has occurred no more than 90 days prior
to the purchase of Class A shares of the Fund and (iii) the Fund, MFD or its
affiliates have not agreed with such company or its affiliates, formally or
informally, to sell Class A shares at net asset value or provide any other
incentive with respect to such redemption and sale. In addition, Class A shares
of the Fund may be sold at net asset value in connection with the acquisition or
liquidation of the assets of other investment companies or personal holding
companies. Insurance company separate accounts may also purchase Class A shares
of the Fund at their net asset value. Class A shares of the Fund may be
purchased at net asset value by retirement plans whose third party
administrators have entered into an administrative services agreement with MFD
or one or more of its affiliates to perform certain administrative services,
subject to certain operational requirements specified from time to time by MFD
or one or more of its affiliates. Class A shares of the Fund may also be sold at
net asset value through the automatic investment of Class A and Class B periodic
distributions which constitute required withdrawals from qualified retirement
plans. Class A shares of the Fund may be purchased at net asset value through
certain broker-dealers and other financial institutions which have entered into
an agreement with MFD, which includes a requirement that such shares be sold for
the benefit of clients participating in a "wrap account" or a similar program
under which such clients pay a fee to such broker-dealer or other financial
institution.
Class A shares of the Fund may be purchased at net asset value by certain
retirement plans subject to the Employee Retirement Income Security Act of 1974,
as amended, subject to the following:
(i) The sponsoring organization must demonstrate to the satisfaction of MFD
that either (a) the employer has at least 25 employees or (b) the aggregate
purchases by the retirement plan of Class A shares of the MFS Funds will be
in an amount of at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion; and
(ii) a CDSC of 1% will be imposed on such purchases in the event of certain
redemption transactions within 12 months following such purchases.
Dealers who initiate and are responsible for purchases of Class A shares of the
Fund in this manner will be paid a commission by MFD, as follows: 1.00% on sales
up to $5 million, plus 0.25% on the amount in excess of $5 million; provided,
however, that MFD may pay a commission, on sales in excess of $5 million to
certain retirement plans, of 1.00% to certain dealers which, at MFD's
invitation, enter into an agreement with MFD in which the dealer agrees to
return any commission paid to it on the sale (or on a pro rata portion thereof)
if the shareholder redeems his or her shares within a period of time after
purchase as specified by MFD. Purchases of $1 million or more for each
shareholder account will be aggregated over a 12-month period (commencing from
the date of the first such purchase) for purposes of determining the level of
commissions to be paid during that period with respect to such account.
Class A shares of the Fund may also be purchased at net asset value by
retirement plans qualified under Section 401(k) of the Code through certain
broker-dealers and other financial institutions which have entered into an
agreement with MFD which includes certain minimum size qualifications for such
retirement plans and provides that the broker-dealer or other financial
institution will perform certain administrative services with respect to the
plan's account. Class A shares of the Fund may be sold at net asset value
through the automatic reinvestment of Class A and Class B distributions which
constitute required withdrawals from qualified retirement plans. Furthermore,
Class A shares of the Fund may be sold at net asset value through the automatic
reinvestment of distributions of dividends and capital gains of Class A shares
of other MFS Funds pursuant to the Distribution Investment Program (see
"Shareholder Services" in the Statement of Additional Information).
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First .................................................... 4%*
Second ................................................... 4%
Third .................................................... 3%
Fourth ................................................... 3%
Fifth .................................................... 2%
Sixth .................................................... 1%
Seventh and following .................................... 0%
- ---------
*Class B shares purchased from January 1, 1993 through August 31,1993, will be
subject to a CDSC of 5% in the event of a redemption within the first year
after purchase.
For Class B shares purchased prior to January 1, 1993, the Fund imposes a CDSC
as a percentage of redemption proceeds as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First .................................................... 6%
Second ................................................... 5%
Third .................................................... 4%
Fourth ................................................... 3%
Fifth .................................................... 2%
Sixth .................................................... 1%
Seventh and following .................................... 0%
No CDSC is paid upon an exchange of shares. For purposes of calculating the CDSC
upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares. See "Redemptions and Repurchases --
Contingent Deferred Sales Charge" for further discussion of the CDSC.
The CDSC on Class B shares will be waived upon the death or disability (as
defined in section 72(m)(7) of the Code) of any investor, provided the account
is registered (i) in the case of a deceased individual, solely in the deceased
individual's name, (ii) in the case of a disabled individual, solely or jointly
in the disabled individual's name or (iii) in the name of a living trust for the
benefit of the deceased or disabled individual. The CDSC on Class B shares will
also be waived in the case of redemptions of shares of the Fund pursuant to a
systematic withdrawal plan. In addition, the CDSC on Class B shares will be
waived in the case of distributions from an IRA, SAR-SEP or any other retirement
plan qualified under Section 401(a), 401(k) or 403(b) of the Code, due to death
or disability, or in the case of required minimum distributions from any such
retirement plan due to attainment of age 70 1/2. The CDSC on Class B shares will
be waived in the case of distributions from a retirement plan qualified under
Sections 401(a) or 401(k) of the Code due to (i) returns of excess contribution
to the plan, (ii) retirement of a participant in the plan, (iii) a loan from the
plan (repayments of loans, however, will constitute new sales for purposes of
assessing the CDSC), (iv) "financial hardship" of the participant in the plan,
as that term is defined in Treasury Regulation Section 1.401(k)-1(d)(2), as
amended from time to time, and (v) termination of employment of the participant
in the plan (excluding, however, a partial or other termination of the plan).
The CDSC on Class B shares of the Fund will also be waived upon redemption by
(i) officers of the Trust, (ii) any of the subsidiary companies of Sun Life,
(iii) eligible Directors, officers, employees (including retired employees) and
agents of MFS, Sun Life or any of their subsidiary companies, (iv) any trust,
pension, profit-sharing or any other benefit plan for such persons, (v) any
trustees and retired trustees of any investment company for which MFD serves as
distributor or principal underwriter, and (vi) certain family members of such
individuals and their spouses, provided in each case that the shares will not be
resold except to the Fund. The CDSC on Class B shares will also be waived in the
case of redemptions by any employee or registered representative of any dealer
or other financial institution which has a sales agreement with MFD, by certain
family members of such employee or representative and their spouses, by any
trust, pension, profit-sharing or other retirement plan for the sole benefit of
such employee or representatives and by clients of MFS Asset Management, Inc.
The CDSC on Class B shares may also be waived in connection with the acquisition
or liquidation of the assets of other investment companies or personal holding
companies. A retirement plan qualified under Section 401(a) or 401(k) of the
Code (a "Retirement Plan") that has invested its assets in Class B shares of one
or more of the MFS Funds for more than 10 years from the later to occur of (i)
January 1, 1993 or (ii) the date the Retirement Plan first invests its assets in
Class B shares of one or more of the MFS Funds, will have the CDSC on Class B
shares waived in the case of a redemption of all the Retirement Plan's shares
(including shares of any other class) in all MFS Funds (i.e., all the assets of
the Retirement Plan invested in the MFS Funds are withdrawn), except that if,
immediately prior to the redemption, the aggregate amount invested by the
Retirement Plan in Class B shares of the MFS Funds (excluding the reinvestment
of distributions) during the prior four year period equals 50% or more of the
total value of the Retirement Plan's assets in the MFS Funds, then the CDSC will
not be waived. The CDSC on Class B shares will be waived upon redemption by a
Retirement Plan where the redemption proceeds are used to pay expenses of the
Retirement Plan or certain expenses of participants under the Retirement Plan
(e.g., participant account fees), provided that the Retirement Plan's sponsor
subscribes to the MFS Fundamental 401(k) Plan (sm) or another similar
recordkeeping system made available by the Shareholder Servicing Agent. The CDSC
on Class B shares will be waived upon the transfer of registration from shares
held by a Retirement Plan through a single account maintained by the Shareholder
Servicing Agent to multiple Class B share accounts provided that the Retirement
Plan's sponsor subscribes to the MFS Fundamental 401(k) Plan(sm) or another
similar recordkeeping system made available by the Shareholder Servicing Agent.
The CDSC on Class B shares may also be waived in connection with the acquisition
or liquidation of the assets of other investment companies or personal holding
companies.
CONVERSION OF CLASS B SHARES: Class B shares of the Fund that remain outstanding
for approximately eight years will convert to Class A shares of the Fund. Shares
purchased through the reinvestment of distributions paid in respect of Class B
shares will be treated as Class B shares for purposes of the payment of the
distribution and service fees under the Distribution Plan applicable to Class B
shares. However, for purposes of conversion to Class A shares, all shares in a
shareholder's account that were purchased through the reinvestment of dividends
and distributions paid in respect of Class B shares (and which have not
converted to Class A shares as provided in the following sentence) will be held
in a separate sub-account. Each time any Class B shares in the shareholder's
account (other than those in the sub-account) convert to Class A shares, a
portion of the Class B shares then in the sub-account will also convert to Class
A shares. The portion will be determined by the ratio that the shareholder's
Class B shares not acquired through reinvestment of dividends and distributions
that are converting to Class A shares bear to the shareholder's total Class B
shares not acquired through reinvestment. The conversion of Class B shares to
Class A shares is subject to the continuing availability of a ruling from the
Internal Revenue Service or an opinion of counsel that such conversion will not
constitute a taxable event for federal tax purposes. There can be no assurance
that such ruling or opinion will be available, and the conversion of Class B
shares to Class A shares will not occur if such ruling or opinion is not
available. In such event, Class B shares would continue to be subject to higher
expenses than Class A shares for an indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge or a CDSC. Class C shares do not convert to any other class of
shares of the Fund. The maximum investment in Class C shares that may be made is
$5,000,000 per transaction.
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Code if the retirement plan
and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan
or another similar 401(a) or 403(b) recordkeeping program made available by MFS
Service Center, Inc.
GENERAL: Except as described below, the minimum initial investment is $1,000 per
account and the minimum additional investment is $50 per account. Accounts being
established for monthly automatic investments and under payroll savings programs
and tax-deferred retirement programs (other than IRAs) involving the submission
of investments by means of group remittal statements are subject to a $50
minimum on initial and additional investments per account. The minimum initial
investment for IRAs is $250 per account and the minimum additional investment is
$50 per account. Accounts being established for participation in the Automatic
Exchange Plan are subject to a $50 minimum on initial and additional investments
per account. There are also other limited exceptions to these minimums for
certain tax-deferred retirement programs. Any minimums may be changed at any
time at the discretion of MFD. The Fund reserves the right to cease offering its
shares at any time.
For shareholders who elect to participate in certain investment programs (e.g.,
the automatic investment plan) or other shareholder services, MFD or its
affiliates may either (i) give a gift of nominal value, such as a hand-held
calculator, or (ii) make a nominal charitable contribution on their behalf.
A shareholder whose shares are held in the name of, or controlled by, an
investment dealer might not receive many of the privileges and services from the
Fund (such as Right of Accumulation, Letter of Intent and certain recordkeeping
services) that the Fund ordinarily provides.
Purchases and exchanges should be made for investment purposes only. The Fund
and MFD each reserve the right to reject any specific purchase order or to
restrict purchases by a particular purchaser (or group of related purchasers).
The Fund or MFD may reject or restrict any purchases by a particular purchaser
or group, for example, when such purchase is contrary to the best interests of
the Fund's other shareholders or otherwise would disrupt the management of the
Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of certain MFS Funds (as determined by MFD) which follow a
timing pattern, and with individuals or entities acting on such shareholders'
behalf (collectively, "market timers"), setting forth the terms, procedures and
restrictions with respect to such exchanges. In the absence of such an
agreement, it is the policy of the Fund and MFD to reject or restrict purchases
by market timers if (i) more than two exchange purchases are effected in a timed
account in the same calendar quarter or (ii) a purchase would result in shares
being held in timed accounts by market timers representing more than (x) one
percent of the Fund's net assets or (y) specified dollar amounts in the case of
certain MFS Funds which may include the Fund and which may change from time to
time. The Fund and MFD each reserve the right to request market timers to redeem
their shares at net asset value, less any applicable CDSC, if either of these
restrictions is violated.
Securities dealers and other financial institutions may receive different
compensation with respect to sales of Class A, Class B and Class C shares. In
some instances, promotional incentives to dealers may be offered only to certain
dealers who have sold or may sell significant amounts of Fund shares. From time
to time, MFD may pay dealers 100% of the applicable sales charge on sales of
Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers and additional commission equal to 0.50% of the net asset
value of all of the Class B shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time MFD, at
its expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of the Fund. The staff
of the SEC has indicated that dealers who receive more than 90% of the sales
charge may be considered underwriters. Such concessions provided by MFD may
include financial assistance to dealers in connection with preapproved
conferences or seminars, sales or training programs for invited registered
representatives, payment for travel expenses, including lodging, incurred by
registered representatives and members of their families or other invited guests
to various locations for such seminars or training programs, seminars for the
public, advertising and sales campaigns regarding one or more MFS Funds, and/or
other dealer-sponsored events. In some instances, these concessions may be
offered to dealers or only to certain dealers who have sold or may sell, during
specified periods, certain minimum amounts of shares of the Fund. From time to
time, MFD may make expense reimbursements for special training of a dealer's
registered representatives in group meetings or to help pay the expenses of
sales contests. In some instances, promotional incentives to dealers may be
offered only to certain dealers who have sold or may sell significant amounts of
Fund shares. Other concessions may be offered to the extent not prohibited by
the laws of any state or any self-regulatory agency, such as the NASD.
The Glass-Steagall Act prohibits national banks from engaging in the business of
underwriting, selling or distributing securities. Although the scope of the
prohibition has not been clearly defined, MFD believes that such Act should not
preclude banks from entering into agency agreements with MFD (as described
above). If, however, a bank were prohibited from so acting, the Trustees would
consider what actions, if any, would be necessary to continue to provide
efficient and effective shareholder services. It is not expected that
shareholders would suffer any adverse financial consequence as a result of these
occurrences. In addition, state securities laws on this issue may differ from
the interpretation of federal law expressed herein and banks and financial
institutions may be required to register as broker-dealers pursuant to state
law.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds (if available for sale) at net asset value. In addition, Class C
shares may be exchanged for shares of MFS Money Market Fund at net asset value.
Shares of one class may not be exchanged for shares of any other class.
Exchanges will be made only after instructions in writing or by telephone (an
"Exchange Request") are received for an established account by the Shareholder
Servicing Agent in proper form (i.e., if in writing -- signed by the record
owner(s) exactly as the shares are registered; if by telephone -- proper account
identification is given by the dealer or shareholder of record) and each
exchange must involve either shares having an aggregate value of at least $1,000
or all the shares in an account (except that the minimum is $50 for accounts of
retirement plan participants whose sponsoring organizations subscribe to the MFS
FUNDamental 401 (k) Plan or another similar 401(k) recordkeeping system made
available by MFS Service Center, Inc.). If the Exchange Request is received by
the Shareholder Servicing Agent on any business day prior to the close of
regular trading on the New York Stock Exchange (the "Exchange"), the exchange
usually will occur on that day if all the requirements set forth above have been
complied with at that time. No more than five exchanges may be made in any one
Exchange Request by telephone. Additional details concerning this exchange
privilege and prospectuses for any of the other MFS Funds may be obtained from
investment dealers or the Shareholder Servicing Agent. A shareholder should read
the prospectus of the other MFS Fund and consider the differences in objectives
and policies before making any exchange. For federal and (generally) state
income tax purposes, an exchange is treated as a sale of the shares exchanged
and, therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to most
non- retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone see "Redemptions By Telephone." The
exchange privilege (or any aspect of it) may be changed or discontinued and is
subject to certain limitations, including certain restrictions on purchases by
market timers. Special procedures, privileges and restrictions with respect to
exchanges may apply to market timers who enter into an agreement with MFD, as
set forth in such agreement (see "Purchases").
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the amount in his account on
any date on which the Fund is open for business by redeeming shares at their net
asset value or by selling such shares to the Fund through a dealer (a
repurchase). Since the net asset value of shares of the account fluctuate,
redemptions or repurchases, which are taxable transactions, are likely to result
in gains or losses to the shareholder. When a shareholder withdraws an amount
from his account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except that for shares purchased, or received in
exchange for shares purchased, by check (including certified checks or cashier's
checks) payment of redemption proceeds may be delayed for 15 days from the
purchase date in an effort to assure that such check has cleared. Payment of
redemption proceeds may be delayed for up to seven days from the redemption date
if the Fund determines that such a delay would be in the best interest of all
its shareholders.
A. REDEMPTION BY MAIL -- Each shareholder has the right to redeem all or any
portion of the shares in his account by mailing or delivering to the Shareholder
Servicing Agent (see back cover for address) a stock power with a written
request for redemption, or a letter of instruction, together with his share
certificates (if any were issued), all in "good order" for transfer. "Good
order" generally means that the stock power, written request for redemption,
letter of instruction or share certificate must be endorsed by the record
owner(s) exactly as the shares are registered and the signature(s) must be
guaranteed in the manner set forth below under the caption "Signature
Guarantee." In addition, in some cases, "good order" may require the furnishing
of additional documents. The Shareholder Servicing Agent may make certain de
minimis exceptions to the above requirements for redemption. Within seven days
after receipt of a redemption request by the Shareholder Servicing Agent in
"good order," the Fund will make payment in cash of the net asset value of the
shares next determined after such redemption request was received, reduced by
the amount of any applicable CDSC and the amount of any income tax required to
be withheld, except during any period in which the right of redemption is
suspended or date of payment is postponed because the Exchange is closed or
trading on such Exchange is restricted or to the extent otherwise permitted by
the 1940 Act if an emergency exists (see "Tax Status").
B. REDEMPTION BY TELEPHONE -- Each shareholder may redeem an amount from his
account by telephoning toll-free at (800) 225-2606. Shareholders wishing to
avail themselves of this telephone redemption privilege must so elect on their
Account Application, designate thereon a commercial bank and account number to
receive the proceeds of such redemption, and sign the Account Application Form
with the signature(s) guaranteed in the manner set forth below under the caption
"Signature Guarantee." The proceeds of such a redemption, reduced by the amount
of any applicable CDSC described above and the amount of any income tax required
to be withheld, are mailed by check to the designated account, without charge.
As a special service, investors may arrange to have proceeds in excess of $1,000
wired in federal funds to the designated account. If a telephone redemption
request is received by the Shareholder Servicing Agent by the close of regular
trading on the Exchange on any business day, shares will be redeemed at the
closing net asset value of the Fund on that day. Subject to the conditions
described in this section, proceeds of a redemption are normally mailed or wired
on the next business day following the date of receipt of the order for
redemption. The Shareholder Servicing Agent will not be responsible for any
losses resulting from unauthorized telephone transactions if it follows
reasonable procedures designed to verify the identity of the caller. The
Shareholder Servicing Agent will request personal or other information from the
caller, and will normally also record calls. Shareholders should verify the
accuracy of confirmation statements immediately after their receipt.
C. REPURCHASE THROUGH A DEALER -- If a shareholder desires to sell his shares at
net asset value through his securities dealer (a repurchase), the shareholder
can place a repurchase order with his dealer, who may charge the shareholder a
fee. IF THE DEALER RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF
REGULAR TRADING ON THE EXCHANGE AND COMMUNICATES IT TO MFD ON THE SAME DAY
BEFORE MFD CLOSES FOR BUSINESS, THE SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE
CALCULATED ON THAT DAY.
SIGNATURE GUARANTEE: In order to protect shareholders against fraud to the
greatest extent possible, the Fund requires in certain instances as indicated
above that the shareholder's signature be guaranteed. In these cases the
shareholder's signature must be guaranteed by an eligible bank, broker, dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association. Signature guarantees shall be accepted
in accordance with policies established by the Shareholder Servicing Agent.
GENERAL: Shareholders of the Fund who have redeemed their shares have a one-time
right to reinvest the redemption proceeds in the same class of shares of any of
the MFS Funds (if shares of such Fund are available for sale) at net asset value
(with a credit for any CDSC paid) within 90 days of the redemption pursuant to
the Reinstatement Privilege. If the shares credited for any CDSC paid are then
redeemed within six years of the initial purchase in the case of Class B shares,
or within 12 months of the initial purchase for certain Class A share purchases,
a CDSC will be imposed upon redemption. Such purchases under the Reinstatement
Privilege are subject to all limitations in the Statement of Additional
Information regarding this privilege.
Subject to the Fund's compliance with applicable regulations, the Fund has
reserved the right to pay the redemption or repurchase price of shares of the
Fund, either totally or partially, by a distribution in kind of portfolio
securities (instead of cash). The securities so distributed would be valued at
the same amount as that assigned to them in calculating the net asset value for
the shares being sold. If a shareholder received a distribution in kind, the
shareholders could incur transaction, tax or other charges when converting the
securities to cash.
Due to the relatively high cost of maintaining small accounts, the Fund reserves
the right to redeem shares in any account at their then-current value (which
will be promptly paid to the shareholder) if at any time the total investment in
such account drops below $500 because of redemptions, except in the case of
accounts established for monthly automatic investments and certain payroll
savings programs, Automatic Exchange Plan accounts and tax-deferred retirement
plans, for which there is a lower minimum investment requirement (see
"Purchases"). Shareholders will be notified that the value of their account is
less than the minimum investment requirement and allowed 60 days to make an
additional investment before the redemption is processed. No CDSC will be
imposed with respect to such involuntary redemptions.
CONTINGENT DEFERRED SALES CHARGE -- Investments ("Direct Purchases") in Class A
and B shares will be subject to a CDSC for a period of 12 months (in the case of
purchases of $1 million or more of Class A shares) or six years (in the case of
purchases of Class B shares). Purchases of Class A shares made during a calendar
month, regardless of when during the month the investment occurred, will age one
month on the last day of the month and each subsequent month. Class B shares
purchased on or after January 1, 1993 will be aggregated on a calendar month
basis -- all transactions made during a calendar month, regardless of when
during the month they have occurred, will age one year at the close of business
on the last day of such month in the following calendar year and each subsequent
year. For Class B shares of the Fund purchased prior to January 1, 1993,
transactions will be aggregated on a calendar year basis -- all transactions
made during a calendar year, regardless of when during the year they have
occurred, will age one year at the close of business on December 31 of that year
and each subsequent year. At the time of a redemption, the amount by which the
value of a shareholder's account for a particular class represented by Direct
Purchases exceeds the sum of the six calendar year aggregations (12 months in
the case of purchases of $1 million or more of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares").
Therefore, at the time of redemption of shares of a particular class, (i) any
Free Amount is not subject to the CDSC, and (ii) the amount of redemption equal
to the then-current value of Reinvested Shares is not subject to the CDSC, but
(iii) any amount of the redemption in excess of the aggregate of the
then-current value of Reinvested Shares and the Free Amount is subject to a
CDSC. The CDSC will first be applied against the amount of Direct Purchases
which will result in any such charge being imposed at the lowest possible rate.
The CDSC to be imposed upon redemptions will be calculated as set forth in
"Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except that, with respect to transfers of registration to an IRA
rollover account, the CDSC will be waived if the shares being reregistered would
have been eligible for a CDSC waiver had they been redeemed.
DISTRIBUTION PLANS
The Trustees have adopted separate distribution plans for Class A, Class B and
Class C shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Rule"), after having concluded that there is a reasonable
likelihood that the plans would benefit the Fund and its shareholders.
CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan provides that the
Fund will pay MFD a distribution/service fee aggregating up to (but not
necessarily all of) 0.35% of the average daily net assets attributable to Class
A shares annually in order that MFD may pay expenses on behalf of the Fund
related to the distribution and servicing of Class A shares. The expenses to be
paid by MFD on behalf of the Fund include a service fee to securities dealers
which enter into a sales agreement with MFD of up to 0.25% of the Fund's average
daily net assets attributable to Class A shares that are owned by investors for
whom such securities dealer is the holder or dealer of record. This fee is
intended to be partial consideration for all personal services and/or account
maintenance services rendered by the dealer with respect to Class A shares. MFD
may from time to time reduce the amount of the service fee paid for shares sold
prior to a certain date. Currently the service fee is reduced to 0.15% per annum
of the Fund's average daily net assets attributable to Class A shares for shares
sold prior to October 1, 1989. MFD may also retain a distribution fee of 0.10%
per annum of the Fund's average daily net assets attributable to Class A shares
as partial consideration for services performed and expenses incurred in the
performance of MFD's obligations under its distribution agreement with the
Trust. MFD, however, currently is suspending this 0.10% per annum distribution
fee and will not in the future accept payment of this fee unless it first
obtains the approval of the Board of Trustees. In addition, to the extent that
the aggregate of the foregoing fees does not exceed 0.35% per annum of the
average daily net assets of the Fund attributable to Class A shares, the Fund is
permitted to pay other distribution-related expenses, including commissions to
dealers and payments to wholesalers employed by MFD for sales at or above a
certain dollar level. Fees payable under the Class A Distribution Plan are
charged to, and therefore reduce, income allocated to Class A shares. Service
fees may be reduced for a securities dealer that is the holder or dealer of
record for an investor who owns shares of the Fund having a net asset value at
or above a certain dollar level. Dealers may from time to time be required to
meet certain criteria in order to receive service fees. MFD or its affiliates
are entitled to retain all service fees payable under the Class A Distribution
Plan for which there is no dealer of record or for which qualification standards
have not been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates for shareholder
accounts. Certain banks and other financial institutions that have agency
agreements with MFD will receive service fees that are the same as service fees
to dealers.
CLASS B DISTRIBUTION PLAN. The Class B Distribution Plan provides that the
Fund will pay MFD a daily distribution fee equal on an annual basis to 0.75% of
the Fund's average daily net assets attributable to Class B shares and will pay
MFD a service fee of up to 0.25% of the Fund's average daily net assets
attributable to Class B shares (which MFD will in turn pay to securities dealers
which enter into a sales agreement with MFD at a rate of up to 0.25% of the
Fund's average daily net assets attributable to Class B shares owned by
investors for whom that securities dealer is the holder or dealer of record).
This service fee is intended to be additional consideration for all personal
services and/or account maintenance services rendered by the dealer with respect
to Class B shares. Fees payable under the Class B Distribution Plan are charged
to, and therefore reduce, income allocated to Class B shares. The Class B
Distribution Plan also provides that MFD will receive all CDSCs attributable to
Class B shares (see "Redemptions and Repurchases" above) which do not reduce the
distribution fee. MFD will pay commissions to dealers of 3.75% of the purchase
price of Class B shares purchased through dealers. MFD will also advance to
dealers the first year service fee at a rate equal to 0.25% of the purchase
price of such shares and, as compensation therefor, MFD may retain the service
fee paid by the Fund with respect to such shares for the first year after
purchase. Therefore, the total amount paid to a dealer upon the sale of shares
is 4.00% of the purchase price of the shares (commission rate of 3.75% plus
service fee equal to 0.25% of the purchase price). Dealers will become eligible
for additional service fees with respect to such shares commencing in the
thirteenth month following the purchase. Dealers may from time to time be
required to meet certain criteria in order to receive service fees. MFD or its
affiliates are entitled to retain all service fees payable under the Class B
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts. The purpose of the distribution payments to MFD under
the Class B Distribution Plan is to compensate MFD for its distribution services
to the Fund. Since MFD's compensation is not directly tied to its expenses, the
amount of compensation received by MFD during any year may be more or less than
its actual expenses. For this reason, this type of distribution fee arrangement
is characterized by the staff of the SEC as being of the "compensation" variety.
However, the Fund is not liable for any expenses incurred by MFD in excess of
the amount of compensation it receives. The expenses incurred by MFD, including
commissions to dealers, are likely to be greater than the distribution fees for
the next several years, but thereafter such expenses may be less than the amount
of the distribution fees. Certain banks and other financial institutions that
have agency agreements with MFD will receive agency transaction and service fees
that are the same as commissions and service fees to dealers.
CLASS C DISTRIBUTION PLAN. The Class C Distribution Plan provides that the
Fund will pay MFD a distribution fee of up to 0.75% per annum of the Fund's
average daily net assets attributable to Class C shares and will pay MFD a
service fee of up to 0.25% per annum of the Fund's average daily net assets
attributable to Class C shares (which MFD in turn pays to securities dealers
which enter into a sales agreement with MFD at a rate of up to 0.25% per annum
of the Fund's daily net assets attributable to Class C shares owned by investors
for whom that securities dealer is the holder or dealer of record). The
distribution/service fees attributable to Class C shares are designed to permit
an investor to purchase such shares through a broker-dealer without the
assessment of an initial sales charge or a CDSC while allowing MFD to compensate
broker-dealers in connection with the sale of such shares. The service fee is
intended to be additional consideration for all personal services and/or account
maintenance services rendered with respect to Class C shares. MFD or its
affiliates are entitled to retain all service fees payable under the Class C
Distribution Plan with respect to accounts for which there is no dealer of
record as partial consideration for personal services and/or account maintenance
services performed by MFD or its affiliates for shareholder accounts. The
purpose of the distribution payments paid to MFD under the Class C Distribution
Plan is to compensate MFD for its distribution services to the Fund.
Distribution payments under the Plan will be used by MFD to pay securities
dealers a distribution fee in an amount equal on an annual basis to 0.75% of the
Fund's average daily net assets attributable to Class C shares owned by
investors for whom that securities dealer is the holder or dealer of record.
(Therefore, the total amount of distribution/service fees paid to a dealer on an
annual basis is 1.00% of the Fund's average daily net assets attributable to
Class C shares owned by investors for whom the securities dealer is the holder
or dealer of record.) MFD also pays expenses for printing prospectuses and
reports used for sales purposes, expenses with respect to the preparation and
printing of sales literature and other distribution related expenses, including,
without limitation, the compensation of personnel and all costs of travel,
office expense and equipment. Since MFD's compensation is not directly tied to
its expenses, the amount of compensation received by MFD during any year may be
more or less than its actual expenses. For this reason, this type of
distribution fee arrangement is characterized by the staff of the SEC as being
of the "compensation" variety. However, the Fund is not liable for any expenses
incurred by MFD in excess of the amount of compensation it receives. Certain
banks and other financial institutions that have agency agreements with MFD will
receive agency transaction and service fees that are the same as distribution
and service fees paid to dealers. Fees payable under the Class C Distribution
Plan are charged to, and therefore reduce, income allocated to Class C shares.
DISTRIBUTIONS
The Fund intends to declare as dividends daily and pay to its shareholders as
dividends monthly substantially all of its net investment income (dividends will
only accrue on shares for which payment has been received). Dividends generally
are distributed on the first business day of the month. The Fund may make one or
more distributions during the calendar year to its shareholders from any
long-term capital gains and may also make one or more distributions during the
calendar year to its shareholders from short-term capital gains. Shareholders
may elect to receive dividends and capital gain distributions in either cash or
additional shares of the same class with respect to which a distribution is made
(see "Tax Status" and "Shareholder Services -- Distribution Options" below).
Distributions paid by the Fund with respect to Class A shares will generally be
greater than those paid with respect to Class B and Class C shares because
expenses attributable to Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, and to make
distributions to its shareholders in accordance with the timing requirements
imposed by the Code. It is expected that the Fund will not be required to pay
entity level federal income or excise taxes, although foreign-source income
received by the Fund may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes (and any
state or local taxes) on dividends and capital gain distributions from the Fund,
whether paid in cash or additional shares. A portion of the dividends received
from the Fund (but none of the Fund's capital gain distributions) may qualify
for the dividends-received deduction for corporations. A statement setting forth
the federal income tax status of all dividends and distributions for that year,
including the portion taxable as ordinary income, the portion taxable as
long-term capital gain, the portion representing interest on U.S. Government
obligations, the portion, if any, representing a return of capital (which is
free of current taxes but results in a basis reduction), and the amount, if any,
of federal income tax withheld, will be sent to each shareholder promptly after
the end of such year.
The Fund intends to withhold U.S. federal income tax at a rate of 30% on
dividends and certain other payments that are subject to such withholding and
that are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable law or
treaty. The Fund is also required in certain circumstances to apply backup
withholding of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a resident of
the U.S.) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. However,
backup withholding will not be applied to payments which have had 30%
withholding taken. Prospective investors should read the Account Application for
information regarding backup withholding of federal income tax and should
consult their own tax advisers as to the tax consequences of an investment in
the Fund.
NET ASSET VALUE
The net asset value per share of each class of shares of the Fund is determined
each day during which the Exchange is open for trading. This determination is
made once each day as of the close of regular trading on the Exchange by
deducting the amount of liabilities attributable to the class from the value of
the Fund's assets attributable to the class and dividing the difference by the
number of shares of the class outstanding. Assets in the Fund's portfolio are
valued on the basis of their market values as described in the Statement of
Additional Information. The net asset value of each class of shares is effective
for orders received by the dealer prior to its calculation and received by MFD
prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of two series of the Trust, has three classes of shares, entitled
Class A, Class B and Class C Shares of Beneficial Interest (without par value).
The Trust has reserved the right to create and issue additional classes and
series of shares, in which case each class of shares of a series would
participate equally in the earnings, dividends and assets attributable to that
class of that particular series. Shareholders are entitled to one vote for each
share held and shares of each series would be entitled to vote separately to
approve investment advisory agreements or changes in investment restrictions,
but shares of all series would vote together in the election of Trustees and
selection of accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under its Distribution
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters. The Trust does not intend to hold annual shareholder meetings.
The Declaration of Trust provides that a Trustee may be removed from office in
certain instances (see "Description of Shares, Voting Rights and Liabilities" in
the Statement of Additional Information).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of that class.
Shares have no pre-emptive or conversion rights (except as set forth above in
"Purchases -- Conversion of Class B Shares"). Shares are fully paid and
non-assessable. Should the Fund be liquidated, shareholders of each class are
entitled to share pro rata in the net assets attributable to that class
available for distribution to shareholders. Shares will remain on deposit with
the Shareholder Servicing Agent and certificates will not be issued except in
connection with pledges and assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance (e.g., fidelity bonding and errors and omissions insurance) existed
and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote fund
rankings in the relevant fund category from various sources, such as the Lipper
Analytical Services, Inc. and Wiesenberger Investment Companies Service. Yield
quotations are based on the annualized net investment income per share allocated
to each class of the Fund over a 30-day period stated as a percent of the
maximum public offering price of that class on the last day of that period.
Yield calculations for Class B shares assume no CDSC is paid. The current
distribution rate for each class is generally based upon the total amount of
dividends per share paid by the Fund to shareholders of that class during the
past 12 months and is computed by dividing the amount of such dividends by the
maximum public offering price of that class at the end of such period. Current
distribution rate calculations for Class B shares assume no CDSC is paid. The
current distribution rate differs from the yield calculation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing, short-term capital gains,
and return of invested capital, and is calculated over a different period of
time. Total rate of return quotations will reflect the average annual percentage
change over stated periods in the value of an investment in each class of shares
of the Fund made at the maximum public offering price of the shares of that
class with all distributions reinvested and which, if quoted for periods of six
years or less, will give effect to the imposition of the CDSC assessed upon
redemptions of the Fund's Class B shares. Such total rate of return quotations
may be accompanied by quotations which do not reflect the reduction in value of
the initial investment due to the sales charge or the deduction of the CDSC, and
which will thus be higher. All performance quotations are based on historical
performance and are not intended to indicate future performance. Yield reflects
only net portfolio income as of a stated period of time and current distribution
rate reflects only the rate of distributions paid by the Fund over a stated
period of time, while total rate of return reflects all components of investment
return over a stated period of time. The Fund's quotations may from time to time
be used in advertisements, shareholder reports or other communications to
shareholders. For a discussion of the manner in which the Fund will calculate
its yield, current distribution rate and total rate of return, see the Statement
of Additional Information. For further information about the Fund's performance
for the fiscal year ended September 30, 1994, please see the Fund's Annual
Report. A copy of the Annual Report may be obtained without charge by contacting
the Shareholder Servicing Agent (see back cover for address and phone number).
In addition to information provided in shareholder reports, the Fund may, in its
discretion, from time to time, make a list of all or a portion of its holdings
available to investors upon request.
7. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund, should contact their investment dealer
or the Shareholder Servicing Agent (see back cover for address and phone
number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive information regarding
the tax status of reportable dividends and distributions for that year (see "Tax
Status" above).
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified.
-- Dividends in cash; capital gain distributions reinvested in additional
shares.
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the last business day of the quarter. Checks for
dividends and capital gain distributions in amounts less than $10 will
automatically be reinvested in additional shares of the Fund. If a shareholder
has elected to receive dividends and/or capital gain distributions in cash and
the postal or other delivery service is unable to deliver checks to the
shareholder's address of record, such shareholders's distribution option will
automatically be converted to having all dividends and other distributions
reinvested in additional shares. Any request to change a distribution option
must be received by the Shareholder Servicing Agent by the record date for a
dividend or distribution in order to be effective for that dividend or
distribution. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT -- If a shareholder (other than a group purchaser as
described in the Statement of Additional Information) anticipates purchasing
$100,000 or more of Class A shares of the Fund alone or in combination with
shares of any class of other MFS Funds or MFS Fixed Fund (a bank collective
trust) within a 13-month period (or 36-month period for purchases of $1 million
or more), the shareholder may obtain such shares at the same reduced sales
charge as though the total quantity were invested in one lump sum, subject to
escrow agreements and the appointment of an attorney for redemptions from the
escrow amount if the intended purchases are not completed, by completing the
Letter of Intent section of the Account Application.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of any class of shares of that
shareholder in the MFS Funds or MFS Fixed Fund (a bank collective trust),
reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM -- Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value in shares of the same class of another
MFS Fund, if shares of such Fund are available for sale (without a sales charge
and not subject to any applicable CDSC).
SYSTEMATIC WITHDRAWAL PLAN -- A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments,
as designated on the Account Application and based upon the value of his
account. Each payment under a Systematic Withdrawal Plan (a "SWP") must be at
least $100, except in certain limited circumstances. The aggregate withdrawals
of Class B shares in any year pursuant to a SWP will not be subject to a CDSC
and are generally limited to 10% of the value of the account at the time of the
establishment of the SWP. The CDSC will not be waived in the case of SWP
redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made through a
shareholder's checking account twice monthly, monthly or quarterly. Required
forms are available from the Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000
in any MFS Fund may exchange their shares for the same class of shares of the
other MFS Funds (and, in the case of Class C shares, for shares of MFS Money
Market Fund) under the Automatic Exchange Plan, a dollar cost averaging program.
The Automatic Exchange Plan provides for automatic monthly or quarterly
exchanges of funds from the shareholder's account in an MFS Fund for investment
in the same class of shares of other MFS Funds selected by the shareholder.
Under the Automatic Exchange Plan, exchanges of at least $50 each may be made to
up to four different funds. A shareholder should consider the objectives and
policies of a fund and review its prospectus before electing to exchange money
into such fund through the Automatic Exchange Plan. No transaction fee is
imposed in connection with exchange transactions under the Automatic Exchange
Plan. However, exchanges of shares of MFS Money Market Fund, MFS Government
Money Market Fund or Class A shares of MFS Cash Reserve Fund will be subject to
any applicable sales charge. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, could result in a capital gain or loss to the shareholder making the
exchange. See the Statement of Additional Information for further information
concerning the Automatic Exchange Plan. Investors should consult their tax
advisers for information regarding the potential capital gain and loss
consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charge included
in share purchases in the case of Class A shares and because of the assessment
of the CDSC for certain share redemptions in the case of Class A shares.
Tax-Deferred Retirement Plans -- Except as noted under "Purchases -- Class C
Shares," shares of the Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans and
other corporate pension and profit-sharing plans. Investors should consult with
their tax adviser before establishing any of the tax-deferred retirement plans
described above.
--------------------
The Fund's Statement of Additional Information, dated February 1, 1995, contains
more detailed information about the Trust and the Fund, including information
related to (i) investment policies and restrictions, (ii) Trustees, officers and
investment adviser, (iii) portfolio transactions and brokerage commissions, (iv)
Distribution Plans, (v) the method used to calculate performance quotations of
the Fund, and (vi) various services and privileges provided by the Fund for the
benefit of its shareholders, including additional information with respect to
the exchange privilege.
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of various debt instruments. IT SHOULD BE EMPHASIZED, HOWEVER, THAT RATINGS ARE
NOT ABSOLUTE STANDARDS OF QUALITY. CONSEQUENTLY, DEBT INSTRUMENTS WITH THE SAME
MATURITY, COUPON AND RATING MAY HAVE DIFFERENT YIELDS WHILE DEBT INSTRUMENTS OF
THE SAME MATURITY AND COUPON WITH DIFFERENT RATINGS MAY HAVE THE SAME YIELD.
MOODY'S
AAA: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue. Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
S&P
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated "AA" has a strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A: Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CC: The rating "CC" is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
C: The rating "C" is typically applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating "CI" is reserved for income bonds on which no interest is being
paid.
D: Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+ ) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
NR: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
FITCH
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-l + ".
A: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin safety
and the need for reasonable business and economic activity throughout the life
of the issue.
CCC: Bonds have certain identifiable characteristics which if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protect. Default in payment of interest and/or principal
seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
PLUS (+ ) MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
R: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
SUSPENDED: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN: A rating will be withdrawn when an issue matures or is called or
refinanced and at Fitch's discretion when an issuer fails to furnish proper and
timely information.
FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for potential downgrade, or "Evolving", where ratings may
be lowered, FitchAlert is relatively short-term, and should be resolved within
12 months.
<PAGE>
APPENDIX B
PORTFOLIO COMPOSITION CHART
FOR FISCAL YEAR ENDED SEPTEMBER 30, 1994
The table below shows the percentages of the Fund's assets at September 30, 1994
invested in securities assigned to the various rating categories by S&P or
Moody's. For split rated securities, the higher rating is reflected. At
September 30, 1994, the portfolio contained no unrated securities.
S&P
OR
RATING MOODY'S
------ -------
AAA/Aaa 7.80%
AA/Aa 1.01%
A/A 3.14%
BBB/Baa 7.74%
BB/Ba 4.88%
B/B 2.00%
CCC/Caa 0.28%
CC/Ca 0.15%
C/C 0.00%
Default 0.00%
------
Total 27.00%
The chart does not necessarily indicate what the composition of the Fund's
portfolio will be in subsequent years. Rather, the Fund's investment objective,
policies and restrictions indicate the extent to which the Fund may purchase
securities in the various categories.
<PAGE>
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Accountants
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
MFS(R) TOTAL RETURN FUND
500 Boylston Street
Boston, MA 02116
MTR-1 2/95/490M 12/212
MFS(R) TOTAL RETURN FUND
Prospectus
February 1, 1995
