<PAGE>
As filed with the Securities and Exchange Commission on January 27, 1997
1933 Act File No. 2-38613
1940 Act File No. 811-2031
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 43
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 28
MFS SERIES TRUST V
(Exact Name of Registrant as Specified in Charter)
500 Boylston, Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (617) 954-5000
Stephen E. Cavan, Massachusetts Financial Services Company
500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on January 28, 1997 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on [date] pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2, the Registrant has registered an indefinite number of
its Shares of Beneficial Interest, (without par value), under the Securities Act
of 1933. The Registrant filed a Rule 24f-2 Notice for its fiscal year ended
September 30, 1996 on November 25, 1996.
- -------------------------------------------------------------------------------
<PAGE>
MFS SERIES TRUST V
MFS TOTAL RETURN FUND
MFS RESEARCH FUND
CROSS REFERENCE SHEET
(Pursuant to Rule 404 showing location in Prospectus and/or Statement of
Additional Information of the responses to the Items in Parts A and B of Form
N-1A)
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
<C> <S> <C>
1 (a), (b) Front Cover Page *
2 (a) Expense Summary *
(b), (c) * *
3 (a) Condensed Financial Information *
(b) * *
(c) Information Concerning Shares *
of the Fund - Performance
Information
(d) Condensed Financial Information *
4 (a) The Fund; Investment Objectives *
and Policies
(b), (c) Investment Objectives and Policies *
5 (a) The Fund; Management of the *
Fund - Investment Adviser
(b) Front Cover Page; Management *
of the Fund - Investment
Adviser; Back Cover Page
(c) Management of the Fund *
(d) * *
(e) Back Cover Page *
(f) Expense Summary; Condensed *
Financial Information
(g) Investment Objectives and Policies *
5A (a), (b) ** **
6 (a) Information Concerning Shares *
of the Fund - Description of
Shares, Voting Rights and
Liabilities; Information Concerning
Shares of the Fund - Redemptions
and Repurchases; Information
Concerning Shares of the Fund -
Purchases
(b), (c), (d) * *
(e) Shareholder Services *
(f) Information Concerning Shares *
of the Fund - Dividends and
Capital Gain Distributions;
Shareholder Services -
Distribution Options
(g) Information Concerning Shares *
of the Fund - Tax Status;
Information Concerning Shares
of the Fund - Dividends and
Capital Gain Distributions
7 (a) Front Cover Page; Management *
of the Fund - Distributor; Back
Cover Page
(b) Information Concerning Shares *
of the Fund - Purchases
(c) Information Concerning Shares *
of the Fund - Purchases;
Information Concerning Shares
of the Fund - Exchanges;
(d) Front Cover Page; Information *
Concerning Shares of the Fund -
Purchases
(e) Information Concerning Shares *
of the Fund - Distribution Plan;
Expense Summary
(f) Information Concerning Shares *
of the Fund - Distribution Plan
8 (a) Information Concerning Shares *
of the Fund - Redemptions and
Repurchases; Information
Concerning Shares of the Fund -
Purchases
(b), (c), (d) Information Concerning Shares *
of the Fund - Redemptions and
Repurchases
9 * *
10 (a), (b) * Front Cover Page
11 * Front Cover Page
12 The Fund Definitions
13 (a), (b), (c) * Investment Objectives;
Policies and Restrictions
(d) * *
14 (a), (b) * Management of the Fund -
Trustees and Officers
(c) * *
15 (a) * *
(b), (c) * Management of the Fund -
Trustees and Officers
16 (a) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser;
Management of the Fund -
Trustees and Officers
(b) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser
(c) * *
(d) * Management of the Fund -
Investment Adviser
(e) * Portfolio Transactions and
Brokerage Commissions
(f) Information Concerning Distribution Plan
Shares of the Fund -
Distribution Plan
(g) * *
(h) * Management of the Fund -
Custodian; Independent
Auditors and Financial
Statements; Back Cover
Page
(i) * Management of the Fund -
Shareholder Servicing
Agent
17 (a) * Portfolio Transactions and
Brokerage Commissions
(b) * *
(c) * Portfolio Transactions and
Brokerage Commissions
(d) * *
(e) * Portfolio Transactions and
Brokerage Commissions
18 (a) Information Concerning Description of Shares
Shares of the Fund - Voting Rights and
Description of Shares, Liabilities
Voting Rights and
Liabilities
(b) * *
19 (a) Information Concerning Shareholder Services
Shares of the Fund -
Purchases; Shareholder
Services
(b) Information Concerning Management of the Fund -
Shares of the Fund - Principal Underwriter;
Net Asset Value; Determination of Net
Information Concerning Asset Value and
Shares of the Fund - Performance - Net Asset
Purchases Value
(c) * *
20 * Tax Status
21 (a) * Management of the Fund -
Principal Underwriter;
Distribution Plan
(b) * Management of the Fund -
Principal Underwriter;
Distribution Plan
(c) * *
22 (a) * *
(b) * Determination of Net Asset
Value and Performance
23 * Independent Auditors
and Financial Statements
- -----------------------------
* Not Applicable
** Contained in Annual Report
</TABLE>
<PAGE>
MFS TOTAL RETURN FUND
SUPPLEMENT TO THE FEBRUARY 1, 1997 PROSPECTUS AND
STATEMENT OF ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED FEBRUARY 1,
1997, AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS I
SHAREHOLDER TRANSACTION EXPENSES: -------
<S> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price)........................................... None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable).................... None
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees........................................................................ 0.38%
Rule 12b-1 Fees........................................................................ None
Other Expenses(1)(2)................................................................... 0.20%
-----
Total Operating Expenses............................................................... 0.58%
.........
(1) "Other Expenses" is based on Class A expenses incurred during the fiscal year ended September 30, 1996.
(2) The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the effect of reducing the Fund's
expenses). Any such fee reductions are not reflected under "Other Expenses."
</TABLE>
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
PERIOD CLASS I
------ -------
1 year........................................ $ 6
3 years....................................... 19
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. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
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.
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates; and
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 4.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") upon redemption of 1.00% during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans), and
are subject to an annual distribution fee and service fee up to a maximum of
0.35% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption of 1.00% during the first year and an annual distribution
fee and service fee up to a maximum of 1.00% per annum. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class C and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
THE DATE OF THIS SUPPLEMENT IS FEBRUARY 1, 1997
<PAGE>
PROSPECTUS
February 1, 1997
MFS(R) TOTAL Class A Shares of Beneficial Interest
RETURN FUND Class B Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) Class C Shares of Beneficial 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 ................... 15
Purchases ............................................... 15
Exchanges ............................................... 20
Redemptions and Repurchases ............................. 21
Distribution Plan ....................................... 23
Distributions ........................................... 24
Tax Status .............................................. 25
Net Asset Value ......................................... 25
Description of Shares, Voting Rights and Liabilities .... 25
Performance Information ................................. 26
7. Shareholder Services ........................................ 27
Appendix A .................................................. A-1
Appendix B .................................................. B-1
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. Under normal market conditions, at least 25% of the Fund's assets will
be invested in fixed income securities and at least 40% and no more than 75% of
the Fund's assets will be invested in equity securities (see "Investment
Objectives and Policies"). The Fund is a diversified series of MFS Series Trust
V (the "Trust"), an open-end investment company. 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.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
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, 1997, as
amended or supplemented from time to time (the "SAI"), which contains more
detailed information about the Trust and the Fund. The SAI is incorporated into
this Prospectus by reference. See page 28 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number). The SEC maintains an Internet World Wide Web site that
contains the SAI, materials that are incorporated by reference into this
Prospectus and the SAI, and other information regarding the Fund. This
Prospectus is available on the Adviser's Internet World Wide Web site at
http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHAREHOLDER TRANSACTION EXPENSES: ------- ------- -------
<S> <C> <C> <C>
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(1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ................................................... 0.38% 0.38% 0.38%
Rule 12b-1 Fees ................................................... 0.35%(2) 1.00%(3) 1.00%(3)
Other Expenses(4) ................................................. 0.20% 0.29% 0.25%
--- --- ---
Total Operating Expenses .......................................... 0.93% 1.67% 1.63%
- ----------
(1) Purchases of $1 million or more and certain purchases by retirement plans are not subject to an initial sales
charge; however, a Contingent Deferred Sales Charge ("CDSC") of 1% will be imposed on such purchases in the event of
certain redemption transactions within 12 months following such purchases. See "Information Concerning Shares of the
Fund -- Purchases" below.
(2) The Fund has adopted a distribution plan for its 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.
The 0.35% per annum distribution/service fee is reduced to 0.25% per annum for shares purchased prior to October 1,
1989. Distribution expenses paid under the Distribution Plan with respect to Class A shares, together with the
initial sales charge, may cause long-term shareholders to pay more than the maximum sales charge that would have
been permissible if imposed entirely as an initial sales charge. See "Information Concerning Shares of the Fund --
Distribution Plan" below.
(3) The Fund's Distribution Plan provides that it will pay distribution/service fees aggregating up to 1.00% per annum
of the average daily net assets attributable to Class B shares and Class C shares, respectively. Distribution
expenses paid under the Distribution Plan with respect to Class B or Class C shares, together with any CDSC payable
upon redemption of Class B shares, may cause long-term shareholders to pay more than the maximum sales charge that
would have been permissible if imposed entirely as an initial sales charge. See "Information Concerning Shares of
the Fund -- Distribution Plan" below.
(4) The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent, and may enter into other such arrangements
and directed brokerage arrangements (which would also have the effect of reducing the Fund's expenses). Any such fee
reductions are not reflected under "Other Expenses."
</TABLE>
EXAMPLE OF EXPENSES
-------------------
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
PERIOD CLASS A CLASS B CLASS C(3)
- ------- ------- ------- ---------
(1) (1)
1 year ......................... $ 57 $ 57 $ 17 $ 27 $ 17
3 years ........................ 76 83 53 51 51
5 years ........................ 97 111 91 89 89
10 years ........................ 156 178(2) 178(2) 193 193
- ----------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
(3) Purchases subsequent to April 1, 1996 which are redeemed within 12 months of
purchase are subject to a 1% CDSC fee.
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 Plan."
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
The Fund is a diversified series of 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 objectives and policies. Shares
of the Fund are continuously sold to the public and the Fund then uses the
proceeds to buy securities (stocks, bonds and other instruments) for its
portfolio. Three classes of shares of the Fund currently are offered for sale to
the general public. Class A shares are offered at net asset value plus an
initial sales charge up to a maximum of 4.75% of the offering price (or a CDSC
upon redemption of 1.00% during the first year in the case of purchases of $1
million or more and certain purchases by retirement plans) and subject to an
annual distribution and service fee up to a maximum of 0.35% per annum. Class B
shares are offered at net asset value without an initial sales charge but
subject to a CDSC upon redemption declining from 4.00% during the first year to
0% after six years and an annual distribution fee and service fee up to a
maximum of 1.00% per annum. 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 but are subject to a CDSC upon
redemption of 1.00% during the first year and annual distribution fee and
service fee up to a maximum of 1.00% per annum. Class C shares do not convert to
any other class of shares of the Fund. In addition, the Fund offers an
additional class of shares, Class I shares, exclusively to certain institutional
investors. Class I shares are made available by means of a separate Prospectus
Supplement provided to institutional investors eligible to purchase Class I
shares and are offered at net asset value without an initial sales charge or
CDSC upon redemption and without an annual distribution and service fee.
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 Fund also offers to
buy back (redeem) its shares from its shareholders at any time at net asset
value, less any applicable CDSC.
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and 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 SAI in reliance upon the report of the Fund's
independent auditors given upon their authority, as experts in accounting and
auditing. The Fund's current independent auditors are Deloitte & Touche LLP.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
CLASS A
----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period ... $ 14.46 $12.80 $13.70 $12.42 $11.82 $10.25 $11.58 $10.13 $11.47 $ 9.77
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investmentincome(S) $ 0.64 $ 0.64 $ 0.54 $ 0.45 $ 0.65 $ 0.67 $ 0.64 $ 0.65 $ 0.62 $ 0.56
Net realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions ....... 1.21 1.64 (0.69) 1.74 0.75 1.57 (1.25) 1.71 (1.07) 2.07
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ........ $ 1.85 $ 2.28 $(0.15) $ 2.19 $ 1.40 $ 2.24 $(0.61) $ 2.36 $(0.45) $ 2.63
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions
declared to
shareholders --
From net investment
income(++) ......... $(0.62) $(0.61) $(0.54) $(0.59) $(0.66) $(0.61) $(0.66) $(0.63) $(0.60) $(0.56)
From net realized gain
on investments and
foreign currency
transactions ....... $(0.66) $(0.01) $(0.10) $(0.32) $(0.14) $(0.06) $(0.06) $(0.28) $(0.08) $(0.36)
In excess of net
realized gain on
investments and
foreign currency
transactions ....... -- -- (0.11) -- -- -- -- -- -- --
From paid-in capital . -- -- -- -- -- -- -- -- (0.21) (0.01)
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders ..... $(1.28) $(0.62) $(0.75) $(0.91) $(0.80) $(0.67) $(0.72) $(0.91) $(0.89) $(0.93)
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value -- end
of period ............ $ 15.03 $14.46 $12.80 $13.70 $12.42 $11.82 $10.25 $11.58 $10.13 $11.47
======= ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN(+) ........ 13.50% 18.36% (1.07)% 18.32% 12.26% 22.25% (5.59)% 23.46% (3.93)% 26.81%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:(S)
Expenses## ........... 0.91% 0.87% 0.85% 0.84% 0.84% 0.87% 0.85% 0.72% 0.71% 0.63%
Net investment income 4.35% 4.82% 4.26% 4.51% 5.40% 5.89% 5.71% 5.97% 6.06% 5.05%
PORTFOLIO TURNOVER ..... 140% 102% 91% 95% 84% 74% 50% 53% 52% 58%
AVERAGE COMMISSION RATE### $0.0547 -- -- -- -- -- -- -- -- --
NET ASSETS AT END OF
PERIOD (000,000 OMITTED) $ 2,568 $2,242 $1,857 $1,702 $1,198 $ 909 $ 707 $ 628 $ 508 $ 551
(S) The distributor did not impose a portion of its distribution fee for the periods indicated. If this fee had been incurred by
the Fund, the net investment income per share and the ratios would have been:
Net investment income -- $0.63 $ 0.52 -- -- -- -- -- -- --
Ratios (to average net assets):
Expenses## ......... -- 0.97% 0.95% -- -- -- -- -- -- --
Net investment income -- 4.72% 4.16% -- -- -- -- -- -- --
- ----------
# Per shares data for the periods subsequent to September 30, 1993 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
(++) For the years ended September 30, 1992 and 1991, $0.0508 and $0.0596, respectively, of per share distributions from net
investment income have been redesignated as distributions from capital gains.
(+) Total returns for Class A shares do not include the applicable sales charge (except for reinvested dividends prior to
October 1, 1989). If the charge had been included, the results would have been lower.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------------
1996 1995 1994 1993* 1996 1995 1994**
---- ---- ---- ---- ---- ---- ----
CLASS B CLASS C
------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning
of period ................ $ 14.46 $12.80 $13.70 $13.53 $ 14.49 $12.80 $12.92
------- ------ ------ ------ ------- ------ ------
Income from investment operations# --
Net investment income .... $ 0.52 $ 0.53 $ 0.39 $ 0.06 $ 0.53 $ 0.54 $ 0.08
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions ........... 1.21 1.64 (0.65) 0.16 1.22 1.66 (0.13)
------- ------ ------ ------ ------- ------ ------
Total from investment
operations ........... $ 1.73 $ 2.17 $(0.26) $ 0.22 $ 1.75 $ 2.20 $(0.05)
------- ------ ------ ------ ------- ------ ------
Less distributions declared
to shareholders --
From net investment income $(0.51) $(0.50) $(0.43) $(0.05) $(0.52) $(0.50) $(0.07)
From net realized gain on
investments and foreign
currency transactions .. (0.66) -- -- -- (0.66) (0.01) --
In excess of net
investment income ...... -- (0.01) (0.10) -- -- -- --
From paid-in capital ..... -- -- (0.11) -- -- -- --
------- ------ ------ ------ ------- ------ ------
Total distributions
declared to
shareholders ......... $(1.17) $(0.51) $(0.64) $(0.05) $(1.18) $(0.51) $(0.07)
------- ------ ------ ------ ------- ------ ------
Net asset value -- end of
period ................... $ 15.02 $14.46 $12.80 $13.70 $ 15.06 $14.49 $12.80
======= ====== ====== ====== ======= ====== ======
TOTAL RETURN ............... 12.49% 17.46% (1.93)% 15.24%+ 12.67% 17.66% (0.41)%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ............... 1.67% 1.71% 1.70% 1.75%+ 1.63% 1.67% 1.76%+
Net investment income .... 3.56% 3.97% 3.45% 3.98%+ 3.67% 4.14% 4.08%+
PORTFOLIO TURNOVER ......... 140% 102% 91% 95% 140% 102% 91%
AVERAGE COMMISSION RATE### . $0.0547 $ -- $ -- $ -- $0.0547 $ -- $ --
NET ASSETS AT END OF PERIOD
(000,000 OMITTED) ........ $ 1,284 $1,005 $ 843 $ 532 $ 83 $ 23 $ 1
- ----------
* For the period from commencement of offering of Class B shares, August 23, 1993 to September 30, 1993.
** For the period from commencement of offering of Class C shares, August 1, 1994 to September 30, 1994.
+ Annualized.
# Per share data for the periods subsequent to September 30, 1993 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
### Average commissions rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
</TABLE>
<PAGE>
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. Under normal market conditions, at least 25% of the Fund's assets
will be invested in fixed income securities and at least 40% and no more than
75% of the Fund's assets will be 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 stocks, preferred stocks
and preference 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 Services ("S&P"), Fitch Investors Service, Inc. ("Fitch") or Duff &
Phelps Credit Rating Co. ("Duff & Phelps")) 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 or Duff & Phelps) (commonly known as "junk bonds") including up
to 20% of its net 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. 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 the following: (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 SAI 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 5% 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 SAI for further
discussion of foreign securities and the holding of foreign currency, as well as
the associated risks.
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low- to
middle-income economy according to the International Bank for Reconstruction and
Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets. The
Adviser determines whether an issuer's principal activities are located in an
emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source of
its revenues and assets. The issuer's principal activities generally are deemed
to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies, authorities
or instrumentalities; (b) the issuer is organized under the laws of, and
maintains a principal office in, that country; (c) the issuer has its principal
securities trading market in that country; (d) the issuer derives 50% or more of
its total revenues from goods sold or services performed in that country; or (e)
the issuer has 50% or more of its assets in that country.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Panama, the
Philippines, Poland, Uruguay and Venezuela. Brady Bonds have been issued only
recently, and for that reason do not have a long payment history. Brady Bonds
may be collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate bonds or floating-rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
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 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 SAI, the Fund has adopted certain procedures intended to
minimize 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, U.S. Government securities or an irrevocable letter of
credit 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 or a letter of credit).
"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 (i.e., principal value) or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be positively or negatively
indexed (i.e., their principal value or interest rates 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 SAI.
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 the Fund's investment exposure from one type
of investment to another. For example, if the 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 the 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 the 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 the
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. The 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 SAI for 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"). A determination is made, based upon a continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to the Fund's limitation on investing not more than
15% of its net assets in illiquid investments. 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, retains oversight,
focusing on factors, such as valuation, liquidity and availability of
information. Investing in Rule 144A securities could have the effect of
decreasing the level of liquidity in the 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 SAI 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 SAI. 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 SAI. 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 SAI 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
securities and other obligations underlying 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 SAI 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. See the SAI 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 SAI 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 foreign securities.
EMERGING MARKET SECURITIES: The risks of investing in foreign securities may
be intensified in the case of investments in emerging markets. Securities of
many issuers in emerging markets may be less liquid and more volatile than
securities of comparable domestic issuers. Emerging markets also have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of the Fund is uninvested and no return is earned thereon. The inability
of the Fund to make intended security purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. Inability to dispose
of portfolio securities due to settlement problems could result in losses to the
Fund due to subsequent declines in value of the portfolio security, a decrease
in the level of liquidity in the Fund portfolio, or if the Fund has entered into
a contract to sell the security, in possible liability to the purchaser. Certain
markets may require payment for securities before delivery and in such markets
the Fund bears the risk that the securities will not be delivered and that the
Fund's payments will not be returned. 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.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation of capital, as well as by the application to the Fund of any
restrictions on investments.
Investment in certain foreign emerging market debt obligations may be restricted
or controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Fund.
----------------
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 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 SAI. For the fiscal
year ended September 30, 1996, the Fund had a portfolio turnover rate in excess
of 100%. Transaction costs incurred by the Fund and the realized capital gains
and losses of the Fund may be greater than that of a fund with a lesser
portfolio turnover rate.
The portfolio will be managed actively with respect to the Fund's fixed income
securities and the asset allocations modified as the Adviser deems necessary.
Although the Fund does not intend to seek short-term profits, fixed income
securities in its portfolio will be sold whenever the Adviser believes it is
appropriate to do so without regard to the length of time the particular asset
may have been held.
With respect to its equity securities, the Fund does not intend to trade in
securities for short-term profits and anticipates that such 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 investing in
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 the Fund.
The SAI 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 SAI may be changed without
shareholder approval unless indicated otherwise (see "Investment Restrictions"
in the SAI). 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. David M. Calabro, a Vice
President of the Adviser, Geoffrey L. Kurinsky, a Senior Vice President of the
Adviser, Judith N. Lamb, a Vice President of the Adviser, Lisa B. Nurme, a Vice
President of the Adviser, and Maura A. Shaughnessy, a Vice President of the
Adviser, are the Fund's portfolio managers. Mr. Calabro is the head of this
portfolio management team and a manager of the common stock portion of the
Fund's portfolio. Mr. Calabro has been employed by the Adviser as a Portfolio
Manager since 1992 and served as an analyst and sector portfolio manager with
Fidelity Investments prior to that time. Mr. Kurinsky, the manager of the Fund's
fixed income securities, has been employed by the Adviser as a Portfolio Manager
since 1987. Ms. Lamb, the manager of the Fund's convertible securities, has been
employed by the Adviser as a Portfolio Manager since 1992 and served as an
analyst with Fidelity Investments prior to that time. Ms. Nurme, a manager of
the common stock portion of the Fund's portfolio, has been employed by the
Adviser as a Portfolio Manager since 1987. Ms. Shaughnessy, also a manager of
the common stock portion of the Fund's portfolio, has been employed by the
Adviser as a Portfolio Manager since 1991 and served as an analyst with Harvard
Management Company prior to that time. 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 BASED ON AVERAGE DAILY NET ASSETS ANNUAL RATE OF MANAGEMENT FEE 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, 1996, MFS received management
fees under the Advisory Agreement of $13,607,772 (of which $7,760,009 was based
on average daily net assets and $5,847,763 on gross income), equivalent, on an
annualized basis, to 0.38% 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, 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 various
fixed/variable annuity contracts. MFS and its wholly-owned subsidiary, MFS
Institutional Advisors, Inc., also 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 $52.1 billion on behalf of approximately 2.2 million investor
accounts as of December 31, 1996. As of such date, the MFS organization
managed approximately $19.9 billion of assets in fixed income securities. MFS
is a subsidiary of Sun Life of Canada (U.S.) which in turn is a wholly owned
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). The Directors
of MFS are A. Keith Brodkin, Jeffrey L. Shames, John D. McNeil, Donald A.
Stewart 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 Stewart 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 also 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.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign & Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG), the oldest publicly
listed bank in Germany, founded in 1835. As part of this alliance, the portfolio
managers and investment analysts of MFS and Foreign & Colonial share their views
on a variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other portfolio
management matters. MFS has access to the extensive international equity
investment expertise of Foreign & Colonial, and Foreign & Colonial has access to
the extensive U.S. equity investment expertise of MFS. MFS and Foreign &
Colonial each have investment personnel working in each other's offices in
Boston and London, respectively.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
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
Class A, B and C shares of the Fund may be purchased at the public offering
price through any dealer and other financial institutions ("dealers") having a
selling agreement with MFD. Dealers may also charge their customers fees
relating to investments in the Fund.
This Prospectus offers Class A, B and C shares, which bear sales charges and
distribution fees in different forms and amounts, as described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
SALES CHARGE* AS
PERCENTAGE OF:
------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
- ------------------ -------------- ---------- -----------------
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** None** See Below**
- ----------
*Because of rounding in the calculation of offering price, actual sales charges
may be more or less than those calculated using the percentages above.
**A CDSC will apply to such purchases, as discussed below.
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 other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 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 Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge). In
the following four circumstances, Class A shares are offered at net asset value
without an initial sales charge but subject to a CDSC, equal to 1% of the lesser
of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares; and
(ii) on investments in Class A shares by certain retirement plans subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
if, prior to July 1, 1996: (a) the Plan had established an account with the
Shareholder Servicing Agent and (b) the sponsoring organization has
demonstrated to the satisfaction of MFD that either (i) the employer had at
least 25 employees or (ii) the aggregate purchases by the retirement plan of
Class A shares of the MFS Funds would be in an amount of at least $250,000
within a reasonable period of time, as determined by MFD in its sole
discretion.
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent (the
"MFS Participant Recordkeeping System"); (b) the plan establishes an account
with the Shareholder Servicing Agent on or after July 1, 1996; and (c) the
aggregate purchases by the retirement plan of Class A shares of the MFS
Funds will be in an aggregate amount of at least $500,000 within a
reasonable period of time, as determined by MFD in its sole discretion; and
(iv) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the time
of purchase, a market value of $500,000 or more invested in shares of any
class or classes of the MFS Funds. THE RETIREMENT PLAN WILL QUALIFY UNDER
THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING ORGANIZATION INFORMS THE
SHAREHOLDER SERVICING AGENT PRIOR TO THE PURCHASES THAT THE PLAN HAS A
MARKET VALUE OF $500,000 OR MORE INVESTED IN SHARES OF ANY CLASS OR CLASSES
OF THE MFS FUNDS. THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION
INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER THIS
CATEGORY.
In the case of all such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
--------------------------------- -----------------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemptions of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus. In addition to these circumstances,
the CDSC imposed upon the redemption of Class A shares is waived with respect to
shares held by certain retirement plans qualified under Section 401(a) or 403(b)
of the Internal Revenue Code of 1986, as amended (the "Code"), and subject to
ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe
to the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to the Shareholder Servicing Agent that the
retirement plan has, at the time of certification or will have pursuant to a
purchase order placed with the certification, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds and
aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated or partially terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or consolidated
with, any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC upon redemption 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%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below, 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 payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996 will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Fund's Distribution Plan. As
discussed above, such retirement plans are eligible to purchase Class A shares
of the Fund at net asset value without an initial sales charge but subject to a
1% CDSC if the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds. IN THIS EVENT,
THE PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption
of Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with, any other entity.
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 Fund's Distribution Plan
applicable to Class B shares. See "Distribution Plan" below. 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 but are subject to a CDSC upon redemption of 1.00% during
the first year. 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 up to
$1,000,000 per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below
for further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Fund's Distribution Plan to
MFD for the first year after purchase (see "Distribution Plan" below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Internal Revenue Code of 1986,
as amended (the "Code"), if the retirement plan and/or the sponsoring
organization subscribe to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping program made available by the Shareholder Servicing Agent.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class C shares is waived. These circumstances are described in Appendix A to
this Prospectus.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. 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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow 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.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserve the
right to reject or restrict any specific purchase or exchange request. In the
event that the Fund or MFD rejects an exchange request, neither the redemption
nor the purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individudals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calender year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase or exchange requests by market
timers. Other funds in the MFS Family of Funds may have different and/or more or
less restrictive policies with respect to market timers than the Fund. These
policies are disclosed in the prospectuses of these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect
to sales of Class A, Class B and Class C shares. In addition, 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 an additional commission equal to 0.50% of the net asset value of all of
the Class B and/or Class C 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. 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 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. 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.
Other concessions may be offered to the extent not prohibited by state laws or
any self-regulatory agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. 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.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. 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. 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 in respect of Shareholders who invested in the Fund through a
national bank. 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.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a 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.
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 at net asset value (if available for sale). Shares of one class
may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING MFS MONEY MARKET FUNDS): No initial sales
charges or CDSC will be imposed in connection with an exchange from shares of an
MFS Fund to shares of any other MFS Fund, except with respect to exchanges from
an MFS money market fund to another MFS Fund which is not an MFS money market
fund (discussed below). With respect to an exchange involving shares subject to
a CDSC, the CDSC will be unaffected by the exchange and the holding period for
purposes of calculating the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth above in this
paragraph.
GENERAL: A shareholder should read the prospectus of the other MFS Funds and
consider the differences in objectives, policies and restrictions before making
any exchange. 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
($50 in the case 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 the Shareholder Servicing Agent) or all
the shares in the account. If an 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 (generally, 4:00 p.m., Eastern time) (the "Exchange"),
the exchange will occur on that day if all the requirements set forth above have
been complied with at that time and subject to the Fund's right to reject
purchase orders. No more than five exchanges may be made in any one Exchange
Request by telephone. Additional information concerning this exchange privilege
and prospectuses for any of the other MFS Funds may be obtained from dealers or
the Shareholder Servicing Agent. 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.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, 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 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 up to 15 days from the purchase date in an effort to
assure that such check has cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may 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
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
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"
will 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 in "good
order" by the Shareholder Servicing Agent, 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 described above 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.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent 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 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 and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. 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.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his 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 BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B and Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of (i) with
respect to Class A and Class C shares, 12 months (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares), or (ii)
with respect to Class B shares, six years. 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 C shares and 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. Prior to April 1, 1996, Class
C shares of the MFS Funds were not subject to a CDSC upon redemption. In no
event will Class C shares of the MFS Funds purchased prior to this date be
subject to a CDSC. For the purpose of calculating the CDSC upon redemption of
shares acquired in an exchange on or after April 1, 1996, 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 (if such original purchase occurred
prior to April 1, 1996, then no CDSC would be imposed upon such a redemption).
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans 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 a particular class, (i) any Free Amount is not subject
to the CDSC and (ii) the amount of the 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 of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, 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.
REINSTATEMENT PRIVILEGE. 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 Class
C shares and 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 SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund solely
in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions either totally or partially, by a distribution
in-kind of securities (instead of cash) from the Fund's portfolio. The
securities distributed in such a distribution 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 shareholder could
incur brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being 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 --
General -- Minimum Investment." 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.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Plan would benefit the Fund and its shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are features of the Distribution
Plan that are common to each class of shares, as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, Class B
or Class C shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date. Service
fees may be reduced for a dealer that is the holder or dealer of record for an
investor who owns shares of the Fund having an aggregate 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 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 to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD
a distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each class
of shares. While the amount of compensation received by MFD in the form of
distribution fees during any year may be more or less than the expense incurred
by MFD under its distribution agreement with the Fund, the Fund is not liable to
MFD for any losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged
to, and therefore reduce, income allocated to shares of the Designated Class.
The provisions of the Distribution Plan relating to operating policies as well
as initial approval, renewal, amendment and termination are substantially
identical as they relate to each class of shares covered by the Distribution
Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered with an initial sales
charge, a substantial portion of which is paid to or retained by the dealer
making the sale (and the remainder of which is paid to MFD). See "Purchases --
Class A Shares" above. In addition to the initial sales charge, the dealer also
generally receives the ongoing 0.25% per annum service fee, as discussed above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.10% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission to dealers with respect to purchases
of $1 million or more and purchases by certain retirement plans of Class A
shares which are sold at net asset value but which are subject to a 1% CDSC for
one year after purchase). See "Purchases -- Class A Shares" above. In addition,
to the extent that the aggregate service and distribution fees paid under the
Distribution Plan do 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 such
distribution-related expenses or other distribution-related expenses.
CLASS B SHARES. Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases -- Class B Shares"
above. MFD will advance to dealers the first year service fee described above at
a rate equal to 0.25% of the purchase price of such shares and, as compensation
therefore, MFD may retain the service fee paid by the Fund with respect to such
shares for the first year after purchase. Dealers will become eligible to
receive the ongoing 0.25% per annum service fee with respect to such shares
commencing in the thirteenth month following purchase.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES. Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases -- Class C shares"
above. MFD will pay a commission to dealers of 1.00% of the purchase price of
Class C shares purchased through dealers at the time of purchase. In
compensation for this 1.00% commission paid by MFD to dealers, MFD will retain
the 1.00% per annum Class C distribution and service fees paid by the Fund with
respect to such shares for the first year after purchase, and dealers will
become eligible to receive from MFD the ongoing 1.00% per annum distribution and
service fees paid by the Fund to MFD with respect to such shares commencing in
the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Distribution Plan equal, on an annual basis, to 0.75% of
the Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A, Class B and
Class C distribution and service fees for its current fiscal year are 0.35%,
1.00% and 1.00% per annum, respectively. The 0.35% per annum Class A
distribution/service fee is reduced to 0.25% per annum for shares purchased
prior to October 1, 1989.
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. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to its shareholders in accordance with the timing requirements imposed by
the Code, it is not expected that the Fund will be required to pay any federal
income or excise taxes, although the Fund's foreign-source income 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 the dividends and capital gain distributions they
receive from the Fund, whether the distribution is in cash or in 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.
Shortly after the end of each calendar year, each shareholder will receive 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, 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. Fund
distributions will reduce the Fund's net asset value per share. Shareholders who
buy shares shortly before the Fund makes a distribution of net capital gains or
net short-term capital gains may thus pay the full price for the shares and then
effectively receive a portion of the purchase price back as a taxable
distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and 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 treaty. The Fund is
also required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and certain 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. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding.
Prospective investors should read the Fund's Account Application for additional
information regarding backup withholding of federal income tax and should
consult their own tax advisors as to the tax consequences to them 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 SAI. The net
asset value of each class of shares is effective for orders received in "good
order" 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 which it
offers to the general public, entitled Class A, Class B and Class C Shares of
Beneficial Interest (without par value). The Fund also has a class of shares
which it offers exclusively to certain institutional investors, entitled Class I
shares. 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 the Distribution
Plan or on any other matter that affects solely its 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 SAI).
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 is 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 and Class C 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 and Class C 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 will give effect to the imposition of any applicable CDSC assessed upon
redemptions of the Fund's Class B and Class C 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. The Fund offers multiple classes of
shares which were initially offered for sale to the public on different dates.
The calculation of total rate of return for a class of shares which initially
was offered for sale to the public subsequent to another class of shares of the
Fund is based both on (i) the performance of the Fund's newer class from the
date it initially was offered for sale to the public and (ii) the performance of
the Fund's oldest class from the date it initially was offered for sale to the
public up to the date that the newer class initially was offered for sale to the
public. See the SAI for further information on the calculation of total rate of
return for share classes initially offered for sale to the public on different
dates.
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 SAI. For further information
about the Fund's performance for the fiscal year ended September 30, 1996,
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, or the shareholder does not respond to mailings
from the Shareholder Servicing Agent with regard to uncashed distribution
checks, 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 SAI) 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 Class A, B and C 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
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 and Class C 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 on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first business day of the month. 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 if
such fund is available for sale. Under the Automatic Exchange Plan, exchanges of
at least $50 each may be made to up to six 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 SAI 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 SAI, dated February 1, 1997, as amended or supplemented from time to
time, contains more detailed information about the Trust and the Fund,
including, but not limited to, information related to (i) investment objectives,
policies and restrictions, (ii) Trustees, officers and investment adviser, (iii)
portfolio transactions and brokerage commissions, (iv) Distribution Plan, (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
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the contingent
deferred sales charge ("CDSC") for Class A shares are waived (Section II), and
the CDSC for Class B and Class C shares is waived (Section III).
I.
WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, is waived:
1. DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any MFS Fund in the MFS Family of
Funds ("MFS Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of
assets of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
o Officers, eligible directors, employees (including retired employees)
and agents of Massachusetts Financial Services Company ("MFS"), Sun
Life Assurance Company of Canada ("Sun Life") or any of their
subsidiary companies;
o Trustees and retired trustees of any investment company for which MFS
Fund Distributors, Inc. ("MFD") serves as distributor;
o Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
o Employees or registered representatives of dealers and other
financial institution ("dealers") which have a sales agreement with
MFD;
o Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to an MFS Fund; and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
("MFSI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/ Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
o Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
o Death, disability or retirement of 401 (a) or ESP Plan participant;
o Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
o Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1 (d)(2), as amended from time to time);
o Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
o Tax-free return of excess 401(a) or ESP Plan contributions;
o To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes
to the MFS FUNDamental 401 (k) Plan or another similar recordkeeping
system made available by the Shareholder Servicing Agent; and
o Distributions from a 401(a) or ESP Plan that has invested its assets
in 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 401(a) or ESP
Plan first invests its assets in one or more of the MFS Funds. The
sales charges will be waived in the case of a redemption of all of
the Plan's shares in all MFS Funds (i.e., all the assets of the 401
(a) or ESP Plan invested in the MFS Funds are withdrawn), unless
immediately prior to the redemption, the aggregate amount invested by
the 401(a) or ESP Plan in shares of the MFS Funds (excluding the
reinvestment of distributions) during the prior four years equals 50%
or more of the total value of the 401(a) or ESP Plan's assets in the
MFS Funds, in which case the sales charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
o Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
o To an IRA rollover account where any sales charges with respect to
the shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants of such Plan, provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemptions of Class A shares are
waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
o Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or
managed by MFD or its affiliates if: (i) the investment is made
through a dealer and appropriate documentation is submitted to MFD;
(ii) the redeemed shares were subject to an initial sales charge or
deferred sales charge (whether or not actually imposed); (iii) the
redemption occurred no more than 90 days prior to the purchase of
Class A shares; and (iv) the MFS Fund, MFD or its affiliates have not
agreed with such company or its affiliates, formally or informally,
to waive sales charges on Class A shares or provide any other
incentive with respect to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
o Shares acquired by investments through certain dealers which have
entered into an agreement with MFD which includes a requirement that
such shares be sold for the sole benefit of clients participating in
a "wrap" account or a similar program under which such clients pay a
fee to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
o Shares acquired by retirement plans whose third party administrators,
or dealers have entered into an administrative services agreement
with MFD or one of its affiliates to perform certain administrative
services, subject to certain operational and minimum size
requirements specified from time to time by MFD or one or more of its
affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
o Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
Shares redeemed on account of distributions made under the following
circumstances:
IRA'S
o Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
o Tax-free returns of excess IRA contributions.
401(A) PLANS
o Distributions made on or after the 401 (a) Plan participant has
attained the age of 59 1/2 years old; and
o Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a Plan.
ESP PLANS AND SRO PLANS
o Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares
is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year of the account value at the time of establishment.
2. DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made
under the following circumstances:
IRA'S, 401(A) PLANS, ESP PLANS AND SRO PLANS
o Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
applicable Internal Revenue Code ("Code") rules.
SALARY REDUCTION EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
o Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
o Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P, Fitch and Duff & Phelps 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 INVESTORS SERVICE, INC.
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.
STANDARD & POORS RATINGS SERVICES
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 INVESTORS SERVICE, INC.
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.
NR: 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.
DUFF & PHELPS CREDIT RATING CO.
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 "D-1+".
A: Bonds considered to be investment grade and of 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 of
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.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within a rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR: Indicates that Duff & Phelps does not rate the specific issue.
DUFF & PHELPS SHORT-TERM RATINGS
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3: Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
<PAGE>
[logo] MFS(SM)
INVESTMENT MANAGEMENT
MFS(R) TOTAL RETURN FUND
Prospectus
February 1, 1997
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 and Trust Company
89 South Street
Boston, MA 02110
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 Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA02110
[logo] MFS(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) TOTAL RETURN FUND
500 Boylston Street
Boston, MA 02116
MTR-1-2/97/520M 15/215/315
<PAGE>
[Logo]
INVESTMENT MANAGEMENT
MFS(R) TOTAL STATEMENT OF
RETURN FUND ADDITIONAL INFORMATION
(A Member of the MFS Family of Funds(R)) February 1, 1997
- --------------------------------------------------------------------------------
Page
----
1. Definitions ........................................................... 2
2. Investment Objectives, Policies and Restrictions ...................... 2
3. Management of the Fund ................................................ 13
Trustees ............................................................ 13
Officers ............................................................ 13
Investment Adviser .................................................. 14
Custodian ........................................................... 15
Shareholder Servicing Agent ......................................... 15
Distributor ......................................................... 15
4. Portfolio Transactions and Brokerage Commissions ...................... 16
5. Shareholder Services .................................................. 17
Investment and Withdrawal Programs .................................. 17
Exchange Privilege .................................................. 19
Tax-Deferred Retirement Plans ....................................... 19
6. Tax Status ............................................................ 20
7. Determination of Net Asset Value and Performance ...................... 21
8. Distribution Plan ..................................................... 23
9. Description of Shares, Voting Rights and Liabilities .................. 24
10. Independent Auditors and Financial Statements ......................... 25
Appendix A -- Performance Information ................................. A-1
MFS TOTAL RETURN FUND
A Series of MFS Series Trust V
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus,
dated February 1, 1997. This SAI should be read in conjunction with the
Prospectus, a copy of which may be obtained without charge by contacting the
Shareholder Servicing Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
1. DEFINITIONS
"Fund" -- MFS Total Return Fund, a series of
MFS Series Trust V (the "Trust"), a
Massachusetts business trust. The
Trust was known as Massachusetts
Financial Total Return Trust until
August 3, 1992.
"MFS" or the "Adviser" -- Massachusetts Financial Services
Company, a Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc., a
Delaware corporation.
"Prospectus" -- The Prospectus of the Fund, dated
February 1, 1997, as amended or
supplemented from time to time.
2. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES. The Fund's primary investment objective is to obtain
above-average income (compared to a portfolio invested entirely 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. Any investment involves risk and there can be no assurance that
the Fund will achieve its investment objectives.
INVESTMENT POLICIES. The Prospectus contains a discussion of the Fund's
policies with respect to investments in various types of securities and the
risks involved in such investments. Some of these policies are discussed
further below.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loan
participations and other direct claims against a borrower. In 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, although some may be unsecured. Such loans may be in default at
the time of purchase. Loans that are fully secured offer the Fund more
protection than an unsecured loan in the event of non-payment of scheduled
interest or principal. However, there is no assurance that the liquidation of
collateral from a secured loan would satisfy the corporate borrower's
obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which
the Fund would assume all of the rights of the lending institution in a loan,
or as an assignment, pursuant to which the Fund would purchase an assignment
of a portion of a lender's interest in a loan either directly from the lender
or through an intermediary. 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. These commitments
may have the effect of requiring the Fund to increase its investment in a
company at a time when the Fund might not otherwise decide to do so (including
at a time when the company's financial condition makes it unlikely that such
amounts will be repaid). To the extent that the Fund is committed to advance
additional funds, it will at all times hold and maintain in a segregated
account cash or other high grade debt obligations in an amount sufficient to
meet such commitments.
The Fund's ability to receive payments of principal, interest and other
amounts due in connection with these investments will depend primarily on the
financial condition of the borrower. In selecting the loan participations and
other direct investments which the Fund will purchase, the Adviser will rely
upon its (and not that of the original lending institution's) own credit
analysis of the borrower. As the Fund may be required to rely upon another
lending institution to collect and pass on to the Fund amounts payable with
respect to the loan and to enforce the Fund's rights under the loan, an
insolvency, bankruptcy or reorganization of the lending institution may delay
or prevent the Fund from receiving such amounts. In such cases, the Fund will
evaluate as well the creditworthiness of the lending institution and will
treat both the borrower and the lending institution as an "issuer" of the loan
participation for purposes of certain investment restrictions pertaining to
the diversification of the Fund's portfolio investments. The highly leveraged
nature of many such loans may make such loans especially vulnerable to adverse
changes in economic or market conditions. Investments in such loans may
involve additional risks to the Fund. For example, if a loan is foreclosed,
the Fund could become part owner of any collateral, and would bear the costs
and liabilities associated with owning and disposing of the collateral. In
addition, it is conceivable that under emerging legal theories of lender
liability, the Fund could be held liable as a co-lender. It is unclear whether
loans and other forms of direct indebtedness offer securities law protections
against fraud and misrepresentation. In the absence of definitive regulatory
guidance, the Fund relies on the Adviser's research in an attempt to avoid
situations where fraud or misrepresentation could adversely affect the Fund.
In addition, 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. To the extent that the Adviser
determines that any such investments are illiquid, the Fund will include them
in the investment limitations described below.
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.
The average lives of mortgage pass-throughs are variable when issued because
their average lives depend on prepayment rates. The average life of these
securities is likely to be substantially shorter than their stated final
maturity as a result of unscheduled principal prepayments. Prepayments on
underlying mortgages result in a loss of anticipated interest, and all or part
of a premium if any has been paid, and the actual yield (or total return) to
the Fund may be different than the quoted yield on the securities. Mortgage
prepayments generally increase with falling interest rates and decrease with
rising interest rates. Like other fixed income securities, when interest rates
rise the value of a mortgage pass-through security generally will decline;
however, when interest rates are declining, the value of mortgage pass-through
securities with prepayment features may not increase as much as that of other
fixed-income securities.
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 the Government National Mortgage Association ("GNMA"); or
guaranteed by agencies or instrumentalities of the U.S. Government (such as
the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation, ("FHLMC") 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). Some of these mortgage pass-through securities may be supported by
various forms of insurance or guarantees.
Interests in pools of mortgage-related securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-
through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by prepayments of principal
resulting from the sale, refinancing or foreclosure of the underlying
property, net of fees or costs which may be incurred. Some mortgage pass-
through securities (such as securities issued by the GNMA) are described as
"modified pass-through." These securities entitle the holder to receive all
interests and principal payments owed on the mortgages in the mortgage pool,
net of certain fees, at the scheduled payment dates regardless of whether the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities is
the GNMA. GNMA is a wholly-owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the U.S. Government, the timely payment of
principal and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks and mortgage bankers)
and backed by mortgage pools of Federal Housing Administration-insured or
Veterans Administration-guaranteed. These guarantees, however, do not apply to
the market value or yield of mortgage pass-through securities. GNMA securities
are often purchased at a premium over the maturity value of the underlying
mortgages. This premium is not guaranteed and will be lost if prepayment
occurs.
Government-related guarantors (i.e., whose guarantees are not backed by the
full faith and credit of the U.S. Government) include the FNMA and the FHLMC.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional residential mortgages
(i.e., mortgages not insured or guaranteed by any governmental agency) from a
list of approved seller/servicers which include state and federally-chartered
savings and loan associations, mutual savings banks, commercial banks, credit
unions and mortgage bankers. Pass-through securities issued by FNMA are
guaranteed as to timely payment by FNMA of principal and interest.
FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which represent
interests in conventional mortgages (i.e., not federally insured or
guaranteed) from FHLMC's national portfolio. FHLMC guarantees timely payment
of interest and ultimate collection of principal regardless of the status of
the underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of mortgage loans. Such issuers may also be the originators
and/or servicers of the underlying mortgage-related securities. Pools created
by such non-governmental issuers generally offer a higher rate of interest
than government and government-related pools because there are no direct or
indirect government or agency guarantees of payments in the former pools.
However, timely payment of interest and principal of mortgage loans in these
pools may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance and letters of credit. The
insurance and guarantees are issued by governmental entities, private insurers
and the mortgage poolers. There can be no assurance that the private insurers
or guarantors can meet their obligations under the insurance policies or
guarantee arrangements. The Fund may also buy mortgage-related securities
without insurance or guarantees.
SECURITIES LENDING: The Fund may seek to increase its income by lending fixed
income portfolio securities. Such loans will usually be made only to member
banks of the Federal Reserve System and to member firms (or subsidiaries
thereof) of the New York Stock Exchange and would be required to be secured
continuously by collateral in cash, U.S. Government securities or an
irrevocable letter of credit maintained on a current basis at an amount at
least equal to the market value of the securities loaned. The Fund would have
the right to call a loan and obtain the securities loaned at any time on
customary industry settlement notice (which will usually not exceed five
days). During the existence of a loan, the Fund would continue to receive the
equivalent of the interest paid by the issuer on the securities loaned and
would also receive compensation based on investment of cash collateral or a
fee. The Fund would not, however, have the right to vote any securities having
voting rights during the existence of the loan, but would call the loan in
anticipation of an important vote to be taken among holders of the securities
or of the giving or withholding of their consent on a material matter
affecting the investment. As with other extensions of credit, there are risks
of delay in recovery or even loss of rights in the collateral should the
borrower of the securities fail financially. However, the loans would be made
only to firms deemed by the Adviser to be of good standing, and when, in the
judgment of the Adviser, the consideration which could be earned currently
from securities loans of this type justifies the attendant risk. If the
Adviser determines to lend securities, it is not intended that the value of
the securities loaned would exceed 30% of the value of the Fund's total
assets. The Fund did not lend any of its portfolio securities during its
fiscal year ended September 30, 1996.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
sellers who are member firms (or subsidiaries thereof) of the New York Stock
Exchange or members of the Federal Reserve System, recognized primary U.S.
Government securities dealers or institutions which the Adviser has determined
to be of comparable creditworthiness. The securities that the Fund purchases
and holds through its agent are U.S. Government securities, the values of
which are equal to or greater than the repurchase price agreed to be paid by
the seller. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and repurchase prices may
be the same, with interest at a standard rate due to the Fund together with
the repurchase price on repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay
the price agreed upon on the agreed upon delivery date or upon demand, as the
case may be, the Fund will have the right to liquidate the securities. If, at
the time the Fund is contractually entitled to exercise its right to liquidate
the securities, the seller is subject to a proceeding under the bankruptcy
laws or its assets are otherwise subject to a stay order, the Fund's exercise
of its right to liquidate the securities may be delayed and result in certain
losses and costs to the Fund. The Fund has adopted and follows procedures
which are intended to minimize the risks of repurchase agreements. For
example, the Fund only enters into repurchase agreements after the Adviser has
determined that the seller is creditworthy, and the Adviser monitors that
seller's creditworthiness on an ongoing basis. Moreover, under such
agreements, the value of the securities (which are marked to market every
business day) is required to be greater than the repurchase price, and the
Fund has the right to make margin calls at any time if the value of the
securities falls below the agreed upon margin.
"WHEN-ISSUED" SECURITIES: When the Fund commits to purchase a security on a
"when-issued" or "forward delivery" basis, it will set up procedures
consistent with the General Statement of Policy of the Securities and Exchange
Commission (the "SEC") concerning such purchases. Since that policy currently
recommends that an amount of the Fund's assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment, the
Fund will always have cash, short-term money market instruments or high
quality debt securities sufficient to cover any commitments or to limit any
potential risk. However, although the Fund does not intend to make such
purchases for speculative purposes and intends to adhere to the provisions of
the SEC policy, purchases of securities on such basis may involve more risk
than other types of purchases. For example, the Fund may have to sell assets
which have been set aside in order to meet redemptions. Also, if the Fund
determines it necessary to sell the "when-issued" or "forward delivery"
securities before delivery, it may incur a loss because of market fluctuations
since the time the commitment to purchase such securities was made.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed
to the prices of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity (i.e., principal value) or coupon rate is determined by reference to
a specific instrument or statistic. Gold-indexed securities, for example,
typically provide for a maturity value that depends on the price of gold,
resulting in a security whose price tends to rise and fall together with gold
prices. Currency-indexed securities typically are short-term to intermediate-
term debt securities whose maturity values or interest rates are determined by
reference to the values of one or more specified foreign currencies, and may
offer higher yields than U.S. dollar-denominated securities of equivalent
issuers. Currency-indexed securities may be positively or negatively indexed;
that is, their maturity value may increase when the specified currency value
increases, resulting in a security that performs similarly to a foreign-
denominated instrument, or their maturity value may decline when foreign
currencies increase, resulting in a security whose price characteristics are
similar to a put on the underlying currency. Currency-indexed securities may
also have prices that depend on the values of a number of different foreign
currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
Government agencies.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: As described in the Prospectus, the Fund
may enter into mortgage "dollar roll" transactions pursuant to which it sells
mortgage-backed securities for delivery in the future and simultaneously
contracts to repurchase substantially similar securities on a specified future
date. The Fund records these transactions as sale and purchase transactions,
rather than as borrowing transactions. During the roll period, the Fund
foregoes principal and interest paid on the mortgage-backed securities. The
Fund is compensated for the lost interest by the difference between the
current sales price and the lower price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. The Fund may also be compensated by receipt of a
commitment fee.
FOREIGN SECURITIES: The Fund may invest up to 20% (and generally expects to
invest between 5% and 20%) of its total assets in foreign securities (not
including American Depositary Receipts). As discussed in the Prospectus,
investing in foreign securities generally represents a greater degree of risk
than investing in domestic securities due to possible exchange rate
fluctuations, less publicly available information, more volatile markets, less
securities regulation, less favorable tax provisions, war or expropriation. As
a result of its investments in foreign securities, the Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of
such securities, in the foreign currencies in which such securities are
denominated. 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. While the holding of currencies will permit the
Fund to take advantage of favorable movements in the applicable exchange rate,
such strategy also exposes the Fund to risk of loss if exchange rates move in
a direction adverse to the Fund's position. Such losses could reduce any
profits or increase any losses sustained by the Fund from the sale or
redemption of securities and could reduce the dollar value of interest or
dividend payments received.
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. ADRs may be sponsored or
unsponsored. A sponsored ADR is issued by a depository which has an exclusive
relationship with the issuer of the underlying security. An unsponsored ADR
may be issued by any number of U.S. depositories. Under the terms of most
sponsored arrangements, depositories agree to distribute notices of
shareholder meetings and voting instructions, and to provide shareholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities. The depository of an unsponsored ADR, on
the other hand, is under no obligation to distribute shareholder
communications received from the issuer of the deposited securities or to pass
through voting rights to ADR holders in respect of the deposited securities.
The Fund may invest in either type of ADR. Although the U.S. investor holds a
substitute receipt of ownership rather than direct stock certificates, the use
of the depositary receipts in the United States can reduce costs and delays as
well as potential currency exchange and other difficulties. The Fund may
purchase securities in local markets and direct delivery of these ordinary
shares to the local depository of an ADR agent bank in the foreign country.
Simultaneously, the ADR agents create a certificate which settles at the
Fund's custodian in five days. The Fund may also execute trades on the U.S.
markets using existing ADRs. A foreign issuer of the security underlying an
ADR is generally not subject to the same reporting requirements in the United
States as a domestic issuer. Accordingly the information available to a U.S.
investor will be limited to the information the foreign issuer is required to
disclose in its own country and the market value of an ADR may not reflect
undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are denominated in foreign currency.
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 and
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. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing
the balance due. Most issuers of automobile receivables permit the servicers
to retain possession of the underlying obligations. If the servicer were to
sell these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
automobile receivables. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws,
the trustee for the holders of the automobile receivables may not have a
proper security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors to make payments on underlying assets, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection against
losses resulting from ultimate default ensures payment through insurance
policies or letters of credit obtained by the issuer or sponsor from third
parties. The Fund will not pay any additional or separate fees for credit
support. The degree of credit support provided for each issue is generally
based on historical information respecting the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that anticipated
or failure of the credit support could adversely affect the return on an
instrument in such a security.
SWAPS AND RELATED TRANSACTIONS: The Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
Fund's exposure to long or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as securities prices or inflation rates. Swap agreements
can take many different forms and are known by a variety of names. The Fund is
not limited to any particular form or variety of swap agreement if MFS
determines it is consistent with the Fund's investment objective and policies.
The Fund will maintain cash or appropriate liquid assets with its custodian to
cover its current obligations under swap transactions. If the Fund enters into
a swap agreement on a net basis (i.e., the two payment streams are netted out,
with the Fund receiving or paying as the case may be, only the net amount of
the two payments), the Fund will maintain cash or liquid assets with its
Custodian with a daily value at least equal to the excess, if any, of the
Fund's accrued obligations under the swap agreement over the accrued amount
the Fund is entitled to receive under the agreement. If the Fund enters into a
swap agreement on other than a net basis, it will maintain cash or liquid
assets with a value equal to the full amount of the Fund's accrued obligations
under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If
MFS is incorrect in its forecasts of such factors, the investment performance
of the Fund would be less than what it would have been if these investment
techniques had not been used. If a swap agreement calls for payments by the
Fund, the Fund must be prepared to make such payments when due. In addition,
if the counterparty's creditworthiness declined, the value of the swap
agreement would be likely to decline, potentially resulting in losses. If the
counterparty defaults, the Fund's risk of loss consists of the net amount of
payments that the Fund is contractually entitled to receive. The Fund
anticipates that it will be able to eliminate or reduce its exposure under
these arrangements by assignment or other disposition or by entering into an
offsetting agreement with the same or another counterparty.
RISKS OF INVESTING IN LOWER RATED BONDS: The Fund may invest in fixed income
securities rated Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by
Standard & Poor's Ratings Services ("S&P"), Fitch Investors Service, Inc.
("Fitch") or Duff & Phelps Credit Rating Co. ("Duff & Phelps") 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 fixed income securities rated Ba or lower by
Moody's or BB or lower by S&P, Fitch or Duff & Phelps and comparable unrated
securities (commonly known as "junk bonds") to the extent described in the
Prospectus. 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 and because 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 the outlook
for economic growth), short-term corporate and industry developments and the
market's perception of their credit quality (especially during times of
adverse publicity) 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). 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. The prices for these
securities may be affected by legislative and regulatory developments. The
market for these lower rated fixed income securities may be less liquid than
the market for investment grade fixed income securities. Furthermore, the
liquidity of these lower rated securities may be affected by the market's
perception of their credit quality. Therefore, the Adviser's judgment may at
times play a greater role in valuing these securities than in the case of
investment grade fixed income securities, and it also may be more difficult
during times of certain adverse market conditions to sell these lower rated
securities to meet redemption requests or to respond to changes in the market.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Fund's policy to rely exclusively on ratings issued by
these rating agencies, but rather to supplement such ratings with the
Adviser's own independent and ongoing review of credit quality. To the extent
the Fund invests in these lower rated securities, the achievement of its
investment objectives may be more dependent on the Adviser's own credit
analysis than in the case of a fund investing in higher quality fixed income
securities. These lower rated securities may also include zero coupon bonds,
deferred interest bonds and bonds on which interest is payable in kind ("PIK
Bonds") which are described in the Prospectus.
OPTIONS ON SECURITIES: The Fund may write (sell) covered call and put options
on securities and purchase call and put options on securities. The Fund may
write options on securities for the purpose of increasing its return on such
securities and for hedging purposes.
A call option written by the Fund is covered if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire such
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion
or exchange of other securities held in its portfolio. A call option is also
covered if a Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash or high grade government securities in a segregated account
with its custodian. A put option written by the Fund is covered if the Fund
maintains cash or high grade government securities with a value equal to the
exercise price in a segregated account with its custodian, or else holds a put
on the same security and in the same principal amount as the put written where
the exercise price of the put held (i) is equal to or greater than the
exercise price of the put written or (ii) is less than the exercise price of
the put written if the difference is maintained by the Fund in cash or high
grade government securities in a segregated account with its custodian. Put
and call options written by the Fund may also be covered in such other manner
as may be in accordance with the requirements of the exchange on which, or the
counterparty with which, the option is traded, and applicable laws and
regulations.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case
of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by deposited cash or
short-term securities. Such transactions permit the Fund to generate
additional premium income, which will partially offset declines in the value
of portfolio securities or increases in the cost of securities to be acquired.
Also, effecting a closing transaction will permit the proceeds from the
concurrent sale of any securities subject to the option to be used for other
investments of the Fund, provided that another option on such security is not
written. If the Fund desires to sell a particular security from its portfolio
on which it has written a call option, it will effect a closing transaction in
connection with the option prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the premium paid
in connection with the closing of an option written by the Fund is less than
the premium received from writing the option, or if the premium received in
connection with the closing of an option purchased by the Fund is more than
the premium paid for the original purchase. Conversely, the Fund will suffer a
loss if the premium paid or received in connection with a closing transaction
is more or less, respectively, than the premium received or paid in
establishing the option position. Because increases in the market price of a
call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the closing out of a call option
previously written by the Fund is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call option the Fund determines to write
will depend upon the expected price movement of the underlying security. The
exercise price of a call option may be below ("in-the-money"), equal to ("at-
the-money") or above ("out-of-the-money") the current value of the underlying
security at the time the option is written. If the call options are exercised
in such transactions, the Fund's maximum gain will be the premium received by
it for writing the option, adjusted upwards or downwards by the difference
between the Fund's purchase price of the security and the exercise price, less
related transaction costs. If the options are not exercised and the price of
the underlying security declines, the amount of such decline will be offset in
part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options could be used by
the Fund in the same market environments that call options would be used in
equivalent buy-and-write transactions.
The Fund may write combinations of put and call options on the same security,
a practice known as a "straddle." By writing a straddle, the Fund undertakes a
simultaneous obligation to sell and purchase the same security in the event
that one of the options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the amount
of the premium and transaction costs, the call will likely be exercised and
the Fund will be required to sell the underlying security at a below market
price. This loss may be offset, however, in whole or in part, by the premiums
received on the writing of the two options. Conversely, if the price of the
security declines by a sufficient amount, the put will likely be exercised.
The writing of straddles will likely be effective, therefore, only where the
price of a security remains stable and neither the call nor the put is
exercised. In an instance where one of the options is exercised, the loss on
the purchase or sale of the underlying security may exceed the amount of the
premiums received.
By writing a call option, the Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise
price of the option. By writing a put option, the Fund assumes the risk that
it may be required to purchase the underlying security for an exercise price
above its then current market value, resulting in a capital loss unless the
security subsequently appreciates in value. The writing of options on
securities will be undertaken by the Fund for purposes in addition to hedging,
and could involve certain risks which are not present in the case of hedging
transactions. Moreover, even where options are written for hedging purposes,
such transactions will constitute only a partial hedge against declines in the
value of portfolio securities or against increases in the value of securities
to be acquired, up to the amount of the premium.
The Fund also may purchase put and call options on securities. Put options
would be purchased to hedge against a decline in the value of securities held
in the Fund's portfolio. If such a decline occurs, the put options will permit
the Fund to sell the underlying securities at the exercise price, or to close
out the options at a profit. By using put options in this way, the Fund will
reduce any profit it might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and related transaction
costs. The Fund may purchase call options to hedge against an increase in the
price of securities that the Fund anticipates purchasing in the future. If
such an increase occurs, the call option will permit the Fund to purchase the
securities at the exercise price or to close out the option at a profit. The
premium paid for a call or put option plus any transaction costs will reduce
the benefit, if any, realized by the Fund upon exercise of the option, and,
unless the price of the underlying security rose or declined sufficiently, the
option may expire worthless to the Fund.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put
options on stock indices and purchase call and put 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.
The Fund may cover call options on stock indices by owning securities whose
price changes, in the opinion of the Adviser, are expected to be similar to
those of the index, or by having an absolute and immediate right to acquire
such securities without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion
or exchange of other securities in its portfolio. Nevertheless, where the Fund
covers a call option on a stock index through ownership of securities, such
securities may not match the composition of the index and, in that event, the
Fund will not be fully covered and could be subject to risk of loss in the
event of adverse changes in the value of the index. A Fund may also cover call
options on stock indices by holding a call on the same index and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash or high grade government securities in a
segregated account with its custodian. The Fund may cover put options on stock
indices by maintaining cash or high grade government securities with a value
equal to the exercise price in a segregated account with its custodian, or
else by holding a put on the same security and in the same principal amount as
the put written where the exercise price of the put held (a) is equal to or
greater than the exercise price of the put written or (b) is less than the
exercise price of the put written if the difference is maintained by the Fund
in cash or high grade government securities in a segregated account with its
custodian. Put and call options on stock indices written by the Fund may also
be covered in such other manner as may be in accordance with the rules of the
exchange on which, or the counterparty with which, the option is traded, and
applicable laws and regulations.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised
or is closed out at a profit. If the value of an index on which the Fund has
written a call option falls or remains the same, the Fund will realize a
profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the securities it owns.
If the value of the index rises, however, the Fund will realize a loss in its
call option position, which will reduce the benefit of any unrealized
appreciation in the Fund's stock investments. By writing a put option, the
Fund assumes the risk of a decline in the index. To the extent that the price
changes of securities owned by a Fund correlate with changes in the value of
the index, writing covered put options on indices will increase the Fund's
losses in the event of a market decline, although such losses will be offset
in part by the premium received for writing the option.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the Fund holds uninvested cash
or short-term debt securities awaiting investment. When purchasing call
options for this purpose, the Fund will also bear the risk of losing all or a
portion of the premium paid, and related transaction costs, if the value of
the index does not rise. The purchase of call options on stock indices when
the Fund is substantially fully invested is a form of leverage, up to the
amount of the premium and related transaction costs, and involves risks of
loss and of increased volatility similar to those involved in purchasing calls
on securities the Fund owns.
The Fund also may purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a stock
index, the Fund will seek to offset a decline in the value of securities it
owns through appreciation of the put option. If the value of the Fund's
investments does not decline as anticipated, or if the value of the option
does not increase, the Fund's loss will be limited to the premium paid for the
option, plus related transaction costs. The success of this strategy will
largely depend on the accuracy of the correlation between the changes in value
of the index and the changes in value of the Fund's security holdings.
YIELD CURVE OPTIONS: The Fund may also enter into options on the "spread," or
yield differential, between two fixed income securities, in transactions
referred to as "yield curve" options. 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 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 may be used for the same purposes as other options on
securities. Specifically, the Fund may purchase or write such options for
hedging purposes. For example, the Fund may purchase a call option on the
yield spread between two securities, if it owns one of the securities and
anticipates purchasing the other security and wants to hedge against an
adverse change in the yield spread between the two securities. The Fund may
also purchase or write yield curve options for other than hedging purposes
(i.e., in an effort to increase its current income) if, in the judgment of the
Adviser, the Fund will be able to profit from movements in the spread between
the yields of the underlying securities. The trading of yield curve options is
subject to all of the risks associated with the trading of other types of
options. In addition, however, such options present risk of loss even if the
yield of one of the underlying securities remains constant, if the spread
moves in a direction or to an extent which was not anticipated. Yield curve
options written by the Fund will be "covered". A call (or put) option is
covered if the Fund holds another call (or put) option on the spread between
the same two securities and maintains in a segregated account with its
custodian cash or cash equivalents sufficient to cover the Fund's net
liability under the two options. Therefore, the Fund's liability for such a
covered option is generally limited to the difference between the amount of
the Fund's liability under the option written by the Fund less the value of
the option held by the Fund. Yield curve options may also be covered in such
other manner as may be in accordance with the requirements of the counterparty
with which the option is traded and applicable laws and regulations. Yield
curve options are traded over-the-counter and because they have been only
recently introduced, established trading markets for these securities have not
yet developed. Because these securities are traded over-the-counter, the SEC
has taken the position that yield curve options are illiquid and, therefore,
cannot exceed the SEC illiquidity ceiling. See the paragraph below for a
discussion of the policies the Adviser intends to follow to limit a Fund's
investment in these securities.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a
certain percentage of the Fund's assets (the "SEC illiquidity ceiling").
Although the Adviser disagrees with this position, the Adviser intends to
limit the Fund's writing of over-the-counter options in accordance with the
following procedure. Except as provided below, the Fund intends to write over-
the-counter options only with primary U.S. Government securities dealers
recognized by the Federal Reserve Bank of New York. Also, the contracts which
the Fund has in place with such primary dealers will provide that the Fund has
the absolute right to repurchase an option it writes at any time at a price
which represents the fair market value, as determined in good faith through
negotiation between the parties, but which in no event will exceed a price
determined pursuant to a formula in the contract. Although the specific
formula may vary between contracts with different primary dealers, the formula
will generally be based on a multiple of the premium received by the Fund for
writing the option, plus the amount, if any, of the option's intrinsic value
(i.e., the amount that the option is in-the-money). The formula may also
include a factor to account for the difference between the price of the
security and the strike price of the option if the option is written out-of-
money. The Fund will treat all or a part of the formula price as illiquid for
purposes of the SEC illiquidity ceiling. The Fund may also write over-the-
counter options with non-primary dealers, including foreign dealers, and will
treat the assets used to cover these options as illiquid for purposes of such
SEC illiquidity ceiling.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
options on foreign currencies ("Options on Foreign Currencies") for the
purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. For example, a decline in the dollar value of a
foreign currency in which portfolio securities are denominated will reduce the
dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
portfolio securities, the Fund may purchase put Options on the Foreign
Currency. If the value of the currency did decline, the Fund would have the
right to sell such currency for a fixed amount in dollars and would thereby
offset, in whole or in part, the adverse effect on its portfolio which
otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of
such securities, the Fund may purchase call options thereon. The purchase of
such options could offset, at least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options,
however, the benefit to the Fund deriving from purchases of Options on Foreign
Currencies would be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in
the direction or to the extent anticipated, the Fund could sustain losses on
transactions in Options on Foreign Currencies which would require it to forego
a portion or all of the benefits of advantageous changes in such rates.
The Fund may write Options on Foreign Currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar
value of foreign-denominated securities due to adverse fluctuations in
exchange rates it may, instead of purchasing a put option, write a call option
on the relevant currency. If the expected decline occurred, the option would
most likely not be exercised, and the diminution in value of portfolio
securities would be offset by the amount of the premium received less related
transaction costs. As in the case of other types of options, therefore, the
writing of Options on Foreign Currencies will constitute only a partial hedge.
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 of currencies (including any index of
U.S. or foreign securities) as such instruments become available for trading
("Futures Contracts"). A Futures Contract is a bilateral agreement providing
for the purchase and sale of a specified type and amount of a financial
instrument, or foreign currency, or for the making and acceptance of a cash
settlement, at a stated time in the future for a fixed price. By its terms, a
Futures Contract provides for a specified settlement date on which, in the
case of the majority of foreign currency futures contracts, the currency or
the contract are delivered by the seller and paid for by the purchaser, or on
which, in the case of stock index futures contracts and certain foreign
currency futures contracts, the difference between the price at which the
contract was entered into and the contract's closing value is settled between
the purchaser and seller in cash. Futures contracts differ from options in
that they are bilateral agreements, with both the purchaser and the seller
equally obligated to complete the transaction. Futures Contracts call for
settlement only on the expiration date and cannot be "exercised" at any other
time during their term.
The purchase or sale of a Futures Contract differs from the purchase or sale
of a security or the purchase of an option in that no purchase price is paid
or received. Instead, an amount of cash or cash equivalents, which varies but
may be as low as 5% or less of the value of the contract, must be deposited
with the broker as "initial margin." Subsequent payments to and from the
broker, referred to as "variation margin," are made on a daily basis as the
value of the index or instrument underlying the Futures Contract fluctuates,
making positions in the Futures Contract more or less valuable -- a process
known as "marking to the market."
Purchases or sales of stock index futures contracts may be used to attempt to
protect a Fund's current or intended stock investments from broad fluctuations
in stock prices. For example, a Fund may sell stock index futures contracts in
anticipation of or during a market decline to attempt to offset the decrease
in market value of the Fund's securities portfolio that might otherwise
result. If such decline occurs, the loss in value of portfolio securities may
be offset, in whole or part, by gains on the futures position. When a Fund is
not fully invested in the securities market and anticipates a significant
market advance, it may purchase stock index futures contracts in order to gain
rapid market exposure that may, in part or entirely, offset increases in the
cost of securities that the Fund intends to purchase. As such purchases are
made, the corresponding positions in stock index futures contracts will be
closed out. In a substantial majority of these transactions, the Fund will
purchase such securities upon termination of the futures position, but under
unusual market conditions, a long futures position may be terminated without a
related purchase of securities.
As noted in the Prospectus, the Fund may purchase and sell foreign currency
futures contracts for hedging purposes, to attempt to protect its current or
intended investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities denominated
in foreign currencies, or increase the cost of foreign-denominated securities
to be acquired, even if the value of such securities in the currencies in
which they are denominated remains constant. A Fund may sell futures contracts
on a foreign currency, for example, where it holds securities denominated in
such currency and it anticipates a decline in the value of such currency
relative to the dollar. In the event such decline occurs, the resulting
adverse effect on the value of foreign-denominated securities may be offset,
in whole or in part, by gains on the futures contracts.
Conversely, a Fund could protect against a rise in the dollar cost of foreign-
denominated securities to be acquired by purchasing futures contracts on the
relevant currency, which could offset, in whole or in part, the increased cost
of such securities resulting from a rise in the dollar value of the underlying
currencies. Where a Fund purchases futures contracts under such circumstances,
however, and the prices of securities to be acquired instead decline, the Fund
will sustain losses on its futures position which could reduce or eliminate
the benefits of the reduced cost of portfolio securities to be acquired.
OPTIONS ON FUTURES CONTRACTS: The Fund may write or purchase options to buy or
sell Futures Contracts ("Options on Futures Contracts"), for hedging purposes
or for non-hedging purposes, to the extent permitted by applicable law. The
writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the securities or other instruments required to be
delivered under the terms of the Futures Contract. If the futures price at
expiration of the option is below the exercise price, the Fund will retain the
full amount of the option premium, less related transaction costs, which
provides a partial hedge against any decline that may have occurred in the
Fund's portfolio holdings. The writing of a put Option on a Futures Contract
constitutes a partial hedge against increasing prices of the securities or
other instruments required to be delivered under the terms of the Futures
Contract. If the futures price at expiration of the option is higher than the
exercise price, the Fund will retain the full amount of the option premium,
less related transaction costs, which provides a partial hedge against any
increase in the price of securities which the Fund intends to purchase. If a
put or call option the Fund has written is exercised, the Fund will incur a
loss which will be reduced by the amount of the premium it receives. Depending
on the degree of correlation between changes in the value of its portfolio
securities and changes in the value of its futures positions, the Fund's
losses from existing Options on Futures Contracts may to some extent be
reduced or increased by changes in the value of portfolio securities.
The Fund may cover the writing of call Options on Futures Contracts (a)
through purchases of the underlying Futures Contract, (b) through ownership of
the instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract
and in the same principal amount as the call written where the exercise price
of the call held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call written if the
difference is maintained by the Fund in cash and high grade government
securities in a segregated account with its custodian. The Fund may cover the
writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through segregation of cash or cash
equivalents in an amount equal to the value of the security or index
underlying the Futures Contract, or (c) through the holding of a put on the
same Futures Contract and in the same principal amount as the put written
where the exercise price of the put held (i) is equal to or greater than the
exercise price of the put written or (ii) is less than the exercise price of
the put written if the difference is maintained by the Fund in cash or high
grade government securities in a segregated account with its custodian. Put
and call Options on Futures Contracts written by the Fund may also be covered
in such other manner as may be in accordance with the rules of the exchange on
which, or the counterparty with which, the option is traded, and applicable
laws and regulations. Upon the exercise of a call Option on a Futures Contract
written by the Fund, the Fund will be required to sell the underlying Futures
Contract which, if the Fund has covered its obligation through the purchase of
such Contract, will serve to liquidate its futures position. Similarly, where
a put Option on a Futures Contract written by the Fund is exercised, the Fund
will be required to purchase the underlying Futures Contract which, if the
Fund has covered its obligation through the sale of such Contract, will close
out its futures position.
The Fund may purchase Options on Futures Contracts for hedging purposes as an
alternative to purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated
as a result of a projected market-wide decline or changes in interest or
exchange rates, the Fund could, in lieu of selling Futures Contracts, purchase
put options thereon. In the event that such decrease occurs, it may be offset,
in whole or part, by a profit on the option. Conversely, where it is projected
that the value of securities to be acquired by the Fund will increase prior to
acquisition, due to a market advance or changes in interest or exchange rates,
the Fund could purchase call Options on Futures Contracts, rather than
purchasing the underlying Futures Contracts.
In order to assure that the Fund will not be deemed to be a "commodity pool"
for purposes of the Commodity Exchange Act, regulations of the Commodities
Futures Trading Commission (the "CFTC") require that the Fund enter into
transactions in Futures Contracts and Options on Futures Contracts only (i)
for bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums
on such non-hedging positions does not exceed 5% of the liquidation value of
the Fund's assets.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a specific currency at a future date at
a price set at the time of the contract (a "Forward Contract"). The Fund may
enter into Forward Contracts for hedging purposes as well as for non-hedging
purposes. The Fund may also enter into Forward Contracts for "cross-hedging"
as noted in the Prospectus. Transactions in Forward Contracts entered into for
hedging purposes will include forward purchases or sales of foreign currencies
for the purpose of protecting the dollar value of securities denominated in a
foreign currency or protecting the dollar equivalent of interest or dividends
to be paid on such securities. By entering into such transactions, however,
the Fund may be required to forego the benefits of advantageous changes in
exchange rates. The Fund may also enter into transactions in Forward Contracts
for other than hedging purposes which presents greater profit potential but
also involves increased risk. For example, if the Adviser believes that the
value of a particular foreign currency will increase or decrease relative to
the value of the U.S. dollar, the Fund may purchase or sell such currency,
respectively, through a Forward Contract. If the expected changes in the value
of the currency occur, the Fund will realize profits which will increase its
gross income. Where exchange rates do not move in the direction or to the
extent anticipated, however, the Fund may sustain losses which will reduce its
gross income. Such transactions, therefore, could be considered speculative.
The Fund has established procedures consistent with statements by the SEC and
its staff regarding the use of Forward Contracts by registered investment
companies, which require the use of segregated assets or "cover" in connection
with the purchase and sale of such contracts. In those instances in which the
Fund satisfies this requirement through segregation of assets, it will
maintain, in a segregated account cash, cash equivalents or high grade debt
securities, which will be marked to market on a daily basis, in an amount
equal to the value of its commitments under Forward Contracts.
RISK FACTORS: IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO -- The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in options, Futures Contracts, and Forward
Contracts will depend on the degree to which price movements in the underlying
index or instrument correlate with price movements in the relevant portion of
the Fund's portfolio. Because the securities in the Fund's portfolio will most
likely not be the same as those securities underlying a stock index, the
correlation between movements in the portfolio and in the securities
underlying the index will not be perfect. The trading of Futures Contracts and
options entails the additional risk of imperfect correlation between movements
in the futures or option price and the price of the underlying index or
obligation. The anticipated spread between the prices may be distorted due to
the differences in the nature of the markets, such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in such markets. In this regard, trading by speculators in options
and Futures Contracts has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such contracts. It should be noted that Futures
Contracts or options based upon a narrower index of securities, such as those
of a particular industry group, may present greater risk than options or
Futures Contracts based on a broad market index, because a narrower index is
more susceptible to rapid and extreme fluctuations as a result of changes in
the value of a small number of securities. The trading of Options on Futures
Contracts also entails the risk that changes in the value of the underlying
Futures Contracts will not be fully reflected in the value of the option.
Further, with respect to options on securities, options on stock indices and
Options on Futures Contracts, the Fund is subject to the risk of market
movements between the time that the option is exercised and the time of
performance thereunder. In writing a covered call option on a security, index
or Futures Contract, the Fund also incurs the risk that changes in the value
of the instruments used to cover the position will not correlate closely with
changes in the value of the option or underlying index or instrument.
The Fund will invest in a hedging instrument only if, in the judgment of its
Adviser, there would be expected to be a sufficient degree of correlation
between movements in the value of the instrument and movements in the value of
the relevant portion of the Fund's portfolio for such hedge to be effective.
There can be no assurance that the Adviser's judgment will be accurate.
It should also be noted that the Fund may enter into transactions in options,
futures contracts, options on futures contracts and forward contracts not only
for hedging purposes, but also for non-hedging purposes, including the purpose
of increasing its return on portfolio securities. As a result, in the event of
adverse market movements, the Fund might be subject to losses, which would not
be offset by increases in the value of portfolio securities or declines in the
cost of securities to be acquired. In addition, the method of covering an
option employed by the Fund may not fully protect it against risk of loss and,
in any event, the Fund could suffer losses on the option position which might
not be offset by corresponding portfolio gains.
With respect to the writing of straddles on securities, the Fund incurs the
risk that the price of the underlying security will not remain stable, that
one of the options written will be exercised and that the resulting loss will
not be offset by the amount of the premiums received.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET -- Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary market
for such instruments on the exchange on which the initial transaction was
entered into. While the Fund will enter into options or futures positions only
if there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular contracts at any
specific time. In that event, it may not be possible to close out a position
held by the Fund, and the Fund could be required to purchase or sell the
instrument underlying an option, make or receive a cash settlement or meet
ongoing variation margin requirements. Under such circumstances, if the Fund
had insufficient cash available to meet margin requirements, it might be
necessary to liquidate portfolio securities at a time when it would be
disadvantageous to do so. The inability to close out options and futures
positions, therefore, could have an adverse impact on the Fund's ability
effectively to hedge its portfolios, and could result in trading losses. The
liquidity of a secondary market in a Futures Contract or options thereon may
also be adversely affected by "daily price fluctuation limits," established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day. The trading of Futures Contracts and options is
also subject to the risk of trading halts, suspensions, exchange or clearing
house equipment failures, government intervention, insolvency of a brokerage
firm or clearing house or other disruptions of normal trading activity, which
could at times make it difficult or impossible to liquidate existing positions
or to recover excess variation margin payments.
MARGIN -- Because of low initial margin deposits made upon the opening of a
futures position and the writing of an option, such transactions involve
substantial leverage. As a result, relatively small movements in the price of
the contract can result in substantial unrealized gains or losses. Because the
Fund would engage in the purchase or sale of Futures Contracts and the writing
of Options on Futures Contracts solely for hedging purposes, however, and
would purchase and write options on securities and stock indices in part for
hedging purposes, any losses incurred in connection therewith should, if the
hedging strategy is successful, be offset, in whole or in part, by increases
in the value of securities held by the Fund or decreases in the prices of
securities the Fund intends to acquire. Where the Fund writes options on
securities or options on stock indices for other than hedging purposes, the
margin requirements associated with such transactions could expose the Fund to
greater risk.
TRADING AND POSITION LIMITS -- The exchanges on which Futures Contracts and
options are traded may impose limitations governing the maximum number of
positions on the same side of the market and involving the same underlying
instrument which may be held by a single investor, whether acting alone or in
concert with others (regardless of whether such contracts are held on the same
or different exchanges or held or written in one or more accounts or through
one or more brokers). In addition, the CFTC and the various contract markets
have established limits referred to as "speculative position limits" on the
maximum net long or net short position which any person may hold or control in
a particular futures or option contract. An exchange may order the liquidation
of positions found to be in violation of these limits and it may impose other
sanctions or restrictions. The Adviser does not believe that these trading and
position limits will have any adverse impact on the strategies for hedging the
portfolio of the Fund.
RISK OF OPTIONS ON FUTURES CONTRACTS -- The amount of risk the Fund assumes
when it purchases an Option on a Futures Contract is the premium paid for the
option, plus related transaction costs. In order to profit from an option
purchased, however, it may be necessary to exercise the option and to
liquidate the underlying Futures Contract, subject to the risks of the
availability of a liquid offset market described herein. The writer of an
Option on a Futures Contract is subject to the risks of commodity futures
trading, including the requirement of initial and variation margin payments,
as well as the additional risk that movements in the price of the option may
not correlate with movements in the price of the underlying index or Futures
Contract.
ADDITIONAL RISKS OF TRANSACTIONS NOT CONDUCTED ON EXCHANGES -- Transactions in
Forward Contracts are subject to all of the correlation, liquidity and other
risks outlined above. In addition, however, such transactions are subject to
the risk of governmental actions affecting trading in or the prices of
currencies underlying such contracts, which could restrict or eliminate
trading and could have a substantial adverse effect on the value of positions
held by the Fund. In addition, the value of such positions could be adversely
affected by a number of other complex political and economic factors
applicable to the countries issuing the underlying currencies. Further, unlike
trading in most other types of instruments, there is no systematic reporting
of last sale information with respect to the foreign currencies underlying
contracts thereon. As a result, the available information on which trading
systems will be based may not be as complete as the comparable data on which
the Fund makes investment and trading decisions in connection with other
transactions. Moreover, because the foreign currency market is a global, 24-
hour market, events could occur on that market which would not be reflected in
the forward markets until the following day, thereby preventing the Fund from
responding to such events in a timely manner. Settlements of exercises of
Forward Contracts generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make delivery
of such currencies in conformity with any United States or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Forward Contracts, and over-the-counter options on securities, are not traded
on exchanges regulated by the CFTC or the SEC, but through financial
institutions acting as market-makers. In an over-the-counter trading
environment, many of the protections afforded to exchange participants will
not be available. In addition, over-the-counter transactions can only be
entered into with a financial institution willing to take the opposite side,
as principal, of the Fund's position unless the institution acts as broker and
is able to find another counterparty willing to enter into the transaction
with the Fund. Where no such counterparty is available, it will not be
possible to enter into a desired transaction. There also may be no liquid
secondary market in the trading of over-the-counter contracts, and the Fund
could be required to retain options purchased or written, or Forward Contracts
entered into, until exercise, expiration or maturity. This in turn could limit
the Fund's ability to profit from open positions or to reduce losses
experienced, and could result in greater losses. Further, over-the-counter
transactions are not subject to the performance guarantee of an exchange
clearing house, and the Fund will therefore be subject to the risk of default
by, or the bankruptcy of, the financial institution serving as its
counterparty.
While Forward Contracts are not presently subject to regulation by the CFTC,
the CFTC may in the future assert or be granted authority to regulate such
instruments. In such event, the Fund's ability to utilize Forward Contracts in
the manner set forth above could be restricted.
The Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the
value of the Fund's total assets. Moreover, the Fund will not purchase put and
call options if, as a result, more than 5% of its total assets would be
invested in such options.
When the Fund purchases a Futures Contract, an amount of cash and cash
equivalents will be deposited in a segregated account with the Fund's
custodian so that the amount so segregated will at all times equal the value
of the Futures Contract, thereby insuring that the leveraging effect of such
Futures Contract is minimized.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
Fund's shares (which, as used in this SAI, means the lesser of (i) more than
50% of the outstanding shares of the Trust (or a class or series, as
applicable), or (ii) 67% or more of the outstanding shares of the Trust (or a
class or series, as applicable) present at a meeting if holders of more than
50% of the outstanding shares of the Trust (or a class or series, as
applicable) are represented at such meeting in person or by proxy):
The Fund may not:
(1) Borrow amounts in excess of 5% of its gross assets (taken at the lower
of cost or market value), and then only as a temporary measure for
extraordinary or emergency purposes;
(2) Pledge, mortgage or hypothecate an amount of assets which (taken at
market value) exceeds 33 1/3% of its gross assets taken at the lower of cost
or market value. For the purpose of this restriction, collateral
arrangements with respect to options on securities, stock indices and
foreign currencies ("Options"), Futures Contracts, Options on Futures
Contracts, Forward Contracts, and payments of initial and variation margin
in connection therewith are not considered a pledge of assets;
(3) Underwrite securities issued by other persons except insofar as the
Fund may technically be deemed an underwriter under the Securities Act of
1933 in selling a portfolio security;
(4) Concentrate its investments in any particular industry, but if it is
deemed appropriate for the attainment of its investment objectives, up to
25% of its assets, at market value at the time of each investment, may be
invested in any one industry;
(5) Purchase or sell real estate (including limited partnership interests
but excluding securities of companies, such as real estate investment
trusts, which deal in real estate or interests therein) or mineral leases,
commodities or commodity contracts (except for Options, Futures Contracts,
Options on Futures Contracts and Forward Contracts) in the ordinary course
of its business. The Fund reserves the freedom of action to hold and to sell
real estate or mineral leases, commodities or commodity contracts acquired
as a result of the ownership of securities. The Fund will not purchase
securities for the purpose of acquiring real estate or mineral leases,
commodities or commodity contracts (except for Options, Futures Contracts,
Options on Futures Contracts and Forward Contracts);
(6) Make loans to other persons except through the lending of its
portfolio securities and by entering into repurchase agreements (see the
discussion above under the caption "Investment Policies"). Not more than 10%
of the Fund's total assets will be invested in repurchase agreements
maturing in more than seven days. The Fund may purchase a portion of an
issue of debt securities of types commonly distributed privately to
financial institutions. For these purposes the purchase of short-term
commercial paper or a portion of an issue of debt securities which are part
of an issue to the public shall not be considered the making of a loan;
(7) Purchase the securities of any issuer if such purchase, at the time
thereof, would cause more than 5% of its total assets (taken at market
value) to be invested in the securities of such issuer, other than U.S.
Government securities;
(8) Purchase voting securities of any issuer if such purchase, at the time
thereof, would cause more than 10% of the outstanding voting securities of
such issuer to be held by the Fund; or purchase securities of any issuer if
such purchase at the time thereof would cause the Fund to hold more than 10%
of any class of securities of such issuer. For this purpose all indebtedness
of an issuer shall be deemed a single class and all preferred stock of an
issuer shall be deemed a single class;
(9) Invest for the purpose of exercising control or management;
(10) Purchase securities issued by any other investment company or
investment trust except by purchase in the open market where no commission
or profit to a sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase, though not made
in the open market, is part of a plan of merger or consolidation, provided,
however, that the Fund shall not purchase the securities of any investment
company or investment trust if such purchase at the time thereof would cause
more than 10% of the Fund's total assets (taken at market value) to be
invested in the securities of such issuer, and provided, further, that the
Fund shall not purchase securities issued by any open-end investment
company;
(11) Invest more than 5% of its assets in companies which, including
predecessors, have a record of less than three years" continuous operation;
(12) Purchase or retain in its portfolio any securities issued by an
issuer any of whose officers, directors, trustees or security holders is an
officer or Trustee of the Trust, or is an officer or director of the
Adviser, if after the purchase of the securities of such issuer by the Fund
one or more of such persons owns beneficially more than 1/2 of 1% of the
shares or securities, or both, all taken at market value, of such issuer,
and such persons owning more than 1/2 of 1% of such shares or securities
together own beneficially more than 5% of such shares or securities, or
both, all taken at market value;
(13) Purchase any securities on margin except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of securities and except that the Fund may make margin deposits in
connection with Options, Futures Contracts, Options on Futures Contracts and
Forward Contracts;
(14) Sell any security which the Fund does not own unless by virtue of its
ownership of other securities the Fund has at the time of sale a right to
obtain securities without payment of further consideration equivalent in
kind and amount to the securities sold and provided that if such right is
conditional the sale is made upon the same conditions; or
(15) Purchase or sell any put or call options or any combination thereof,
provided, that this shall not prevent the purchase, ownership, holding or
sale of warrants where the grantor of the warrants is the issuer of the
underlying securities or the writing, purchasing and selling of puts, calls
or combinations thereof with respect to securities, foreign currencies,
indices of securities and Futures Contracts.
As a matter of non-fundamental policy, the Fund may not invest in securities
(other than repurchase agreements maturing in seven days or less) which are
subject to legal or contractual restrictions on resale or for which there is
no readily available market (unless the Board of Trustees has determined that
such securities are liquid based upon trading markets for the specific
security) if more than 15% of the Fund's assets (taken at market value) would
be invested in such securities. The Fund also may not invest more than 5% of
the value of the Fund's net assets, valued at the lower of cost or market, in
warrants. Included within such amount, but not to exceed 2% of the value of
the Fund's net assets, may be warrants which are not listed on the New York or
American Stock Exchange. Warrants acquired by the Fund in units or attached to
Securities may be deemed to be without value.
These investment restrictions 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.
3. MANAGEMENT OF THE FUND
The Board of Trustees provides broad supervision over the affairs of the Fund.
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 Trust's
officers and Trustees are listed below, together with their principal
occupations during the past five years. (Their titles may have varied during
that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President (born 8/4/35)
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY* (born 9/14/26)
Private investor; Massachusetts Financial Services Company, Former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
PETER G. HARWOOD (born 4/3/26)
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES (born 5/1/36)
Eastern Enterprises (diversified holding company), Chairman and Chief
Executive Officer; The Neiman Marcus Group, Inc., Vice Chairman and Chief
Financial Officer (prior to February 1992)
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA (born 6/23/35)
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU (born 4/10/35)
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment
trust), Director; The Baupost Fund (a registered investment company), Vice
Chairman (since November 1993), Chairman and Trustee (prior to November
1993)
Address: Harvard Business School, Soldier's Field Road, Cambridge,
Massachusetts
CHARLES W. SCHMIDT (born 3/18/28)
Private investor; OHM Corporation, Director; The Boston Company, Director;
Boston Safe Deposit and Trust Company, Director; Mohawk Paper Company,
Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT,* Senior Executive Vice President and Secretary
(born 12/16/42)
Massachusetts Financial Services Company
JEFFREY L. SHAMES,* President (born 6/2/55)
Massachusetts Financial Services Company
ELAINE R. SMITH (born 4/25/46)
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (prior to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Director
Address: Ten Post Office Square, Suite 300, Boston Massachusetts
OFFICERS
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- ----------
*"Interested persons" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of the Adviser whose address is 500 Boylston
Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS
affiliates or with certain other funds of which MFS or a subsidiary of MFS is
the investment adviser or distributor. Mr. Brodkin, the Chairman of MFD,
Messrs. Shames and Scott, Directors of MFD, and Mr. Cavan, the Secretary of
MFD, hold similar positions with certain other MFS affiliates. Mr. Bailey is a
Director of Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada
(U.S.)"), the corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey who
currently receive a fee of $5,500 per year plus $250 per meeting and $225 per
committee meeting attended, together with such Trustee's out-of-pocket
expenses. The Trust has adopted a retirement plan for non-interested Trustees
and Mr. Bailey. Under the plan, a Trustee will retire upon reaching age 73 and
if the Trustee has completed at least five years of service, he would be
entitled to annual payments during his lifetime of up to 50% of such Trustee's
average annual compensation (based on the three years prior to his retirement)
depending on his length of service. A Trustee may also retire prior to age 73
and receive reduced payments if he has completed at least five years of
service. Under the plan, a Trustee (or his beneficiaries) will also receive
benefits for a period of time in the event the Trustee is disabled or dies.
These benefits will also be based on the Trustee's average annual compensation
and length of service. There is no retirement plan provided by the Trust for
Messrs. Brodkin, Scott and Shames. The Fund will accrue its allocable share of
compensation expenses each year to cover current year's service and amortize
past service cost.
Set forth below is certain information concerning the cash compensation paid
to the Trustees and benefits accrued, and estimated benefits payable, under
the retirement plan.
TRUSTEE COMPENSATION TABLE
RETIREMENT
BENEFIT TOTAL TRUSTEE
ACCRUED AS ESTIMATED FEES FROM FUND
TRUSTEE FEES PART OF FUND CREDITED YEARS AND FUND
TRUSTEE FROM FUND(1) EXPENSE(1) OF SERVICE(2) COMPLEX(3)
- -------------------------------------------------------------------------------
Richard B. Bailey $8,700 $1,758 8 $247,168
A. Keith Brodkin --0-- --0-- N/A --0--
Peter G. Harwood 9,600 1,293 5 105,995
J. Atwood Ives 8,450 1,830 17 98,750
Lawrence T. Perera 8,900 3,636 26 98,310
William J. Poorvu 9,600 3,826 25 102,840
Charles W. Schmidt 9,600 3,641 20 105,995
Arnold D. Scott --0-- --0-- N/A --0--
Jeffrey L. Shames --0-- --0-- N/A --0--
Elaine R. Smith 9,600 1,821 27 105,995
David B. Stone 9,825 3,848 14 108,710
(1) For fiscal year ended September 30, 1996.
(2) Based on normal retirement age of 73.
(3) For calendar year 1996. All Trustees receiving compensation served as
Trustees of 23 funds within the MFS fund complex (having aggregate net
assets at December 31, 1996, of approximately $21.2 billion) except Mr.
Bailey, who served as Trustee of 81 funds within the MFS fund complex
(having aggregate net assets at December 31, 1996, of approximately $38.5
billion).
ESTIMATED ANNUAL BENEFITS
PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
-------------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- ------------------------------------------------------------------------------
$ 7,605 $1,141 $1,901 $2,662 $3,803
8,246 1,237 2,061 2,886 4,123
8,886 1,333 2,222 3,110 4,443
9,527 1,429 2,382 3,334 4,763
10,167 1,525 2,542 3,558 5,084
10,808 1,621 2,702 3,783 5,404
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of December 31, 1996, all Trustees and officers as a group owned less than
1% of the Fund's shares outstanding. As of December 31, 1996, Merrill Lynch,
Pierce, Fenner & Smith Inc., 4800 Deer Lake Drive East, Jacksonville, FL
32246-6484 was the record owner of approximately 5.60% of the outstanding
Class C shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify the Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, unless, as to liabilities to the Trust or its shareholders, it is
finally adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
with respect to any matter unless it is adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interest of the Trust. In the case of a settlement, such indemnification will
not be provided unless it has been determined pursuant to the Declaration of
Trust, that such officers or Trustees have not engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in
their offices.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management
dating from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.), which in
turn is a wholly owned subsidiary of Sun Life Assurance Company of Canada
("Sun Life").
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. 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, on the basis of a formula based upon a percentage of the Fund's
average daily net assets plus a percentage of its gross income (i.e., income
other than gains from the sale of securities). The applicable percentages are
reduced as assets and income reach the following levels:
ANNUAL RATE OF MANAGEMENT FEE ANNUAL RATE OF MANAGEMENT FEE
BASED ON AVERAGE DAILY NET ASSETS BASED ON GROSS INCOME
- ------------------------------------ --------------------------------
..25% of the first $200 million 3.57% of the first $14 million
..212% of average daily net assets in 3.04% of gross income in excess
excess of $200 million of $14 million
For the Fund's fiscal year ended September 30, 1996, MFS received management
fees under the Advisory Agreement of $13,607,772 (of which $7,760,009 was
based on average daily net assets and $5,847,763 on gross income), equivalent
on an annualized basis, to 0.38% of the Fund's average daily net assets. For
the Fund's fiscal year ended September 30, 1995, MFS received management fees
under the Advisory Agreement of $11,256,389 (of which $6,210,710 was based on
average daily net assets and $5,045,679 on gross income), equivalent on an
annualized basis, to 0.39% of the Fund's average daily net assets. 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. In order to
comply with the expense limitations of certain state securities commissions,
the Adviser will reduce its management fee or otherwise reimburse the Fund for
any expenses, exclusive of interest, taxes and brokerage commissions, incurred
by the Fund in any fiscal year to the extent such expenses exceed the most
restrictive of such state expense limitations. The Adviser will make
appropriate adjustments to such reimbursements in response to any amendment or
rescission of the various state requirements. Any such adjustment would not
become effective until the beginning of the Fund's next fiscal year following
the date of such amendments or the date on which such requirements become no
longer applicable.
The Fund pays all of the Fund's expenses (other than those assumed by MFS or
MFD), including: governmental fees; interest charges; taxes; membership dues
in the Investment Company Institute allocable to the Fund; fees and expenses
of independent auditors, of legal counsel, and of any transfer agent,
registrar or dividend disbursing agent of the Fund; expenses of repurchasing
and redeeming shares; expenses of preparing, printing and mailing share
certificates, shareholder reports, notices, proxy statements and reports to
governmental officers and commissions; brokerage and other expenses connected
with the execution, recording and settlement of portfolio security
transactions; insurance premiums; fees and expenses of Investors Bank & Trust
Company, the Fund's custodian, for all services to the Fund, including
safekeeping of funds and securities and maintaining required books and
accounts; expenses of calculating the net asset value of shares of the Fund;
and expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of the Fund and the preparation,
printing and mailing of prospectuses for such purposes are borne by the Fund
except that its Distribution Agreement with MFD, the Fund's Distributor,
requires MFD to pay for prospectuses that are to be used for sales purposes.
Expenses of the Trust which are not attributable to a specific series are
allocated among the series in a manner believed by management of the Trust to
be fair and equitable. For a list of the Fund's expenses, including the
compensation paid to the Trustees who are not officers of MFS during the
fiscal year ended September 30, 1996, see "Financial Statements -- Statement
of Operations" in the Annual Report to shareholders. Payment by the Fund of
brokerage commissions for brokerage and research services of value to the
Adviser in serving its clients is discussed under the caption "Portfolio
Transactions and Brokerage Commissions."
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing the Fund's investments, effecting its
portfolio transactions, and, in general, administering its affairs.
The Advisory Agreement will remain in effect until August 1, 1997, and will
continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority
of the Fund's outstanding voting securities (as defined under "Investment
Restrictions") and, in either case, by a majority of the Trustees who are not
parties to the Advisory Agreement or interested persons of any such party. The
Advisory Agreement terminates automatically if it is assigned and may be
terminated without penalty by vote of a majority of the Fund's shares (as
defined in "Investment Restrictions") or by either party on not more than 60
days" nor less than 30 days' written notice. MFS may render services to others
and neither the Adviser nor its personnel shall be liable for any error of
judgment or mistake of law or for any loss arising out of any investment or
for any act or omission in the execution and management of the Fund, except
for willful misfeasance, bad faith or gross negligence in the performance of
its or their duties or by reason of reckless disregard of its or their
obligations and duties under the Advisory Agreement.
CUSTODIAN
Investors Bank & Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery
of securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily
net asset value of shares of each class of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agreement, effective August 1, 1985 (the "Agency
Agreement") with the Trust. The Shareholder Servicing Agent's responsibilities
under the Agency Agreement include administering and performing transfer agent
functions and keeping records in connection with the issuance, transfer and
redemption of each class of shares of the Fund. For these services, the
Shareholder Servicing Agent will receive a fee calculated as a percentage of
the average daily net assets of the Fund at an effective annual rate of 0.13%.
In addition, the Shareholder Servicing Agent will be reimbursed by the Fund
for certain expenses incurred by the Shareholder Servicing Agent on behalf of
the Fund. State Street Bank and Trust Company, the dividend and distribution
disbursing agent, has contracted with the Shareholder Servicing Agent to
administer and perform certain dividend and distribution disbursing functions
for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the
continuous offering of shares of the Fund pursuant to a Distribution
Agreement, dated as of January 1, 1995 (the "Distribution Agreement"). Prior
to January 1, 1995, MFS Financial Services, Inc. ("FSI"), another wholly owned
subsidiary of MFS, was the Fund's distributor. Where this SAI refers to MFD in
relation to the receipt or payment of money with respect to a period or
periods prior to January 1, 1995, such reference shall be deemed to include
FSI, as the predecessor in interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of Class A shares of the Fund is their net
asset value next computed after the sale plus a sales charge which varies
based upon the quantity purchased. The public offering price of a Class A
share of the Fund is calculated by dividing net asset value of a Class A share
by the difference (expressed as a decimal) between 100% and the sales charge
percentage of offering price applicable to the purchase (see "Purchases" in
the Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS
Funds") and other funds (as noted under Right of Accumulation) by any person,
including members of a family unit (e.g., husband, wife and minor children)
and bona fide trustees, and also applies to purchases made under the Right of
Accumulation or a Letter of Intent (see "Investment and Withdrawal Programs"
in this SAI). A group might qualify to obtain quantity sales charge discounts
(see "Investment and Withdrawal Programs").
Class A shares of the Fund may be sold at their net asset value to certain
persons or in certain circumstances as described in the Prospectus. Such sales
are made without a sales charge to promote good will with employees and others
with whom MFS, MFD and/or the Fund have business relationships, and because
the sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may
be more or less than the sales charge calculated using the sales charge
expressed as a percentage of the offering price or as a percentage of the net
amount invested as listed in the Prospectus. 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. In addition, MFD, on behalf of the Fund, will pay a
commission to dealers who initiate and are responsible for purchases of $1
million or more as described in the Prospectus.
CLASS B, CLASS C AND CLASS I SHARES: MFD acts as agent in selling Class B,
Class C and Class I shares of the Fund to dealers. The public offering price
of Class B, Class C and Class I shares is their net asset value next computed
after the sale (see "Purchases" in the Prospectus and the Prospectus
Supplement pursuant to which Class I shares are offered).
GENERAL: Neither MFD nor dealers are permitted to delay the placement of
orders to benefit themselves by a price change. On occasion, MFD may obtain
brokers loans from various banks, including the Custodian for the MFS Funds,
to facilitate the settlement of sales of shares of the Fund to dealers. MFD
may benefit from its temporary holding of funds paid to it by investment
dealers for the purchase of Fund shares.
During the Fund's fiscal year ended September 30, 1996, MFD and dealers and
certain other financial institutions received net commissions of $1,144,503
and $6,409,441, respectively (as their concession on gross commissions of
$7,553,944), for selling Class A shares of the Fund. The Fund received
$427,829,505 representing the aggregate net asset value of such shares. During
the Fund's fiscal year ended September 30, 1995, MFD and dealers and certain
other financial institutions received net commissions of $862,946 and
$4,972,643, respectively (as their concession on gross commissions of
$5,835,589), for selling Class A shares of the Fund. The Fund received
$339,269,433 representing the aggregate net asset value of such shares. During
the Fund's fiscal year ended September 30, 1994, MFD and dealers and certain
other financial institutions received net commissions of $1,855,403 and
$9,829,248, respectively (as their concession on gross commissions of
$11,684,651), for selling Class A shares of the Fund. The Fund received
$429,939,786 representing the aggregate net asset value of such shares.
For the Fund's fiscal years ended September 30, 1996, 1995 and 1994, the
Contingent Deferred Sales Charge ("CDSC") imposed on redemption of Class A
shares were $13,595, $27,736 and $414, respectively. For the Fund's fiscal
years ended September 30, 1996, 1995 and 1994, the CDSC imposed on redemption
of Class B shares was $1,500,543, $1,756,259 and $404,550, respectively.
During the Fund's fiscal year ended September 30, 1996 the CDSC imposed on
redemption of Class C shares was $3,178.
The Distribution Agreement will remain in effect until August 1, 1997, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority
of the Trust's shares (as defined in "Investment Restrictions") and, in either
case, by a majority of the Trustees who are not parties to the Distribution
Agreement or interested persons of any such party. The Distribution Agreement
terminates automatically if it is assigned and may be terminated without
penalty by either party on not more than 60 days' nor less than 30 days'
notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by a
portfolio committee consisting of persons who are employees of the Adviser and
who are appointed and supervised by its senior officers. Changes in the Fund's
investments are reviewed by the Board of Trustees. Members of the Fund's
portfolio committee may serve other clients of the Adviser or any subsidiary
of the Adviser in similar capacities.
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. The Adviser attempts to achieve this result by selecting broker-
dealers to execute portfolio transactions on behalf of the Fund and other
clients of the Adviser on the basis of their professional capability, the
value and quality of their brokerage services, and the general level of their
brokerage commissions. In the case of securities traded in the over-the-
counter market (where no stated commissions are paid but the prices include a
dealer's markup or markdown), the Adviser normally seeks to deal directly with
the primary market-makers, unless, in its opinion, best execution is available
elsewhere. In the case of securities purchased from underwriters, the cost of
such securities generally includes a fixed underwriting commission or
concession. From time to time, soliciting dealer fees are available to the
Adviser on the tender of the Fund's portfolio securities in so-called tender
or exchange offers. Such soliciting dealer fees are in effect recaptured for
the Fund by the Adviser. At present no other recapture arrangements are in
effect.
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 other investment company clients
of MFD as a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Adviser may cause the Fund to pay a
broker-dealer which provides brokerage and research services to the Adviser an
amount of commission for effecting a securities transaction for the Fund in
excess of the amount other broker-dealers would have charged for the
transaction if the Adviser determines in good faith that the greater
commission is reasonable in relation to the value of the brokerage and
research services provided by the executing broker-dealer viewed in terms of
either a particular transaction or the Adviser's overall responsibilities to
the Fund or to its other clients. Not all of such services are useful or of
value in advising the Fund.
The term "brokerage and research services" includes: advice as to the value of
securities, the advisability of investing in, purchasing, or selling
securities, and the availability of securities or of purchasers or sellers of
securities; furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the
performance of accounts; and effecting securities transactions and performing
functions incidental thereto such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to
the availability of securities or of purchasers or sellers of securities and
services in effecting securities transactions and performing functions
incidental thereto such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other
factual information or services ("Research") to the Adviser for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold from time to time through such broker-dealers on behalf of
the Fund. The Trust's Trustees (together with the Trustees of the other MFS
Funds) have directed the Adviser to allocate a total of $39,100 of commission
business from the MFS Funds to the Pershing Division of Donaldson, Lufkin &
Jenrette as consideration for the annual renewal of certain publications
provided by Lipper Analytical Securities Corporation (which provides
information useful to the Trustees in reviewing the relationship between the
Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality
of Research provided by brokers. The Adviser sometimes uses evaluations
resulting from this effort as a consideration in the selection of brokers to
execute portfolio transactions. However, the Adviser is unable to quantify the
amount of commissions set forth below which were paid as a result of such
Research because a substantial number of transactions were effected through
brokers which provide Research but which were selected principally because of
their execution capabilities.
The management fee that the Fund pays to the Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research services. To
the extent the Fund's portfolio transactions are used to obtain such services,
the brokerage commissions paid by the Fund will exceed those that might
otherwise be paid by an amount which cannot be presently determined. Such
services would be useful and of value to the Adviser in serving both the Fund
and other clients and, conversely, such services obtained by the placement of
brokerage business of other clients would be useful to the Adviser in carrying
out its obligations to the Fund. While such services are not expected to
reduce the expenses of the Adviser, the Adviser would, through use of the
services, avoid the additional expenses which would be incurred if it should
attempt to develop comparable information through its own staff.
For the Fund's fiscal years ended September 30, 1994, 1995 and 1996, total
brokerage commissions of $670,133, $1,333,734 and $3,740,816 on total
transactions of $405,332,911, $829,696,064 and $2,942,323,293, respectively,
were paid. Not all of the Fund's transactions are equity security transactions
which involve the payment of brokerage commissions. During the Fund's fiscal
year ended September 30, 1996, the Fund owned securities issued by Alex Brown,
Inc. which securities had a value of $4,225,158 at the end of such fiscal
year, by Lehman Brothers, Inc., which securities had a value of $15,799,056 at
the end of such fiscal year, by Merrill Lynch Pierce Fenner & Smith Inc.,
which securities had a value of $6,779,375 at the end of such fiscal year and
by Salomon Brothers, Inc. which securities had a value of $2,683,750 at the
end of such fiscal year. Each of these entities are regular broker dealers of
the Fund.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the
Adviser or any subsidiary of the Adviser. Investment decisions for the Fund
and for such other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by, or bought or sold
for, other clients. Likewise, a particular security may be bought for one or
more clients when one or more other clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client.
When two or more clients are simultaneously engaged in the purchase or sale of
the same security, the securities are allocated among clients in a manner
believed by the Adviser to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of
the security as far as the Fund is concerned. In other cases, however, the
Fund believes that its ability to participate in volume transactions will
produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or
withdraw from it with a minimum of paper work. These are described below and,
in certain cases, in the Prospectus. 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 described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with shares of Class B or Class C of the Fund or any
of the Classes of other MFS Funds, or MFS Fixed Fund (a bank collective trust)
within a 13-month period (or 36-month period in the case of purchases of $1
million or more), the shareholder may obtain Class A shares of the Fund at the
same reduced sales charge as though the total quantity were invested in one
lump sum by completing the Letter of Intent section of the Fund's Account
Application or filing a seperate Letter of Intent application (available from
the Shareholder Servicing Agent) within 90 days of the commencement of
purchases. Subject to acceptance by MFD and the conditions mentioned below,
each purchase will be made at a public offering price applicable to a single
transaction of the dollar amount specified in the Letter of Intent
application. The shareholder or his dealer must inform MFD that the Letter of
Intent is in effect each time shares are purchased. The shareholder makes no
commitment to purchase additional shares, but if his purchases within 13
months (or 36-months in the case of purchases of $1 million or more) plus the
value of shares credited toward completion of the Letter of Intent do not
total the sum specified, he will pay the increased amount of the sales charge
as described below. Instructions for issuance of shares in the name of a
person other than the person signing the Letter of Intent application must be
accompanied by a written statement from the dealer stating that the shares
were paid for by the person signing such Letter. Neither income dividends nor
capital gain distributions taken in additional shares will apply toward the
completion of the Letter of Intent. Dividends and distributions of other MFS
Funds automatically reinvested in shares of the Fund pursuant to the
Distribution Investment Program will also not apply toward completion of the
Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder
or to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released
by the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in
the premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when that shareholder's new
investment, together with the current offering price value of all the holdings
of Class A, B and C shares of that shareholder in the MFS Funds or MFS Fixed
Fund (a bank collective trust) reaches a discount level (see "Purchases" in
the Prospectus for the sales charges on quantity purchases). For example, if a
shareholder owns shares valued at $75,000 and purchases an additional $25,000
of Class A shares of the Fund, the sales charge for the $25,000 purchase would
be at the rate of 4% (the rate applicable to single transactions of $100,000).
A shareholder must provide the Shareholder Servicing Agent (or his investment
dealer must provide MFD) with information to verify that the quantity sales
charge discount is applicable at the time the investment is made. See the
prospectus for further information on the Right of Accumulation.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-
free at (800) 225-2606. The minimum purchase amount is $50 and the maximum
purchase amount is $100,000. Shareholders wishing to avail themselves of this
telephone purchase privilege must so elect on their Account Application and
designate thereon a bank and account number from which purchases will be made.
If a telephone purchase request is received by the Shareholder Servicing Agent
on any business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the closing
net asset value of the shares purchased on that day. The Shareholder Servicing
Agent may be liable for any losses resulting from unauthorized telephone
transactions if it does not follow 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.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital
gains made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and will not be subject to any
CDSC. Distributions will be invested at the close of business on the payable
date for the distribution. A shareholder considering the Distribution
Investment Program should obtain and read the prospectus of the other fund and
consider the differences in objectives and policies before making any
investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic
payments 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 generally are limited to 10% of the value of the account at
the time of the establishment of the SWP. SWP payments are drawn from the
proceeds of share redemptions (which would be a return of principal and, if
reflecting a gain, would be taxable). Redemptions of Class B and Class C
shares will be made in the following order: (i) any "Free Amount"; (ii) to the
extent necessary, any "Reinvested Shares"; and (iii) to the extent necessary,
the "Direct Purchase" subject to the lowest CDSC (as such terms are defined in
"Contingent Deferred Sales Charge" in the Prospectus). The CDSC will be waived
in the case of redemptions of Class B and Class C shares pursuant to a SWP,
but will not be waived in the case of SWP redemptions of Class A shares which
are subject to a CDSC. To the extent that redemptions for such periodic
withdrawals exceed dividend income reinvested in the account, such redemptions
will reduce and may eventually exhaust the number of shares in the
shareholder's account. All dividend and capital gain distributions for an
account with a SWP will be reinvested in full and fractional shares of the
Fund at the net asset value in effect at the close of business on the record
date for such distributions. To initiate this service, shares having an
aggregate value of at least $5,000 either must be held on deposit by, or
certificates for such shares must be deposited with, the Shareholder Servicing
Agent. With respect to Class A shares, maintaining a withdrawal plan
concurrently with an investment program would be disadvantageous because of
the sales charges included in share purchases and the imposition of a CDSC on
certain redemptions. The shareholder may deposit into the account additional
shares of the Fund, change the payee or change the dollar amount of each
payment. The Shareholder Servicing Agent may charge the account for services
rendered and expenses incurred beyond those normally assumed by the Fund with
respect to the liquidation of shares. No charge is currently assessed against
the account, but one could be instituted by the Shareholder Servicing Agent on
60 days' notice in writing to the shareholder in the event that the Fund
ceases to assume the cost of these services. The Fund may terminate any SWP
for an account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of shares
of the Fund for shares of another MFS Fund. Any SWP may also be terminated at
any time by either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any
time by mailing a check payable to the Fund directly to the Shareholder
Servicing Agent. The shareholder's account number and the name of his
investment dealer must be included with each investment.
GROUP PURCHASES: A bona fide group and all of its members may be treated as
a single purchaser and, under the Right of Accumulation (but not a Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the
investment program so it may be used by the investment dealer to facilitate
solicitation of the membership, thus effecting economies of sales effort; (2)
has been in existence for at least six months and has a legitimate purpose
other than to purchase mutual fund shares at a discount; (3) is not a group of
individuals whose sole organizational nexus is as credit cardholders of a
company, policyholders of an insurance company, customers of a bank or broker-
dealer, clients of an investment adviser or other similar groups; and (4)
agrees to provide certification of membership of those members investing money
in the MFS Funds upon the request of MFD.
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 other MFS Funds (if available for sale) under the Automatic Exchange Plan.
The Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in a MFS Fund for investment in other MFS Funds selected
by the shareholder. Under the Automatic Exchange Plan, exchanges of at least
$50 each may be made to up to six different funds effective on the seventh day
of each month or of every third month, depending whether monthly or quarterly
exchanges are elected by the shareholder. If the seventh day of the month is
not a business day, the transaction will be processed on the next business
day. Generally, the initial exchange will occur after receipt and processing
by the Shareholder Servicing Agent of an application in good order. Exchanges
will continue to be made from a shareholder's account in any MFS Fund, as long
as the balance of the account is sufficient to complete the exchanges.
Additional payments made to a shareholder's account in such MFS Fund will
extend the period that exchanges will continue to be made under the Automatic
Exchange Plan. However, if additional payments are added to an account subject
to the Automatic Exchange Plan shortly before an exchange is scheduled, such
funds may not be available for exchanges until the following month; therefore,
care should be used to avoid inadvertently terminating the Automatic Exchange
Plan through exhaustion of the account balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market
Fund, MFS Government Money Market Fund and Class A shares of MFS Cash Reserve
Fund will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions
in writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as shares of the MFS Fund are registered; if by
telephone -- proper account identification is given by the dealer or
shareholder of record). Each Exchange Change Request (other than termination
of participation in the program) must involve at least $50. Generally, if an
Exchange Change Request is received before the close of business on the last
business day of a month, the Exchange Change Request will be effective for the
following month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds,
to make exchanges of shares from one MFS Fund to another and to withdraw from
an MFS Fund, as well as a shareholder's other rights and privileges, are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the
other MFS Funds (except MFS Money Market Fund, MFS Government Money Market
Fund and holders of Class A shares of MFS Cash Reserve Fund in the case where
the shares of such funds are acquired through direct purchase or reinvested
dividends) 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 the fund are available for sale) at net asset value (without a
sales charge) and, if applicable, with credit for any CDSC paid. In the case
of proceeds reinvested in shares of MFS Money Market Fund, MFS Government
Money Market Fund and Class A shares of MFS Cash Reserve Fund, the shareholder
has the right to exchange the acquired shares for shares of another MFS Fund
at net asset value pursuant to the exchange privilege described below. Such a
reinvestment must be made within 90 days of the redemption and is limited to
the amount of the redemption proceeds. If the shares credited for any CDSC
paid are then redeemed within six years of their initial purchase in the case
of Class B shares or within 12 months of the initial purchase of Class C
shares and certain Class A shares, a CDSC will be imposed upon redemption.
Although redemptions and repurchases of shares are taxable events, a
reinvestment within a certain period of time in the same fund may be
considered a "wash sale" and may result in the inability to recognize
currently any loss realized on the original redemption for federal income tax
purposes. Please see your tax adviser for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares 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 and if the purchaser is eligible to
purchase the class of shares) at net asset value. 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.
Each Exchange Request must be 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 the 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 the Shareholder Servicing Agent). Each
exchange involves the redemption of the shares of the Fund to be exchanged and
the purchase at net asset value (i.e., without a sales charge) of shares of
the same class of the other MFS Fund. Any gain or loss on the redemption of
the shares exchanged is reportable on the shareholder's federal income tax
return, unless both the shares received and the shares surrendered in the
exchange are held in a tax-deferred retirement plan or other tax-exempt
account. No more than five exchanges may be made in any one Exchange Request
by telephone. If the Exchange Request is received by the Shareholder Servicing
Agent 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 of the
requirements set forth above have been complied with at that time. However,
payment of the redemption proceeds by the Fund, and thus purchase of shares of
the other MFS Fund, may be delayed for up to seven days if the Fund determines
that such a delay would be in the best interest of all its shareholders.
Investment dealers which have satisfied criteria established by MFD may also
communicate a shareholder's Exchange Request to MFD by facsimile subject to
the requirements set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for
the CDSC is carried forward to the exchanged 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.
Additional information with respect to any of the MFS Funds, including a copy
of its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should
obtain and read the prospectus of the other MFS Fund and consider the
differences in objectives and policies before making any exchange.
Shareholders in the other MFS Funds (except holders of shares of MFS Money
Market Fund, MFS Government Money Market Fund and Class A shares of MFS Cash
Reserve Fund acquired through direct purchase and dividends reinvested prior
to June 1, 1992) have the right to exchange their shares for shares of the
Fund, subject to the conditions, if any, set forth in their respective
prospectuses. In addition, unitholders of the MFS Fixed Fund (a bank
collective investment fund) have the right to exchange their units (except
units acquired through direct purchases) for shares of the MFS Funds, subject
to the conditions, if any, imposed upon such unitholders by the MFS Fixed
Fund.
Any state income tax advantages for investment in shares of each state-
specific series of MFS Municipal Series Trust may only benefit residents of
such states. Investors should consult their own tax advisers to be sure this
is an appropriate investment, based on their residency and each state's income
tax laws.
The exchange privilege (or any aspect of it) may be changed or discontinued
and is subject to certain limitations (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available through investment
dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their non-
employed spouses who desire to make limited contributions to a tax-deferred
retirement program and, if eligible, to receive a federal income tax
deduction for amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986 (the "Code"), as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested
automatically. For further details with respect to any plan, including fees
charged by the trustee, custodian or MFD, tax consequences and redemption
information, see the specific documents for that plan. Plan documents other
than those provided by MFD may be used to establish any of the plans described
above. Third party administrative services, available for some corporate
plans, may limit or delay the processing of transactions.
Investors should consult with their tax adviser before establishing any of the
tax-deferred retirement plans described above.
6. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, by meeting all
applicable requirements of Subchapter M, including requirements as to the
nature of the Fund's gross income, the amount of Fund distributions, and the
composition and holding period of the Fund's portfolio assets. Because the
Fund intends to distribute all of its net investment income and net realized
capital gains to shareholders in accordance with the timing requirements
imposed by the Code, it is not expected that the Fund will be required to pay
any federal income or excise taxes, although the Fund's foreign-source income
may be subject to foreign withholding taxes. If the Fund should fail to
qualify as a "regulated investment company" in any year, the Fund would incur
a regular corporate federal income tax upon its taxable income and Fund
distributions would generally be taxable as ordinary dividend income to
shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and
any state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions
from net short-term capital gains are taxable to shareholders as ordinary
income for federal income tax purposes (whether the distribution is paid in
cash or reinvested in additional shares). A portion of the Fund's ordinary
income dividends is normally eligible for the dividends received deduction for
corporations if the recipient otherwise qualifies for that deduction with
respect to its holding of Fund shares. Availability of the deduction for
particular shareholders is subject to certain limitations, and deducted
amounts may be subject to the alternative minimum tax and result in certain
basis adjustments. Distributions of net capital gains (i.e., the excess of net
long-term capital gains over net short-term capital losses), whether paid in
cash or reinvested in additional shares, are taxable to shareholders as long-
term capital gains without regard to the length of time the shareholders have
held their shares. Any Fund dividend that is declared in October, November or
December of any calendar year, that is payable to shareholders of record in
such a month, and that is paid the following January will be treated as if
received on December 31 of the year in which the dividend is declared. The
Fund will notify shareholders regarding the federal tax status of its
distributions after the end of each calendar year.
Any Fund distribution of net capital gains or net short-term capital gains
will have the effect of reducing the per share net asset value of shares in
the Fund by the amount of the distribution. Shareholders purchasing shares
shortly before the record date of any such distribution may thus pay the full
price for the shares and then effectively receive a portion of the purchase
price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss.
However, any loss realized upon a disposition of shares in the Fund held for
six months or less will be treated as a long-term capital loss to the extent
of any distributions of net capital gain made with respect to those shares.
Any loss realized upon a redemption of shares may also be disallowed under
rules relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within 90 days after their purchase
followed by any purchase (including purchases by exchange or by reinvestment)
without payment of an additional sales charge of Class A shares of the Fund or
of another MFS Fund (or any other shares of an MFS Fund generally sold subject
to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. Any
investment in zero coupon securities, deferred interest bonds, payment-in-kind
bonds, and certain securities purchased at a market discount will cause the
Fund to recognize income prior to the receipt of cash payments with respect to
those securities. In order to distribute this income and avoid a tax on the
Fund, the Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold, potentially resulting in additional taxable
gain or loss to the Fund.
The Fund's transactions in options, Futures Contracts, and Forward Contracts
will be subject to special tax rules that may affect the amount, timing, and
character of Fund income and distributions to shareholders. For example,
certain positions held by the Fund on the last business day of each taxable
year will be marked to market (i.e., treated as if closed out) on that day,
and any gain or loss associated with the positions will be treated as 60%
long-term and 40% short-term capital gain or loss. Certain positions held by
the Fund that substantially diminish its risk of loss with respect to other
positions in its portfolio may constitute "straddles," and may be subject to
special tax rules that would cause deferral of Fund losses, adjustments in the
holding periods of Fund securities, and conversion of short-term into long-
term capital losses. Certain tax elections exist for straddles that may alter
the effects of these rules. The Fund will limit its activities in options,
Futures Contracts, Forward Contracts and swaps and related transactions to the
extent necessary to meet the requirements of Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. Use of foreign currencies for non-
hedging purposes and investment by the Fund in certain "passive foreign
investment companies" may be limited in order to avoid a tax on the Fund.
Investment income received by the Fund from foreign securities may be subject
to foreign income taxes withheld at the source; the Fund does not expect to
be able to pass through to shareholders foreign tax credits with respect to
such foreign taxes. The United States has entered into tax treaties with many
foreign countries that may entitle the Fund to a reduced rate of tax or an
exemption from tax on such income; the Fund intends to qualify for treaty
reduced rates where available. It is not possible, however, to determine the
Fund's effective rate of foreign tax in advance since the amount of the Fund's
assets to be invested within various countries is not known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends
to withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments made to Non-U.S. Persons that are subject to such
withholding, regardless of whether a lower rate may be permitted under an
applicable treaty. Any amounts overwithheld may be recovered by such persons
by filing a claim for refund with the U.S. Internal Revenue Service within the
time period appropriate to such claims. Distributions received from the Fund
by Non-U.S. Persons may also be subject to tax under the laws of their own
jurisdictions. The Fund is also required in certain circumstances to apply
backup withholding at the rate of 31% on taxable dividends and redemption
proceeds paid to any shareholder (including a Non-U.S. Person) who does not
furnish to the Fund certain information and certifications or who is otherwise
subject to backup withholding. Backup withholding will not, however, be
applied to payments that have been subject to 30% withholding.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but
generally not from capital gains realized upon the disposition of such
obligations) may be exempt from state and local taxes. The Fund intends to
advise shareholders of the extent, if any, to which distributions consist of
such interest. Shareholders are urged to consult their tax advisors regarding
the possible exclusion of such portion of their dividends for state and local
income tax purposes as well as regarding the tax consequences of an investment
in the Fund.
7. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. (As of the date of this SAI,
the Exchange is open for trading every weekday except for the following
holidays or the day on which they are observed: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.) This determination is made once each day as of the close
of regular trading on the Exchange by deducting the amount of the liabilities
attributable to the class from the value of the assets attributable to the
class and dividing the difference by the number of shares of the class
outstanding.
Bonds and other fixed income securities (other than short-term obligations) in
the Fund's portfolio are valued on the basis of valuations furnished by a
pricing service which utilizes both dealer-supplied valuations and electronic
data processing techniques which take into account appropriate factors such as
institution-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices,
since such valuations are believed to reflect more accurately the fair value
of such securities. Forward Contracts will be valued using a pricing model
taking into consideration market data from an external pricing source. Use of
the pricing service has been approved by the Trust's Board of Trustees. All
other securities, futures contracts and options in the Fund's portfolio (other
than short-term obligations) for which the principal market is one or more
securities or commodities exchanges (whether domestic or foreign) will be
valued at the last reported sale price or at the settlement price prior to the
determination (or if there has been no current sale, at the closing bid price)
on the primary exchange on which such securities, futures contracts or options
are traded; but if a securities exchange is not the principal market for
securities, such securities will, if market quotations are readily available,
be valued at current bid prices, unless such securities are reported on the
NASDAQ system, in which case they are valued at the last sale price or, if no
sales occurred during the day, at the last quoted bid price. Short-term
obligations with a remaining maturity in excess of 60 days will be valued
based upon dealer supplied valuations. Other short-term obligations are valued
at amortized cost, which constitutes fair value as determined by the Board of
Trustees. Portfolio securities for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Board of Trustees.
Generally, trading in foreign securities is substantially completed each day
at various times prior to the close of regular trading on the Exchange.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the close of regular trading on the
Exchange which will not be reflected in the computation of the Fund's net
asset value unless the Trustees deem that such event would materially affect
the net asset value in which case an adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. A share's net asset value is effective for orders
received by the dealer prior to its calculation and received by MFD in its
capacity as the Fund's distributor, or its agent, the shareholder servicing
agent, prior to the close of that business day.
The Trustees review the appropriateness of the time of day as of which the net
asset value is computed.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for
each class of shares for certain periods by determining the average annual
compounded rates of return over those periods that would cause an investment
of $1,000 (made with all distributions reinvested and reflecting the CDSC or
the maximum public offering price) to reach the value of that investment at
the end of the periods. The Fund may also calculate (i) a total rate of
return, which is not reduced by the CDSC (4% maximum for Class B shares and 1%
maximum for Class C shares purchased after April 1, 1996) and therefore may
result in a higher rate of return, (ii) a total rate of return assuming an
initial account value of $1,000, which will result in a higher rate of return
since the value of the initial account will not be reduced by the maximum
sales charge (currently 4.75% on Class A shares) and/or (iii) total rates of
return which represent aggregate performance over a period or year-by-year
performance, and which may or may not reflect the effect of the maximum or
other sales charge or CDSC. Prior to October 1, 1989, the maximum sales charge
on Class A shares was 7.25%. On October 1, 1989, the maximum sales charge on
Class A shares was lowered to 4.75%, a sales charge on reinvested dividends
was eliminated and a Distribution Plan (described below) pursuant to Rule
12b-1 under the 1940 Act was implemented with respect to Class A shares.
The Fund offers multiple classes of shares which were initially offered for
sale to the public on different dates. The calculation of total rate of return
for a class of shares which initially was offered for sale to the public
subsequent to another class of shares of the Fund is based both on (i) the
performance of the Fund's newer class from the date it initially was offered
for sale to the public and (ii) the performance of the Fund's oldest class
from the date it initially was offered for sale to the public up to the date
that the newer class initially was offered for sale to the public.
As discussed in the Prospectus, the sales charges, expenses and expense
ratios, and therefore the performance, of the Fund's classes of shares differ.
In calculating total rate of return for a newer class of shares in accordance
with certain formulas required by the SEC, the performance will be adjusted to
take into account the fact that the newer class is subject to a different
sales charge than the oldest class (e.g., if the newer class is Class A
shares, the total rate of return quoted will reflect the deduction of the
initial sales charge applicable to Class A shares; if the newer class is Class
B shares, the total rate of return quoted will reflect the deduction of the
CDSC applicable to Class B shares). However, the performance will not be
adjusted to take into account the fact that the newer class of shares bears
different class specific expenses than the oldest shares (e.g., Rule 12b-1
fees). Therefore, the total rate of return quoted for a newer class of shares
will differ from the return that would be quoted had the newer class of shares
been outstanding for the entire period over which the calculation is based
(i.e., the total rate of return quoted for the newer class will be higher than
the return that would have been quoted had the newer class of shares been
outstanding for the entire period over which the calculation is based if the
class specific expenses for the newer class are higher than the class specific
expenses of the oldest class, and the total rate of return quoted for the
newer class will be lower than the return that would be quoted had the newer
class of shares been outstanding for this entire period if the class specific
expenses for the newer class are lower than the class specific expenses of the
oldest class).
Total rate of return quotations for each class are presented in Appendix A
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS: The performance results for Class A shares presented in
Appendix A attached hereto under the heading "Performance Results" assume an
initial investment of $10,000 in Class A shares and cover the period from
January 1, 1987 through December 31, 1996 for Class A shares. It has been
assumed that dividends and capital gain distributions were reinvested in
additional shares. These performance results, as well as any total rate of
return quotations provided by the Fund, should not be considered as
representative of the performance of the Fund in the future since the net
asset value and public offering price of shares of the Fund will vary based
not only on the type, quality and maturities of the securities held in the
Fund's portfolio, but also on changes in the current value of such securities
and on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate yields and total rates of return
should be considered when comparing the yield and total rate of return of the
Fund to yields and total rates of return published for other investment
companies or other investment vehicles. Total rate of return reflects the
performance of both principal and income. Current net asset value and account
balance information may be obtained by calling 1-800-MFS-TALK (637-8255).
YIELD: Any yield quotation for a class of shares of the Fund is based on the
annualized net investment income per share of that class over a 30-day period.
The yield for each class of shares of the Fund is calculated by dividing the
net investment income per share allocated to that class earned during the
period by the maximum offering price per share of that class of the Fund on
the last day of that period. The resulting figure is then annualized. Net
investment income per share of a class is determined by dividing (i) the
dividends and interest allocated to that class during the period, minus
accrued expenses of that class for the period, by (ii) the average number of
shares of the class, entitled to receive dividends during the period
multiplied by the maximum offering price per share on the last day of the
period. The yield calculation for Class A shares assumes a maximum sales
charge of 4.75%. The yield calculations for Class B and Class C shares assume
no CDSC is paid. Yield quotations for each class of shares are presented in
Appendix A attached hereto under the heading "Performance Quotations".
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which were or will be
paid to the Fund's shareholders. Amounts paid to shareholders of each class
are reflected in the "current distribution rate" for that class. The current
distribution rate for a class is computed by dividing the total amount of
dividends per share paid by the Fund to shareholders of that class during the
past 12 months by the maximum public offering price of that class at the end
of such period. Under certain circumstances, such as when there has been a
change in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during
the past 12 months. The current distribution rate differs from the yield
computation 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. The Fund's current distribution rate
calculation for Class A shares assumes a maximum sales charge of 4.75%. The
Fund's current distribution rate calculation for Class B and Class C shares
assumes no CDSC is paid. Current distribution rate quotations for each class
of shares are presented in Appendix A attached hereto.
GENERAL: From time to time the Fund may, as appropriate, quote Fund rankings
or reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to
the following: Money, Fortune, U.S. News and World Report, Kiplinger's
Personal Finance, The Wall Street Journal, Barron's, Investors Business Daily,
Newsweek, Financial World, Financial Planning, Investment Advisor, USA Today,
Pensions and Investments, SmartMoney, Forbes, Global Finance, Registered
Representative, Institutional Investor, the Investment Company Institute,
Johnson's Charts, Morningstar, Lipper Analytical Services, Inc., CDA
Wiesenberger, Shearson Lehman and Salomon Bros. Indices, Ibbotson, Business
Week, Lowry Associates, Media General, Investment Company Data, The New York
Times, Your Money, Strangers Investment Advisor, Financial Planning on Wall
Street, Standard and Poor's, Individual Investor, The 100 Best Mutual Funds
You Can Buy, by Gordon K. Williamson, Consumer Price Index, and Sanford C.
Bernstein & Co. Fund performance may also be compared to the performance of
other mutual funds tracked by financial or business publications or
periodicals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers;
investment philosophies, strategies, techniques and criteria used in the
selection of securities to be purchased or sold for the Fund; the Fund's
portfolio holdings; the investment research and analysis process; the
formulation and evaluation of investment recommendations; and the assessment
and evaluation of credit, interest rate, market and economic risks and similar
or related matters.
The Fund may also quote evaluations mentioned in independent radio or
television broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding
and tax-deferral.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from
surveys, regarding individual and family financial planning. Such views may
include information regarding the following: retirement planning; tax
management strategies; estate planning; general investment techniques (e.g.,
asset allocation and disciplined saving and investing); business succession;
ideas and information provided through the MFS Heritage Planningsm program, an
inter-generational financial planning assistance program; issues with respect
to insurance (e.g., disability and life insurance and Medicare supplemental
insurance); issues regarding financial and health care management for elderly
family members; and other similar or related matters.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a fund at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares when
prices are low. While such a strategy does not assure a profit or guard
against a loss in a declining market, the investor's average cost per share
can be lower than if fixed numbers of shares are purchased at the same
intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management
firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to
register under the Securities Act of 1933 ("Truth in Securities Act" or
"Full Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
-- 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non- qualified
market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced
fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard Trust, the
first Trust to invest in companies deemed to be union-friendly by an
Advisory Board of senior labor officials, senior managers of companies
with significant labor contracts, academics and other national labor
leaders or experts.
8. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares (the "Distribution Plans") 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 Distribution Plan would benefit the Fund and
the respective class of shareholders. The provisions of the Distribution Plan
are severable with respect to each class of shares offered by the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the Fund's expense ratio to
the extent the Fund's fixed costs are spread over a larger net asset base.
Also, an increase in net assets may lessen the adverse effects that could
result were the Fund required to liquidate portfolio securities to meet
redemptions. There is, however, no assurance that the net assets of the Fund
will increase or that the other benefits referred to above will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to Class A shares, no service fees will be paid:
(i) to any dealer who is the holder or dealer of record for investors who own
Class A shares having an aggregate net asset value less than $750,000, or such
other amount as may be determined from time to time by MFD (MFD, however, may
waive this minimum amount requirement from time to time); or (ii) to any
insurance company which has entered into an agreement with the Fund and MFD
that permits such insurance company to purchase Class A shares from the Fund
at their net asset value in connection with annuity agreements issued in
connection with the insurance company's separate accounts. Dealers may from
time to time be required to meet certain other criteria in order to receive
service fees.
With respect to Class B shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder
or dealer of record for investors who own Class B shares having an aggregate
net asset value of less than $750,000 or such other amount as may be
determined by MFD from time to time. MFD, however, may waive this minimum
amount requirement from time to time. Dealers may from time to time be
required to meet certain other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable
under the 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.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of 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 cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended September 30, 1996, the Fund paid the following
Distribution Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
CLASSES OF SHARES BY FUND BY MFD BY DEALERS
- ----------------- ------------ ------------- -------------
Class A Shares $ 7,883,575 $2,661,359 $5,222,216
Class B Shares $11,488,260 $8,754,280 $2,733,980
Class C Shares $ 487,605 $ 5,233 $ 482,372
GENERAL: The Distribution Plan will remain in effect until August 1, 1997, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the
Trustees shall review, at least quarterly, a written report of the amounts
expended (and purposes therefor) under such Plan. The Distribution Plan may be
terminated at any time by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the Fund's shares (as defined in "Investment Restrictions"). All
agreements relating to the Distribution Plan entered into between the Fund or
MFD and other organizations must be approved by the Board of Trustees,
including a majority of the Distribution Plan Qualified Trustees. Agreements
under the Distribution Plan must be in writing, will be terminated
automatically if assigned, and may be terminated at any time without payment
of any penalty, by vote of a majority of the Distribution Plan Qualified
Trustees or by vote of the holders of a majority of the respective class of
the Fund's shares. The Distribution Plan may not be amended to increase
materially the amount of permitted distribution expenses without the approval
of a majority of the respective class of the Fund's shares (as defined in
"Investment Restrictions") or may not be materially amended in any case
without a vote of the Trustees and a majority of the Distribution Plan
Qualified Trustees. The selection and nomination of Distribution Plan
Qualified Trustees shall be committed to the discretion of the non-interested
Trustees then in office. No Trustee who is not an "interested person" has any
financial interest in the Distribution Plan or in any related agreement.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one
or more separate series and to divide or combine the shares of any series into
a greater or lesser number of shares without thereby changing the
proportionate beneficial interests in that series. The Trustees have currently
authorized shares of the Fund and one other series. The Declaration of Trust
further authorizes the Trustees to classify or reclassify any series of shares
into one or more classes. Pursuant thereto, the Trustees have authorized the
issuance of four classes of shares of each of the Trust's two series, Class A
shares, Class B shares and Class C shares as well as Class I shares for the
Fund. Each share of a class of the Fund represents an equal proportionate
interest in the assets of the Fund allocable to that class. Upon liquidation
of the Fund, shareholders of each class of the Fund are entitled to share pro
rata in the Fund's net assets allocable to such class available for
distribution to shareholders. The Trust reserves the right to create and issue
additional series or classes of shares, in which case the shares of each class
of a series would participate equally in the earnings, dividends and assets
allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of
shareholders. Although Trustees are not elected annually by the shareholders,
shareholders have, under certain circumstances, the right to remove one or
more Trustees in accordance with the provisions of section 16(c) of the 1940
Act. No material amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the Trust shares (as defined in "Investment
Restrictions") or by an instrument in writing without a meeting, signed by a
majority of Trustees and consented to by the holders of not less than a
majority of the shares outstanding and entitled to vote. Shares have no pre-
emptive or conversion rights (except as described in the Prospectus under
"Purchases -- Conversion of Class B Shares"). Shares are fully paid and non-
assessable. The Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the holders
of two-thirds of the Trust's outstanding shares voting as a single class, or
of the affected series of the Trust, as the case may be, except that if the
Trustees of the Trust recommend such merger, consolidation or sale, the
approval by vote of the holders of a majority of the Trust's or the affected
series' outstanding shares (as defined in "Investment Restrictions") will be
sufficient. The Trust or any series of the Trust may also be terminated (i)
upon liquidation and distribution of its assets, if approved by the vote of
the holders of two-thirds of its outstanding shares, or (ii) by the Trustees
by written notice to the shareholders of the Trust or the affected series. If
not so terminated the Trust will continue indefinitely.
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 Declaration of Trust contains an express disclaimer
of shareholder liability for acts, obligations or affairs of the Trust and
provides for indemnification and reimbursement of expenses out of the Trust
property for any shareholder held personally liable for the obligations of the
Trust. The Declaration of Trust also provides that the Trust shall maintain
appropriate insurance (for example, fidelity bonding and errors and omissions
insurance) for the protection of the Trust, its shareholders, Trustees,
officers, employees and agents covering possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are
not binding upon the Trustees individually but only upon the property of the
Trust and that the Trustees will not be liable for any action or failure to
act, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, tax return preparation, and assistance and consultation with respect
to the preparation of filings with the SEC.
The Portfolio of Investments at September 30, 1996, the Statement of Assets
and Liabilities at September 30, 1996, the Statement of Operations for the
year ended September 30, 1996, the Statement of Changes in Net Assets for each
of the two years in the period ended September 30, 1996, the Notes to
Financial Statements and the Independent Auditors' Report, each of which is
included in the Annual Report to shareholders of the Fund, are incorporated by
reference into this SAI and have been so incorporated in reliance upon the
report of Deloitte & Touche LLP, independent auditors, as experts in
accounting and auditing. A copy of the Annual Report accompanies this SAI.
<PAGE>
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net
asset value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
PERFORMANCE RESULTS -- CLASS A SHARES
<TABLE>
<CAPTION>
VALUE OF VALUE OF VALUE OF
INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
---------- --------------- ------------- --------- -----
<S> <C> <C> <C> <C>
December 31, 1987 $ 8,999 $ 373 $ 487 $ 9,859
December 31, 1988 9,560 607 1,174 11,341
December 31, 1989 10,813 1,042 2,101 13,956
December 31, 1990 9,925 972 2,734 13,631
December 31, 1991 11,271 1,379 3,929 16,579
December 31, 1992 11,476 1,859 4,913 18,248
December 31, 1993 12,467 2,206 6,339 21,012
December 31, 1994 11,626 2,073 6,758 20,457
December 31, 1995 13,467 3,320 9,176 25,963
December 31, 1996 13,822 5,026 10,907 29,755
</TABLE>
Explanatory Notes: The results in the table assume that income dividends and
capital gain distributions were invested in additional shares. The results
also assume that the initial investment in Class A shares was reduced by the
current maximum applicable sales charge. No adjustment has been made for
income taxes, if any, payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are for the fiscal year ended September 30, 1996.
<TABLE>
<CAPTION>
ACTUAL 30-DAY 30-DAY
YIELD YIELD
AVERAGE ANNUAL TOTAL RETURNS (INCLUDING (WITHOUT CURRENT
------------------------------- ANY ANY DISTRIBUTION
1 YEAR 5 YEAR 10 YEAR WAIVERS) WAIVERS) RATE
------ ------ ------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
Class A Shares with sales charge ................ 8.12% 10.95% 11.44% N/A 3.71% 3.95%
Class A Shares without sales charge ............. 13.50% 12.03% 11.98% N/A N/A N/A
Class B Shares with CDSC ........................ 8.49% 11.19%(1) 11.69%(1) N/A N/A N/A
Class B Shares without CDSC ..................... 12.49% 11.45%(1) 11.69%(1) N/A 3.14% 3.41%
Class C Shares with CDSC ........................ 11.67% 11.70%(2) 11.82%(2) N/A N/A N/A
Class C Shares without CDSC ..................... 12.67% 11.70%(2) 11.82%(2) N/A 3.18% 3.44%
(1) Class B share performance includes the performance of the Fund's Class A shares for periods prior to the commencement of
offering of Class B shares on August 23, 1993. Sales charges, expenses and expense ratios, and therefore performance, for
Class A and Class B shares differ. Class B share performance has been adjusted to reflect that Class B shares generally
are subject to a CDSC (unless the performance quotation does not give effect to the CDSC) whereas Class A shares
generally are subject to an initial sales charge. Class B share performance has not, however, been adjusted to reflect
differences in operating expenses (e.g., Rule 12b-1 fees), which generally are lower for Class A shares.
(2) Class C share performance includes the performance of the Fund's Class A shares for periods prior to the commencement of
offering of Class C shares on August 1, 1994. Sales charges, expenses and expense ratios, and therefore performance, for
Class A and Class C shares differ. Class C share performance has been adjusted to reflect that Class C shares generally
are subject to a CDSC (unless the performance quotation does not give effect to the CDSC) whereas Class A shares
generally are subject to an initial sales charge. Class C share performance has not, however, been adjusted to reflect
differences in operating expenses (e.g., Rule 12b-1 fees), which generally are lower for Class A shares.
</TABLE>
<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 AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R) TOTAL
RETURN FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[Logo]
INVESTMENT MANAGEMENT
[recycle symbol] Printed on recycled paper.
MTR-13-2/97/500 15/215/315
<PAGE>
[front cover]
[MFS logo] Annual Report
INVESTMENT MANAGEMENT for Year Ended
September 30, 1996
MFS(R) Total Return Fund
[photo of scale with weights on it]
America learns how "We invented the mutual fund", (see page 40)
<PAGE>
Table of Contents
Letter from the Chairman 1
A Discussion with the Fund Manager 3
Performance Summary 6
Fund Facts 8
Portfolio of Investments 9
Financial Statements 24
Notes to Financial Statements 31
Independent Auditors' Report 38
MFS Family of Funds 39
Trustees and Officers 41
[screened box]
Highlights
[bullet] For the year ended September 30, 1996, Class A shares of this balanced
Fund provided a total return of 13.50%, Class B shares 12.49%, and
Class C shares 12.67%. These returns assume the reinvestment of
distributions but exclude the effects of any sales charges.
[bullet] About 57% of the Fund's assets are invested in stocks, preferred
stocks, and convertible bonds, with the remainder in a blend of
corporate bonds and U.S. Treasuries.
[bullet] Two of the Fund's major equity sectors are financial services and
energy, which include companies that we feel have earnings prospects or
asset values equal to or greater than the overall market.
[bullet] Bank stocks have done well, a reflection of their steady rise in
earnings and an increase in merger activity that has made most banks
more valuable.
[end screened box]
<PAGE>
Letter from the Chairman
[photo of A. Keith Brodkin]
Dear Shareholders:
As we enter the last quarter of 1996, the U.S. economy appears to have
settled into a pattern of moderate growth and inflation -- two factors that
we think can be important contributors to a favorable long-term investment
climate. During the first quarter of 1996, real (inflation-adjusted) economic
growth was 2.3% on an annualized basis, followed by a rate of 4.7% in the
second quarter. Real growth in gross domestic product has surpassed our
expectations this year, and we now expect growth for all of 1996 could exceed
2.5%. Although individual consumers appear to be carrying an excessive debt
load, the consumer sector itself, which represents two-thirds of the economy,
continues to be impressive in its support of the automobile and housing
markets. Consumer spending has also been positively impacted by widespread
job growth and, more recently, increasing wages. However, the latest
statistics appear to be showing signs of a slowdown in consumer spending.
This is particularly true when considering overall retail sales, which have
been flat for several months. Furthermore, the economies of Europe and Japan
continue to be in the doldrums, weakening U.S. export markets while subduing
the capital spending plans of American corporations. While economic growth
should continue, we expect it could slacken toward the end of the year.
While we do not anticipate the U.S. stock market to match the
extraordinary performance of 1995, we continue to be positive about the
equity market this year. Although we believe the equity market represents
fair value at current levels, the expected slowdown in corporate earnings
growth and the increases in interest rates earlier in the year have raised
some near-term concerns, as was seen in July's stock market correction.
Further increases in interest rates, and an acceleration of inflation coupled
with an additional slowdown in corporate earnings growth, could have a
negative effect on the stock market in the near term. However, to the extent
that some earnings disappointments are taken as a sign that the economy is
not overheating, this may prove beneficial for the longer-term health of the
equity market. We also believe that many of the technology-driven
productivity gains that U.S. companies have made in recent years will
continue to enhance corporate America's competitiveness and profitability.
While we have some near-term concerns, we remain quite constructive on the
long-term equity market.
1
<PAGE>
Letter from the Chairman - continued
In the bond market, persistent signs of economic weakness led to decreases
in short-term interest rates by the Federal Reserve Board in late 1995 and
early 1996. Should signs of more rapid economic growth and, particularly, of
higher inflation resurface, we would expect the Fed to maintain its
anti-inflationary stance. In the beginning of the year, the bond market
traded in a narrow range as investors shifted between concern for the lack of
a budget resolution in Washington and hope that sluggish economic reports and
low inflation might lead to lower interest rates. Later, the fixed-income
market began reacting to conflicting signals regarding the economy's strength
with more volatile trading patterns marked by an upward bias in interest
rates. Interest rates may move even higher over the coming months, but we
believe the current rise in bond yields is reaching a point where the
fixed-income market is equitably valued.
Finally, as you may notice, this report to shareholders incorporates a
number of changes which we hope you will find informative and useful.
Following a discussion with the Fund Manager, we have added new information
on the Fund's holdings, including a chart illustrating the portfolio's
concentration in the types of investments that meet its criteria. Near the
back of the report, telephone numbers and addresses are listed if you would
like to contact MFS.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/A. Keith Brodkin
A. Keith Brodkin
Chairman and President
October 10, 1996
2
<PAGE>
A Discussion with the Fund Manager
[photo of David M. Calabro]
For the year ended September 30, 1996, Class A shares of this balanced Fund
provided a total return of 13.50%, Class B shares 12.49%, and Class C shares
12.67%. These returns assume the reinvestment of distributions but exclude
the effects of any sales charges.
Q. What do you think were some of the reasons for this performance, David?
A. As a balanced fund, we have a large portion of our assets in both stocks
and bonds. In addition, we own preferred stocks and convertible bonds, which
in many cases provide similar returns to stocks, with less risk. Over the
past 12 months, the portfolio held about 57% of its assets in stocks,
preferred stocks, and convertible bonds. This allocation provided the bulk of
the return for the total portfolio for the past year as equities benefited
from a 20.32% increase as measured by the Standard & Poor's 500 Composite
Index (the S&P 500), a popular, unmanaged index of common stock performance.
The remainder of the portfolio was invested in a blend of corporate and
U.S. Treasury bonds with an overall duration between five and six years. This
fixed-income sector provided positive returns, but the magnitude was far less
than that of the stock portion. For example, the Lehman Brothers Government
Corporate Bond Index, which is representative of our fixed-income sector,
gained 4.50% over the past year. (The Lehman Index is an unmanaged,
market-value weighted index of U.S. Treasury and government-agency
securities, excluding mortgage-backed securities.)
Q. Could you describe the business and economic environment you faced over
the past year, particularly as it relates to the Fund?
A. During the first part of the fiscal year, economic activity declined,
pulling interest rates lower. As the year progressed, the U.S. economy picked
up steam and posted a surprisingly strong 4.7% growth rate in the second
quarter of the calendar year. This pushed interest rates higher and focused
the market on whether or not the Federal Reserve Board would continue the
tightening trend.
This improving economic climate gave investors confidence that the
excellent earnings growth of corporate America had staying power, and stock
prices moved up. However, the high interest rates hurt bond prices, reducing
the overall returns in fixed-income securities.
3
<PAGE>
A Discussion with the Fund Manager - continued
Q. Would you say your current stock/bond allocation is conservative,
aggressive, or somewhere in between? And why are you at that allocation?
A. We would describe our current allocation as slightly conservative. Our
allocation to stocks, preferred stocks, and convertible bonds has been in the
57% to 58% range. We would consider 60% neutral and 65% to 70% aggressive.
We have remained somewhat conservative because we believe equities offer
less value now than they have historically. In particular, the dividend yield
on the S&P 500 is just 2.2%.
Q. We noticed that financial services and energy are two of your major equity
sectors. What is it you like about these sectors more than others?
A. We like to own companies that we feel have earnings prospects equal to or
higher than the overall market (as measured by the S&P 500). We also like to
pay a price (as measured by P/E ratio, dividend yield, price/book) that is
below the market. We have found these characteristics in the financial
services and energy sectors over the past 12 months.
Q. What other sectors do you like?
A. We like the health care sector, where strong earnings and consolidation
are benefiting the outlook for many stocks. We also like the aerospace and
defense area, which we think will benefit from a cyclical increase in the
number of aircraft being built over the next three years as well as strong
free cash flow generation.
Q. Can you tell us about some sectors you might be avoiding, and why?
A. We have been avoiding the technology sector, where many of the stocks have
high growth prospects but also high valuations, which means they often carry
greater risk. We are also underweighted in consumer companies because many of
them are still unable to raise prices. The U.S. consumer continues to demand
more value at lower prices.
Q. Can you name some stocks or sectors that performed as well as or better
than expected and tell us why you think they did well?
A. Bank stocks have done particularly well because earnings have risen
steadily and an increase in merger activity has made nearly all banks more
valuable. Drug company stocks and aerospace and defense stocks have also done
well for very similar reasons.
4
<PAGE>
A Discussion with the Fund Manager - continued
Q. Now, how about some stocks or sectors that did not perform as well as you
expected?
A. The telephone stocks have been a big disappointment. While we still
believe the telecommunications sector is a dynamic growth area, deregulation
activity and continued long-distance pricing battles for long-distance
service have hurt most of the major participants.
Q. What can you tell us about your bond position, in terms of types of bonds
in the portfolio and their average duration, or interest rate sensitivity?
A. About 65% of our bond portfolio is corporate bonds and 35% is Treasuries
and mortgages. The average duration is a little more than five years.
Q. As you look ahead, what changes do you see in the overall market or
economic environment, particularly as it relates to your Fund, and how are
you positioning the Fund to try and take advantage of those changes?
A. We see a modest growth rate in the U.S. economy over the next 12 months.
However, over the near term, we believe the Federal Reserve will keep a close
watch on wage inflation and general economic activity, and may raise interest
rates should the economic numbers suggest a stronger-than-expected economy.
Given where equity valuations are today, we feel comfortable with our
asset allocation. However, should the stock market experience a meaningful
correction, we would be looking to buy stocks.
/s/David M. Calabro
David M. Calabro
(On behalf of the MFS Total Return Team)
[screened box]
Fund Managers' Profiles
David M. Calabro, Vice President; Geoffrey L. Kurinsky, Senior Vice President;
Judith N. Lamb, Vice President; Lisa B. Nurme, Vice President; and Maura A.
Shaughnessy, Vice President, are the Fund's portfolio managers. Mr. Calabro is
the head of this portfolio management team and a manager of the common stock
portion of the Fund's portfolio. Mr. Calabro has been employed by MFS since
1992. Mr. Kurinsky, the manager of the Fund's fixed-income securities, has been
employed by MFS since 1987. Ms. Lamb, the manager of the Fund's convertible
securities, has been employed by MFS since 1992. Ms. Nurme, a manager of the
common stock portion of the Fund's portfolio, has been employed by MFS since
1987. Ms. Shaughnessy, also a manager of the common stock portion of the Fund's
portfolio, has been employed by MFS since 1991.
[end screened box]
5
<PAGE>
Performance Summary
The information below and on the following page illustrates the historical
performance of MFS Total Return Fund Class A shares in comparison to various
market indicators. Class A share results reflect the deduction of the 4.75%
maximum sales charge; benchmark comparisons are unmanaged and do not reflect
any fees or expenses. You cannot invest in an index. All results reflect the
reinvestment of all dividends and capital gains.
Class B shares were offered effective August 23, 1993. Information on Class B
share performance appears on the next page. Class C shares were offered
effective August 1, 1994. Information on Class C share performance appears on
the next page.
Growth of a Hypothetical $10,000 Investment
(For the 5-Year Period Ended September 30, 1996)
[typeset representation of line chart]
MFS Total Consumer Lehman
Return Fund Price Brothers S&P 500
Class A Index--U.S. Gov't/Corp. Composite
9/91 9525 10000 10000 10000
9/92 10692 10299 11272 11099
9/93 12651 10576 12199 12542
9/94 12516 10889 11997 13000
9/95 14813 11166 13351 16850
9/96 16813 11486 14036 20260
[end line chart]
Growth of a Hypothetical $10,000 Investment
(For the 10-Year Period Ended September 30, 1996)
[typeset representation of line chart]
MFS Total Lehman Consumer
Return Fund S&P 500 Brothers Price
Class A Composite Gov't/Corp. Index--U.S.
9/86 9522 10000 10000 10000
9/87 12128 14335 9962 10430
9/88 11693 12555 11234 10866
9/89 14497 16684 12506 11337
9/90 13686 15139 13350 12036
9/91 16732 19849 15467 12444
9/92 18783 22030 17514 12815
9/93 22224 24893 19519 13160
9/94 21987 25803 18710 13550
9/95 26022 33445 21395 13895
9/96 29536 40213 22359 14293
[end line chart]
6
<PAGE>
Performance Summary - continued
<TABLE>
<CAPTION>
Average Annual Total Returns 1 Year 3 Years 5 Years 10 Years
- ---------------------------------------- --------- --------- --------------------
<S> <C> <C> <C> <C>
MFS Total Return Fund (Class A)
at net asset value +13.50% +9.94% +12.03% +11.98%
- ---------------------------------------- --------- --------- --------------------
MFS Total Return Fund (Class A)
including 4.75% sales charge +8.12% +8.18% +10.95% +11.44%
- ---------------------------------------- --------- --------- --------------------
MFS Total Return Fund (Class B)
without CDSC +12.49% +9.02% +11.45% +11.69%
- ---------------------------------------- --------- --------- --------------------
MFS Total Return Fund (Class B)
with CDSC +8.49% +8.17% +11.19% +11.69%
- ---------------------------------------- --------- --------- --------------------
MFS Total Return Fund (Class C)
without CDSC +12.67% +9.40% +11.70% +11.82%
- ---------------------------------------- --------- --------- --------------------
MFS Total Return Fund (Class C)
with CDSC +11.67% +9.40% +11.70% +11.82%
- ---------------------------------------- --------- --------- --------------------
Average balanced fund** +12.46% +10.11% +10.90% +11.07%
- ---------------------------------------- --------- --------- --------------------
Lehman Brothers Government Corporate
Bond Index +4.50% +4.63% +7.65% +8.38%
- ---------------------------------------- --------- --------- --------------------
Standard & Poor's 500 Composite Index +20.32% +17.34% +15.17% +14.93%
- ---------------------------------------- --------- --------- --------------------
Consumer Price Index* +2.85% +2.79% +2.81% +3.64%
- ---------------------------------------- --------- --------- --------------------
</TABLE>
*The Consumer Price Index is a popular measure of change in prices.
**Source: Lipper Analytical Services Inc.
Class A SEC results include the maximum 4.75% sales charge. Class B SEC
results reflect the applicable contingent deferred sales charge (CDSC), which
declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. See the
prospectus for details. Class C shares have no initial sales charge, but
along with Class B shares, have higher annual fees and expenses than Class A
shares. Class C share purchases made on or after April 1, 1996 will be
subject to a 1% CDSC if redeemed within 12 months of purchase.
Class B and Class C share performance includes the performance of the Fund's
Class A shares for periods prior to the commencement of offering of Class B
shares on August 23, 1993 and of Class C shares on August 1, 1994. Sales
charges and operating expenses for Class A, Class B, and Class C shares
differ. The Class A share performance, which is included within the Class B
and Class C share SEC performance, has been adjusted to reflect the CDSC
generally applicable to Class B and Class C shares rather than the initial
sales charge generally applicable to Class A shares. Class B and Class C
share performance has not been adjusted, however, to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for
Class A shares.
7
<PAGE>
Performance Summary - continued
All results are historical and therefore, are not an indication of future
results. The principal value and income return of an investment in a mutual
fund will vary with changes in market conditions, and shares, when redeemed,
may be worth more or less than their original cost.
[screened box]
Tax Form Summary
In January 1997, shareholders will be mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1996.
For the year ended September 30, 1996, the amount of distributions from income
eligible for the 70% dividends-received deduction for corporations came to
32.8%.
Federal Income Tax Information on Distributions
For the year ended September 30, 1996, distributions from long-term capital
gains were $121,623,591.
[end screened box]
[screen box]
Fund Facts
Strategy: The Fund's primary objective is to provide
above-average current income consistent with prudent
employment of capital.
Commencement of
investment operations: October 6, 1970
Size: $3.9 billion as of September 30, 1996
[end screened box]
8
<PAGE>
Portfolio Concentration
Top Ten Equity Holdings
<TABLE>
<S> <C>
United Technologies General Electric Co.
Aerospace, defense, and building equipment Diversified manufacturing and services
company conglomerate
Royal Dutch Petroleum National City Bankshares
Oil exploration and production company Central U.S. Bank
Chase Manhattan Corp. Eastman Kodak Company
Money center bank Photographic equipment and supplies
Philip Morris Companies, Inc. SmithKline Beecham
Tobacco, food, and beverage conglomerate Pharmaceutical products company
British Petroleum CSX Corp.
Oil exploration and production company Railroad, shipping, and distribution company
</TABLE>
Largest Sectors
[typeset representation of pie chart]
Other 31.5%
Financial Services 20.3%
Energy 17.0%
Industrial Goods
and Services 12.3%
Utilities and
Communications 10.8%
Health Care 8.1%
[end pie chart]
9
<PAGE>
Portfolio of Investments - September 30, 1996
<TABLE>
<CAPTION>
Non-Convertible Bonds - 38.6%
- ------------------------------------------------------------------------------------------ --------------- ----------------
Principal Amount
Issuer (000 Omitted) Value
----------------------------------------------------------------------------------------- ---------------- ---------------
<S> <C> <C>
Banks and Credit Companies - 1.0%
Advanta Corp., 7.47s, 2001 $ 9,395 $ 9,477,206
Capital One Bank, 6.875s, 2000 17,765 17,652,903
Export-Import Bank of Korea, 6.375s, 2006 3,000 2,775,000
First National Bank of Boston, 7.375s, 2006 2,500 2,503,125
Union Bank of Switzerland, 7.25s, 2006 5,000 5,012,500
---------------
$ 37,420,734
----------------------------------------------------------------------------------------- ---------------- ---------------
Corporate Asset Backed - 2.1%
Beneficial Mortgage Corp. 96-2, 5.585s, 2026 $25,000 $ 25,000,000
Chevy Chase Master Credit Card Trust, 96-A, 5.619s, 2001 32,500 32,500,000
Continental Air, 96-2, 10.22s, 2014## 5,875 6,792,969
First Union Corp., 5.482s, 2003 12,500 12,515,625
Merrill Lynch Mortgage Investors, Inc., 9.7s, 2010 253 257,845
Merrill Lynch Mortgage Investors, Inc., 91-C, "B", 8.9s, 2011 1,953 1,965,792
Merrill Lynch Mortgage Investors, Inc., 9s, 2011 702 720,946
Merrill Lynch Mortgage Investors, Inc., 9.25s, 2011 242 248,984
Merrill Lynch Mortgage Investors, Inc., 94-M1, 8.073s, 2022+ 4,000 2,985,000
---------------
$ 82,987,161
----------------------------------------------------------------------------------------- ---------------- ---------------
Financial Institutions - 1.7%
Alex Brown, Inc., 7.625s, 2005 $ 4,215 $ 4,225,158
Auburn Hills Trust, 12s, 2020 7,795 11,393,250
Bankers Trust of New York Corp., 7.375s, 2008 12,913 12,734,543
Contifinancial Corp., 8.375s, 2003 3,800 3,790,500
Fairfax Financial Holdings, 8.3s, 2026 5,225 5,263,665
HubCo., Inc., 8.2s, 2006## 1,965 1,994,829
Lehman Brothers, Inc., 7.5s, 2026 15,600 15,799,056
Salton Sea Funding Corp., 7.37s, 2005 5,250 5,130,405
Salton Sea Funding Corp., 7.84s, 2010 5,250 5,155,710
Salton Sea Funding Corp., 8.3s, 2011 2,500 2,531,800
---------------
$ 68,018,916
----------------------------------------------------------------------------------------- ---------------- ---------------
Foreign - U.S. Dollar Denominated - 1.0%
Domtar, Inc., 9.5s, 2016 $ 2,700 $ 2,821,500
Financiera Energetica Nacional S.A., 6.625s, 1996## 5,360 5,360,000
Financiera Energetica Nacional S.A., 9.375s, 2006## 1,360 1,366,800
Hidroelectrica Alicura, 8.375s, 1999## 6,244 6,009,850
Naples, Italy, 7.52s, 2006 4,725 4,780,755
Ocensa, 9.35s, 2005## 3,500 3,468,637
Province of Quebec, Canada, 6.5s, 2006 3,125 2,948,466
Province of Saskatchewan, Canada, 9.375s, 2020 500 593,810
Republic of Argentina, 9.25s, 2001 3,000 2,943,750
Republic of Colombia, 8.75s, 1999 3,640 3,744,650
Republic of Colombia, 8.7s, 2016 7,610 6,991,688
---------------
$ 41,029,906
----------------------------------------------------------------------------------------- ---------------- ---------------
Industrials - 5.1%
Building - 0.2%
Owens Corning Fiberglass Corp., 8.875s, 2002 $ 5,390 $ 5,755,819
Owens Corning Fiberglass Corp., 9.9s, 2015## 2,500 2,725,000
---------------
$ 8,480,819
----------------------------------------------------------------------------------------- ---------------- ---------------
10
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Principal Amount
Issuer (000 Omitted) Value
----------------------------------------------------------------------------------------- ---------------- ---------------
Industrials - continued
Consumer Goods and Services - 0.3%
Fingerhut Cos., 7.375s, 1999## $ 3,000 $ 2,996,250
Philip Morris Cos., Inc., 7.25s, 2001 2,150 2,158,063
Philip Morris Cos., Inc., 7.65s, 2008 2,970 2,968,307
Tupperware Financial, 7.25s, 2006 3,500 3,494,330
---------------
$ 11,616,950
----------------------------------------------------------------------------------------- ---------------- ---------------
Entertainment - 1.1%
Paramount Communications, 5.875s, 2000 $ 3,558 $ 3,395,969
Time Warner, Inc., 7.45s, 1998 12,460 12,594,443
Time Warner, Inc., 7.95s, 2000 6,850 7,007,619
Time Warner, Inc., 8.375s, 2023 21,540 21,261,057
---------------
$ 44,259,088
----------------------------------------------------------------------------------------- ---------------- ---------------
Food and Beverage Products - 0.9%
Borden, Inc., 0s, 1997## $10,000 $ 9,564,900
Coca-Cola Enterprises, 7s, 2026 4,750 4,740,785
Nabisco, Inc., 7.55s, 2015 9,160 8,688,535
RJR Nabisco, Inc., 8.75s, 2005 6,800 6,673,248
RJR Nabisco, Inc., 8.75s, 2007 6,075 5,907,148
---------------
$ 35,574,616
----------------------------------------------------------------------------------------- ---------------- ---------------
Forest and Paper Products - 0.6%
Canadian Pacific Forest, 9.25s, 2002 $11,840 $ 12,541,638
Georgia Pacific Corp., 9.875s, 2021 8,215 8,892,655
Stone Container Corp., 9.875s, 2001 1,875 1,884,375
---------------
$ 23,318,668
----------------------------------------------------------------------------------------- ---------------- ---------------
Medical and Health Products - 0.1%
Fisher Scientific, Inc., 7.125s, 2005 $ 4,595 $ 4,391,809
----------------------------------------------------------------------------------------- ---------------- ---------------
Medical and Health Technology and Services - 0.1%
Tenet Healthcare, 8.625s, 2003 $ 2,835 $ 2,948,400
----------------------------------------------------------------------------------------- ---------------- ---------------
Oils - 0.8%
Mitchell Energy & Development, 5.1s, 1997 $11,350 $ 11,305,281
Mitchell Energy & Development, 9.25s, 2002 2,375 2,491,779
Oryx Energy Co., 10s, 2001 3,800 4,127,142
Oryx Energy Co., 8s, 2003 3,650 3,638,576
Oryx Energy Co., 8.375s, 2004 8,390 8,484,388
---------------
$ 30,047,166
----------------------------------------------------------------------------------------- ---------------- ---------------
Printing and Publishing - 0.3%
News America Holdings, Inc., 10.125s, 2012 $10,000 $ 11,239,600
----------------------------------------------------------------------------------------- ---------------- ---------------
Restaurants and Lodging - 0.1%
RHG Finance Corp., 8.875s, 2005 $ 4,125 $ 4,284,845
----------------------------------------------------------------------------------------- ---------------- ---------------
Special Products and Services - 0.4%
Loewen Group International, Inc., 8s, 2001## $ 5,540 $ 5,533,075
Mark IV Industries, Inc., 7.75s, 2006 8,800 8,481,000
---------------
$ 14,014,075
----------------------------------------------------------------------------------------- ---------------- ---------------
Steel - 0.1%
USX-Marathon Group, 9.8s, 2001 $ 5,000 $ 5,520,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Stores - 0.1%
Price/Costco, Inc., 7.125s, 2005 $ 4,585 $ 4,465,882
----------------------------------------------------------------------------------------- ---------------- ---------------
Total Industrials $ 200,161,918
--------------------------------------------------------------------------------------- ---------------- ---------------
11
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Principal Amount
Issuer (000 Omitted) Value
----------------------------------------------------------------------------------------- ---------------- ---------------
Insurance - 1.8%
American Life Holdings Co., 11.25s, 2004 $ 4,880 $ 5,477,800
Liberty Mutual Insurance Co., 8.2s, 2007## 20,120 21,048,739
Manufacturers' Life Insurance, 7.875s, 2005## 12,770 13,117,983
Massachusetts Mutual Life, 7.625s, 2023## 2,500 2,429,625
Metropolitan Life Insurance, 7.7s, 2015## 4,750 4,597,786
Nationwide Mutual Insurance, 7.5s, 2024## 10,925 9,966,004
New York Life Insurance Co., 7.5s, 2023 3,600 3,379,176
PennCorp Financial Group, Inc., 9.25s, 2003 1,500 1,537,500
Phoenix Re Corp., 9.75s, 2003 1,000 1,055,000
Travelers' Group, Inc., 7.875s, 2025 8,685 8,749,964
---------------
$ 71,359,577
----------------------------------------------------------------------------------------- ---------------- ---------------
Real Estate - 0.2%
Taubman Realty Group, 8s, 2001 $ 7,580 $ 7,876,152
--------------------------------------------------------------------------------------- ---------------- ---------------
Telecommunications - 1.0%
360 Communications Co., 7.5s, 2006 $ 2,293 $ 2,228,957
TCI Communications, Inc., Floating Rate, 2003 8,250 8,250,000
Tele-Communications, Inc., 7.375s, 2000 2,500 2,500,900
Tele-Communications, Inc., 7.38s, 2001 5,250 5,245,065
Tele-Communications, Inc., 10.125s, 2022 6,000 6,511,980
Tele-Communications, Inc., 9.25s, 2023 12,047 11,724,261
Viacom, Inc., 7.625s, 2016 3,540 3,130,280
---------------
$ 39,591,443
----------------------------------------------------------------------------------------- ---------------- ---------------
Transportation - 1.4%
AMR Corp., 9.75s, 2021 $ 3,755 $ 4,409,346
Continental Airlines, 9.5s, 2013 3,970 4,373,431
Delta Air Lines, Inc., 9.75s, 2021 2,420 2,793,914
Delta Air Lines, Inc., 10.375s, 2022 9,450 11,509,911
Jet Equipment Trust, 9.41s, 2010## 3,365 3,810,290
Jet Equipment Trust, 11.44s, 2014## 4,700 5,268,747
Jet Equipment Trust, 8.64s, 2015## 3,339 3,557,974
Jet Equipment Trust, 10.69s, 2015## 1,250 1,498,900
Qantas Airways, Ltd., 7.5s, 2003## 5,690 5,693,471
US Air, Inc., 6.76s, 2008 3,000 2,868,750
United Airlines, 9.125s, 2012 2,500 2,692,500
United Airlines, 96, 7.27s, 2013 5,000 4,758,750
---------------
$ 53,235,984
----------------------------------------------------------------------------------------- ---------------- ---------------
U.S. Government Agencies - 2.5%
Federal Home Loan Mortgage Corporation - 0.3%
FHLMC, 8.5s, 2025 $10,613 $ 10,897,774
----------------------------------------------------------------------------------------- ---------------- ---------------
Federal National Mortgage Association - 2.2%
FNMA, 7s, 2026 $15,942 $ 15,379,309
FNMA, 7.5s, 2010 - 2011 50,239 50,537,150
FNMA, 8.5s, 2003 - 2010 20,917 21,677,978
FNMA, 9s, 2001 - 2006 1,394 1,448,820
---------------
$ 89,043,257
----------------------------------------------------------------------------------------- ---------------- ---------------
Total U.S. Government Agencies $ 99,941,031
--------------------------------------------------------------------------------------- ---------------- ---------------
12
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Principal Amount
Issuer (000 Omitted) Value
----------------------------------------------------------------------------------------- ---------------- ---------------
U.S. Government Guaranteed - 16.5%
Small Business Administration
SBA, 8.8s, 2011 $ 519 $ 556,814
----------------------------------------------------------------------------------------- ---------------- ---------------
U.S. Treasury Obligations - 16.5%
U.S. Treasury Notes, 8.5s, 1997 $32,750 $ 33,317,885
U.S. Treasury Notes, 6s, 1998 2,000 1,996,406
U.S. Treasury Notes, 7.25s, 1998 44,000 44,715,000
U.S. Treasury Notes, 8.875s, 1998 38,900 40,972,592
U.S. Treasury Notes, 6s, 1999 1,165 1,156,810
U.S. Treasury Notes, 9.125s, 1999 77,010 82,292,115
U.S. Treasury Notes, 6.875s, 2000 1,000 1,015,780
U.S. Treasury Notes, 8.5s, 2000 71,980 76,591,039
U.S. Treasury Notes, 6.25s, 2001 38,000 37,697,140
U.S. Treasury Notes, 6.5s, 2001 26,470 26,450,700
U.S. Treasury Notes, 6.625s, 2001 41,000 41,249,690
U.S. Treasury Notes, 7s, 2006 71,833 73,325,690
U.S. Treasury Bonds, 12s, 2005 18,675 25,065,398
U.S. Treasury Bonds, 12s, 2013 35,070 49,317,188
U.S. Treasury Bonds, 11.25s, 2015 9,200 13,212,028
U.S. Treasury Bonds, 6s, 2026 63,787 56,052,826
U.S. Treasury Bonds, 6.75s, 2026 46,520 45,465,857
---------------
$ 649,894,144
----------------------------------------------------------------------------------------- ---------------- ---------------
Total U.S. Government Guaranteed $ 650,450,958
----------------------------------------------------------------------------------------- ---------------- ---------------
Utilities - Electric - 3.3%
Arkansas Power & Light Co., 8.75s, 2026 $ 2,150 $ 2,154,687
Central Maine Power Co., 7.98s, 1996 5,000 5,000,350
Central Maine Power Co., 7.5s, 1997 1,000 1,004,970
Central Maine Power Co., 7.45s, 1999 2,500 2,470,275
Cleveland Electric Illumination, 8.68s, 2001 3,500 3,563,980
DQU II Funding Corp., 8.7s, 2016 6,475 6,676,632
Edelnor S.A., 7.75s, 2006## 1,915 1,905,119
El Paso Electric Co., 8.25s, 2003 7,000 6,930,000
First PV Funding Corp., 10.3s, 2014 7,810 8,288,363
First PV Funding Corp., 10.15s, 2016 8,993 9,532,580
Long Island Lighting Co., 8.75s, 1997 8,000 8,071,120
Long Island Lighting Co., 7.625s, 1998 8,150 8,162,470
Long Island Lighting Co., 7.125s, 2005 4,000 3,553,640
Long Island Lighting Co., 8.9s, 2019 10,575 9,894,076
Long Island Lighting Co., 9.75s, 2021 7,000 6,980,820
Long Island Lighting Co., 9.625s, 2024 16,390 16,333,455
Louisiana Power & Light Co., 10.67s, 2017 3,065 3,279,866
Louisiana Power & Light Co., 8.75s, 2026 1,075 1,053,500
Midland Cogeneration Venture Corp., 10.33s, 2002 3,098 3,253,041
Midland Funding Corp. II, "A", 11.75s, 2005 2,220 2,391,895
Midland Funding Corp., "B", 13.25s, 2006 3,970 4,522,306
Niagara Mohawk Power Co., 8s, 2004 3,835 3,587,259
Pacificorp Holdings, 7.2s, 2006## 8,320 8,093,779
Texas & New Mexico Power Co., 12.5s, 1999 2,848 3,104,548
---------------
$ 129,808,731
----------------------------------------------------------------------------------------- ---------------- ---------------
13
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Principal Amount
Issuer (000 Omitted) Value
----------------------------------------------------------------------------------------- ---------------- ---------------
Utilities - Gas - 1.0%
California Energy Co., 0s, 2004 $ 5,005 $ 5,080,075
Coastal Corp., 10.25s, 2004 6,000 6,977,280
Coastal Corp., 7.75s, 2035 11,390 10,948,638
Gulf Canada Resources Ltd., 8.35s, 2006 4,420 4,418,895
Louis Dreyfus Natural Gas, 9.25s, 2004 2,925 3,012,750
NGC Corp., 6.75s, 2005 2,000 1,909,580
Southern Union Co., 7.6s, 2024 5,165 4,905,201
Texas Eastern Corp., 9s, 1997 1,000 1,008,750
---------------
$ 38,261,169
----------------------------------------------------------------------------------------- ---------------- ---------------
Total Non-Convertible Bonds (Identified Cost, $1,530,985,099) $1,520,143,680
----------------------------------------------------------------------------------------- ---------------- ---------------
Convertible Bonds - 2.5%
----------------------------------------------------------------------------------------- ---------------- ---------------
Aerospace - 0.1%
Hexcel Corp., 7s, 2003 $ 1,500 $ 2,113,125
----------------------------------------------------------------------------------------- ---------------- ---------------
Automotive
Pep Boys--Manny, Moe, Jack, 0s, 2011 $ 1,000 $ 563,750
----------------------------------------------------------------------------------------- ---------------- ---------------
Building
Continental Homes, 6.875s, 2002 $ 500 $ 490,625
----------------------------------------------------------------------------------------- ---------------- ---------------
Business Services
CS First Boston, Inc., 3s, 2001## $ 500 $ 505,000
Protection One Alarm, 6.75s, 2003 500 486,875
---------------
$ 991,875
----------------------------------------------------------------------------------------- ---------------- ---------------
Chemicals - 0.2%
Sandoz, 2s, 2002## $ 1,450 $ 1,609,500
Valhi, Inc., 0s, 2007 16,719 7,335,461
---------------
$ 8,944,961
----------------------------------------------------------------------------------------- ---------------- ---------------
Computer Software - Personal Computers
Synoptics Communications, 5.25s, 2003## $ 750 $ 712,500
----------------------------------------------------------------------------------------- ---------------- ---------------
Computer Software - Systems - 0.1%
3Com Corp., 10.25s, 2001## $ 250 $ 475,314
S3, Inc., 5.75s, 2003## 1,000 1,233,750
Safeguard Scientific, 6s, 2006## 1,500 1,991,250
SCI System, Inc., 5s, 2006## 750 988,125
Solectron Corp., 6s, 2006## 1,000 1,017,500
---------------
$ 5,705,939
----------------------------------------------------------------------------------------- ---------------- ---------------
Conglomerates - 0.1%
Cooper Industries, 7.05s, 2015 $ 2,000 $ 2,192,500
----------------------------------------------------------------------------------------- ---------------- ---------------
Consumer Goods and Services - 0.1%
Coleman Worldwide Corp., 0s, 2013 $ 3,000 $ 873,750
Fieldcrest Cannon Industries, 6s, 2012 1,860 1,339,200
---------------
$ 2,212,950
----------------------------------------------------------------------------------------- ---------------- ---------------
Electrical Equipment
National Semiconductor, 6.5s, 2002## $ 1,500 $ 1,318,125
----------------------------------------------------------------------------------------- ---------------- ---------------
Electronics - 0.1%
ADT Operations, Inc., 0s, 2010 $ 2,000 $ 1,120,000
Dovatron International, Inc., 6s, 2002## 500 443,125
Thermo-Electron, 4.25s, 2003## 1,250 1,523,439
Xilinx, Inc., 5.25s, 2002## 500 492,500
---------------
$ 3,579,064
--------------------------------------------------------------------------------------- ---------------- ---------------
14
<PAGE>
Portfolio of Investments - continued
Convertible Bonds - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Principal Amount
Issuer (000 Omitted) Value
----------------------------------------------------------------------------------------- ---------------- ---------------
Financial Institutions
Cityscape, 6s, 2006## $ 1,000 $ 1,080,000
RAC Financial Group, 7.25s, 2003## 500 677,500
---------------
$ 1,757,500
----------------------------------------------------------------------------------------- ---------------- ---------------
Food and Beverage Products - 0.1%
Grand Metropolitan Public Ltd., 6.5s, 2000## $ 2,000 $ 2,317,500
----------------------------------------------------------------------------------------- ---------------- ---------------
Insurance - 0.3%
Equitable Cos., Inc., 6.125s, 2024 $ 8,000 $ 9,310,000
Italy Rep, 5s, 2001 1,000 1,015,000
---------------
$ 10,325,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Medical and Health Products - 0.3%
Alza Corp., 0s, 2014 $ 7,000 $ 2,913,750
North American Vaccine, 6.5s, 2003## 2,250 2,688,750
Roche Holdings, Inc., 0s, 2008## 5,000 3,750,000
Roche Holdings, Inc., 0s, 2010 4,230 1,829,475
Ventritex, Inc., 5.75s, 2001 1,300 1,517,750
---------------
$ 12,699,725
----------------------------------------------------------------------------------------- ---------------- ---------------
Medical and Health Technology and Services - 0.1%
National Health Investors, 7.75s, 2001 $ 500 $ 526,875
Omega Healthcare Investors, 8.5s, 2001 500 524,375
Quintiles Transnational, 4.25s, 2000## 1,250 1,351,562
---------------
$ 2,402,812
----------------------------------------------------------------------------------------- ---------------- ---------------
Oils - 0.1%
Pogo Producing, 5.5s, 2006## $ 2,000 $ 2,060,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Oil Services
Nabors Industries, 5s, 2006 $ 1,350 $ 1,358,438
----------------------------------------------------------------------------------------- ---------------- ---------------
Pollution Control - 0.2%
Sanifill, Inc., 5s, 2006 $ 1,250 $ 1,612,500
Thermo Terratech, 4.625s, 2003## 500 480,000
U.S. Filter, 6s, 2005## 2,000 3,852,500
United Waste Systems, Inc., 4.5s, 2001## 2,000 2,385,000
---------------
$ 8,330,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Real Estate Investment Trusts - 0.1%
Liberty Property Trust, 8s, 2001 $ 3,930 $ 4,259,138
----------------------------------------------------------------------------------------- ---------------- ---------------
Restaurants and Lodging - 0.1%
HFS, Inc., 4.75s, 2003 $ 250 $ 288,125
Hilton Hotels Corp., 5s, 2006 750 802,500
Marriott, Inc., 0s, 2011## 2,000 1,120,000
---------------
$ 2,210,625
----------------------------------------------------------------------------------------- ---------------- ---------------
Special Products and Services - 0.2%
Cemex S.A., 4.25s, 1997## $ 5,500 $ 5,273,125
Checkpoint Systems, 5.25s, 2005 500 730,625
---------------
$ 6,003,750
----------------------------------------------------------------------------------------- ---------------- ---------------
Stores - 0.2%
Federated Department Stores, 5s, 2003 $ 1,000 $ 1,123,750
Home Depot, Inc., 3.25s, 2001 400 406,000
Men's Wearhouse, Inc., 5.25s, 2003 750 736,875
Office Depot, Inc., 0s, 2008 3,000 1,852,500
Saks Holdings, Inc., 5.5s, 2006 2,245 2,365,668
Staples, Inc., 4.5s, 2000## 500 581,875
15
<PAGE>
Portfolio of Investments - continued
Convertible Bonds - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Principal Amount
Issuer (000 Omitted) Value
----------------------------------------------------------------------------------------- ---------------- ---------------
Stores - continued
U.S. Office Products Co., 5.5s, 2001 $ 500 $ 620,000
U.S. Office Products Co., 5.5s, 2003 1,500 1,395,000
---------------
$ 9,081,668
----------------------------------------------------------------------------------------- ---------------- ---------------
Telecommunications - 0.1%
Broadband Technologies, 5s, 2001## $ 250 $ 199,063
Jacor Communications, 0s, 2011 2,000 1,025,000
Tele-Communications, 4.5s, 2006 2,420 1,963,225
Turner Broadcasting Systems, Inc., 0s, 2007## 3,000 1,443,750
---------------
$ 4,631,038
----------------------------------------------------------------------------------------- ---------------- ---------------
Total Convertible Bonds (Identified Cost, $84,494,454) $ 96,262,608
----------------------------------------------------------------------------------------- ---------------- ---------------
Preferred Stocks - 0.3%
---------------------------------------------------------------------------------------------------------------------------
Shares
----------------------------------------------------------------------------------------- ---------------- ---------------
Insurance - 0.1%
Aetna Capital LLC. 9.5%, MIPS 171,400 $ 4,649,225
----------------------------------------------------------------------------------------- ---------------- ---------------
Metals and Minerals
Conagra Capital, "A", 9% 35,900 $ 933,400
----------------------------------------------------------------------------------------- ---------------- ---------------
Steel - 0.2%
USX Capital LLC, 8.75% 277,100 $ 6,892,863
----------------------------------------------------------------------------------------- ---------------- ---------------
Total Preferred Stocks (Identified Cost, $11,934,330) $ 12,475,488
----------------------------------------------------------------------------------------- ---------------- ---------------
Common Stocks - 50.9%
---------------------------------------------------------------------------------------------------------------------------
U.S. Stocks - 49.3%
Aerospace - 2.9%
Allied Signal, Inc. 265,000 $ 17,456,875
General Dynamics Corp. 81,000 5,578,875
Lockheed Martin Corp. 126,000 11,355,750
McDonnell Douglas Co. 160,000 8,400,000
Raytheon Co. 353,500 19,663,438
United Technologies Corp. 425,324 51,092,046
---------------
$ 113,546,984
----------------------------------------------------------------------------------------- ---------------- ---------------
Agricultural Products - 0.3%
AGCO Corp. 300,000 $ 7,650,000
Case Corp. 100,000 4,875,000
---------------
$ 12,525,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Airlines - 0.1%
America West Airlines, "B"* 424,800 $ 4,991,400
----------------------------------------------------------------------------------------- ---------------- ---------------
Apparel and Textiles - 0.4%
Springs Industries, Inc. 45,000 $ 2,002,500
VF Corp. 202,700 12,187,337
---------------
$ 14,189,837
----------------------------------------------------------------------------------------- ---------------- ---------------
Automotive - 1.7%
Dana Corp. 200,000 $ 6,050,000
Ford Motor Co. 530,677 16,583,656
General Motors Corp. 186,669 8,960,113
Goodrich (B.F.) Co. 566,000 25,540,750
Goodyear Tire & Rubber Co. 76,600 3,533,175
Volvo Aktiebolaget, "B", ADR 210,000 4,515,000
---------------
$ 65,182,694
----------------------------------------------------------------------------------------- ---------------- ---------------
16
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Issuer Shares Value
- ----------------------------------------------------------------------------------------- ---------------- ---------------
U.S. Stocks - continued
Business Machines - 0.7%
Digital Equipment Corp.* 430,000 $ 15,372,500
International Business Machines Corp. 45,000 5,602,500
Texas Instruments, Inc. 34,500 1,901,813
Xerox Corp. 105,000 5,630,625
---------------
$ 28,507,438
----------------------------------------------------------------------------------------- ---------------- ---------------
Business Services - 0.1%
Storage Trust Realty 250,000 $ 5,437,500
----------------------------------------------------------------------------------------- ---------------- ---------------
Cellular Telephones - 0.1%
Telephone & Data Systems, Inc. 90,860 $ 3,657,115
----------------------------------------------------------------------------------------- ---------------- ---------------
Chemicals - 2.3%
Air Products & Chemicals, Inc. 86,600 $ 5,044,450
Betzdearborn, Inc. 70,000 3,675,000
Dexter Corp. 270,000 8,066,250
Dow Chemical Co. 148,900 11,949,225
du Pont (E.I.) de Nemours, Inc. 235,000 20,738,750
PPG Industries, Inc. 80,000 4,350,000
Praxair, Inc. 380,100 16,344,300
Rohm & Haas Co. 184,000 12,052,000
Witco Corp. 299,010 9,829,954
---------------
$ 92,049,929
----------------------------------------------------------------------------------------- ---------------- ---------------
Conglomerates - 0.2%
Eastern Enterprises 215,000 $ 8,116,250
----------------------------------------------------------------------------------------- ---------------- ---------------
Construction Services - 0.2%
Champion International Corp. 125,000 $ 5,734,375
----------------------------------------------------------------------------------------- ---------------- ---------------
Consumer Goods and Services - 2.7%
American Brands, Inc. 222,200 $ 9,387,950
Colgate-Palmolive Co. 156,300 13,578,563
Gillette Co. 85,600 6,173,900
Olin Corp. 149,200 12,532,800
Philip Morris Cos., Inc. 455,400 40,872,150
Rubbermaid, Inc. 171,300 4,196,850
Sherwin Williams Co. 152,400 7,067,550
UST, Inc. 405,000 11,998,125
---------------
$ 105,807,888
----------------------------------------------------------------------------------------- ---------------- ---------------
Electrical Equipment - 2.0%
Alcatel Alsthom Compagnie, ADR 92,480 $ 1,560,600
Cooper Industries 150,000 6,487,500
Emerson Electric Co. 83,000 7,480,375
General Electric Co. 442,372 40,255,852
Honeywell, Inc. 387,000 24,429,375
---------------
$ 80,213,702
----------------------------------------------------------------------------------------- ---------------- ---------------
Electronics
Analog Devices, Inc.* 59,900 $ 1,624,788
----------------------------------------------------------------------------------------- ---------------- ---------------
Financial Institutions - 6.7%
Advanta Corp., Class "B" 91,300 $ 3,903,075
American Express Co. 290,000 13,412,500
Associates First Capital, "A" 61,800 2,533,800
Bank of Boston Corp. 475,300 27,507,988
Bank of New York, Inc. 842,504 24,748,555
17
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Issuer Shares Value
----------------------------------------------------------------------------------------- ---------------- ---------------
U.S. Stocks - continued
Financial Institutions - continued
Bank United Corp., "A"* 138,800 $ 3,452,650
Barnett Banks, Inc. 120,000 4,050,000
Beneficial Corp. 120,000 6,900,000
Chase Manhattan Corp. 517,848 41,492,571
Comerica, Inc. 30,000 1,545,000
Corestates Financial Corp. 128,817 5,571,335
Crestar Financial Corp. 100,000 5,900,000
Federal Home Loan Mortgage Corp. 202,700 19,839,262
Fleet Financial Group, Inc. 328,900 14,636,050
National City Corp. 856,300 36,071,638
NationsBank Corp. 251,000 21,805,625
Northern Trust Co. 114,000 7,495,500
Republic of New York Corp. 65,200 4,506,950
Southern National Corp. 357,000 11,870,250
Union Planters Corp. 175,000 6,212,500
Wells Fargo & Co. 2 520
---------------
$ 263,455,769
----------------------------------------------------------------------------------------- ---------------- ---------------
Food and Beverage Products - 1.0%
Anheuser-Busch Cos., Inc. 100,000 $ 3,762,500
Dimon, Inc. 172,200 3,293,325
General Mills, Inc. 358,000 21,614,250
McCormick & Co. Inc. 83,700 1,956,488
PepsiCo, Inc. 298,400 8,429,800
---------------
$ 39,056,363
----------------------------------------------------------------------------------------- ---------------- ---------------
Forest and Paper Products - 0.4%
Kimberly Clark Corp. 113,500 $ 10,002,188
Weyerhaeuser Co. 126,700 5,844,038
---------------
$ 15,846,226
----------------------------------------------------------------------------------------- ---------------- ---------------
Insurance - 2.0%
Aetna, Inc. 40,300 $ 2,836,113
Allstate Corp. 298,800 14,715,900
CIGNA Corp. 183,800 22,033,025
Conseco, Inc. 40,000 1,970,000
GCR Holdings Ltd. 183,200 4,419,700
ITT Hartford Group, Inc. 39,300 2,318,700
St. Paul Cos., Inc. 198,000 10,989,000
Torchmark Corp. 222,000 10,184,250
Travelers, Inc. 183,854 9,031,803
---------------
$ 78,498,491
----------------------------------------------------------------------------------------- ---------------- ---------------
Machinery - 0.6%
Deere & Co., Inc. 290,000 $ 12,180,000
Sundstrand Corp. 146,000 5,694,000
York International Corp. 147,000 7,111,125
---------------
$ 24,985,125
----------------------------------------------------------------------------------------- ---------------- ---------------
Medical and Health Products - 3.4%
American Home Products Corp. 431,000 $ 27,476,250
Baxter International, Inc. 391,800 18,316,650
Lilly (Eli) & Co. 252,600 16,292,700
18
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Issuer Shares Value
----------------------------------------------------------------------------------------- ---------------- ---------------
U.S. Stocks - continued
Medical and Health Products - continued
Pharmacia & Upjohn 345,575 $ 14,254,969
Rhone-Poulenc Rorer, Inc. 298,500 21,977,062
Schering Plough Corp. 10,000 615,000
Smithkline Beecham PLC, ADR 480,100 29,226,089
Warner-Lambert Co. 60,000 3,960,000
---------------
$ 132,118,720
----------------------------------------------------------------------------------------- ---------------- ---------------
Medical and Health Technology and Services - 0.3%
Pacificare Health Systems, Inc., "B"* 75,000 $ 6,487,500
St. Jude Medical, Inc.* 125,000 5,046,875
---------------
$ 11,534,375
----------------------------------------------------------------------------------------- ---------------- ---------------
Metals and Minerals - 0.6%
Aluminum Companies of America 204,800 $ 12,083,200
Phelps Dodge Corp. 187,560 12,027,285
---------------
$ 24,110,485
----------------------------------------------------------------------------------------- ---------------- ---------------
Oils - 5.7%
Amoco Corp. 199,800 $ 14,085,900
Atlantic Richfield Co. 175,500 22,376,250
British Petroleum PLC, ADR 323,586 40,448,190
Exxon Corp. 202,936 16,894,422
Mobil Corp. 242,000 28,011,500
Occidental Petroleum Corp. 949,600 22,196,900
Reading & Bates Corp.* 51,106 1,386,250
Repsol S.A., ADR 145,580 4,822,338
Royal Dutch Petroleum Co., ADR 272,000 42,466,000
Sun, Inc. 84,582 1,945,386
Ultramar Corp. 95,000 2,873,750
USX-Marathon Group 1,197,400 25,893,775
---------------
$ 223,400,661
----------------------------------------------------------------------------------------- ---------------- ---------------
Oil Services - 0.4%
Schlumberger Ltd. 209,112 $ 17,669,964
----------------------------------------------------------------------------------------- ---------------- ---------------
Photographic Products - 0.8%
Eastman Kodak Co. 409,500 $ 32,145,750
----------------------------------------------------------------------------------------- ---------------- ---------------
Pollution Control - 0.3%
Browning-Ferris Industries, Inc. 180,700 $ 4,517,500
Laidlaw One, Inc. 44,000 1,881,000
WMX Technologies, Inc. 137,400 4,517,025
---------------
$ 10,915,525
----------------------------------------------------------------------------------------- ---------------- ---------------
Printing and Publishing - 0.7%
Gannett Co., Inc. 225,000 $ 15,834,375
Tribune Co., Inc. 162,750 12,694,500
---------------
$ 28,528,875
----------------------------------------------------------------------------------------- ---------------- ---------------
Railroads - 1.6%
Burlington Northern Santa Fe 288,000 $ 24,300,000
CSX Corp. 576,000 29,088,000
Illinois Central Corp. 348,500 11,021,313
---------------
$ 64,409,313
----------------------------------------------------------------------------------------- ---------------- ---------------
19
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Issuer Shares Value
----------------------------------------------------------------------------------------- ---------------- ---------------
U.S. Stocks - continued
Restaurants and Lodging - 0.2%
Felcor Suite Hotels, Inc. 185,600 $ 5,985,600
----------------------------------------------------------------------------------------- ---------------- ---------------
Real Estate Investment Trusts - 1.0%
Beacon Properties Corp. 93,100 $ 2,699,900
First Industrial Realty 79,500 2,057,062
Hong Kong Land Holdings 1,750,000 4,077,500
Hospitality Properties Trust 514,000 13,749,500
Meditrust Corp. 254,800 8,822,450
National Health Investors, Inc. 210,200 7,015,425
Public Storage, Inc. 71,400 1,615,425
---------------
$ 40,037,262
----------------------------------------------------------------------------------------- ---------------- ---------------
Special Products and Services - 0.2%
Stanley Works 299,600 $ 8,426,250
--------------------------------------------------------------------------------------- ---------------- ---------------
Stores - 1.4%
May Department Stores Co. 315,560 $ 15,344,105
Office Depot, Inc.* 126,200 2,981,475
Sears, Roebuck & Co. 582,400 26,062,400
Talbots, Inc. 150,000 4,500,000
Wal-Mart Stores, Inc. 185,700 4,897,838
---------------
$ 53,785,818
----------------------------------------------------------------------------------------- ---------------- ---------------
Telecommunications - 0.3%
Lucent Technologies 19,600 $ 899,150
Telefonica del Peru, "B", ADR 422,045 9,654,279
---------------
$ 10,553,429
----------------------------------------------------------------------------------------- ---------------- ---------------
Utilities - Electric - 2.8%
Allegheny Power System 160,000 $ 4,640,000
Carolina Power & Light Co. 164,800 5,685,600
Cinergy Corp. 345,000 10,651,875
CMS Energy Corp. 330,000 9,941,250
DPL, Inc. 108,000 2,524,500
Duke Power Co. 80,000 3,730,000
FPL Group, Inc. 470,000 20,327,500
Pacific Gas & Electric Co. 78,400 1,705,200
PECO Energy Co. 118,100 2,804,875
Pinnacle West Capital Corp. 315,000 9,331,875
Portland General Corp. 564,000 21,643,500
Scana Corp. 100,000 2,625,000
Sierra Pacific Resources 315,000 8,150,625
Texas Utilities Co. 166,000 6,577,750
---------------
$ 110,339,550
----------------------------------------------------------------------------------------- ---------------- ---------------
Utilities - Gas - 3.1%
Coastal Corp. 366,400 $ 15,114,000
Columbia Gas System, Inc. 100,000 5,600,000
K N Energy, Inc. 138,100 4,868,025
Pacific Enterprises 188,400 5,699,100
Panenergy Corp. 683,000 23,648,875
Questar Corp. 120,000 4,245,000
Sonat, Inc. 516,800 22,868,400
Tenneco, Inc. 107,400 5,383,425
20
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Issuer Shares Value
----------------------------------------------------------------------------------------- ---------------- ---------------
U.S. Stocks - continued
Utilities - Gas - continued
UGI Corp. 435,000 $ 10,222,500
Westcoast Energy, Inc. 50,000 800,000
Williams Cos., Inc. 425,012 21,675,612
---------------
$ 120,124,937
----------------------------------------------------------------------------------------- ---------------- ---------------
Utilities - Telephone - 2.1%
Ameritech Corp. 307,416 $ 16,177,767
AT&T Corp. 44,000 2,299,000
BellSouth Corp. 448,500 16,594,500
GTE Corp. 611,000 23,523,500
MCI Communications Corp. 891,000 22,831,875
---------------
$ 81,426,642
----------------------------------------------------------------------------------------- ---------------- ---------------
Total U.S. Stocks $1,938,940,030
----------------------------------------------------------------------------------------- ---------------- ---------------
Foreign Stocks - 1.6%
Canada - 0.2%
Canadian National Railway (Railroad) 355,600 $ 7,289,800
----------------------------------------------------------------------------------------- ---------------- ---------------
New Zealand - 0.2%
Lion Nathan Ltd. (Beverages) 3,008,500 $ 7,484,245
----------------------------------------------------------------------------------------- ---------------- ---------------
Spain - 0.1%
Acerinox (Iron and Steel) 28,800 $ 3,353,792
----------------------------------------------------------------------------------------- ---------------- ---------------
Switzerland - 0.6%
Ciba-Geigy AG (Pharmaceuticals) 17,700 $ 22,632,971
----------------------------------------------------------------------------------------- ---------------- ---------------
United Kingdom - 0.5%
PowerGen PLC (Utilities - Electric) 2,879,000 $ 21,841,246
----------------------------------------------------------------------------------------- ---------------- ---------------
Total Foreign Stocks $ 62,602,054
----------------------------------------------------------------------------------------- ---------------- ---------------
Total Common Stocks (Identified Cost, $1,494,901,539) $2,001,542,084
----------------------------------------------------------------------------------------- ---------------- ---------------
Convertible Preferred Stocks - 3.5%
----------------------------------------------------------------------------------------- ---------------- ---------------
Agricultural Products - 0.5%
Case Corp., $4.50 153,200 $ 18,613,800
----------------------------------------------------------------------------------------- ---------------- ---------------
Airlines
Continental Air Finance Trust, 8.5%## 10,000 $ 560,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Apparel and Textiles - 0.1%
Owens Corning Capital, 6.5%## 50,000 $ 2,600,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Banks and Credit Companies - 0.2%
First Chicago Corp., "B", 5.75% 91,000 $ 6,893,250
Washington Mutual, Inc., "D", $6.00 12,800 1,875,200
---------------
$ 8,768,450
----------------------------------------------------------------------------------------- ---------------- ---------------
Business Services - 0.1%
ALCO Standard Corp., $5.04 30,000 $ 2,730,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Computer Software - Systems
Wang Labs, Inc., "B", 6.5%## 25,000 $ 1,175,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Consumer Goods and Services - 0.1%
Corning Delaware LP, 6% 50,000 $ 2,825,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Entertainment - 0.2%
American Radio Systems Co., 7%## 55,000 $ 2,970,000
Bally Entertainment Corp., 8%, Prides 60,000 1,590,000
Golden Books Financing, 8.75%## 35,000 1,968,750
---------------
$ 6,528,750
----------------------------------------------------------------------------------------- ---------------- ---------------
21
<PAGE>
Portfolio of Investments - continued
Convertible Preferred Stocks - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Issuer Shares Value
----------------------------------------------------------------------------------------- ---------------- ---------------
Financial Institutions - 0.5%
American Express Co., DECS 10,000 $ 670,000
Cox Communications, 6% 43,000 860,000
First USA, Inc., 6.25% 10,000 475,000
Greenfield Capital Trust, 6%, Prides## 28,000 1,204,000
Jefferson Pilot Co., 7.25% 35,000 2,948,750
Merrill Lynch & Co., 6.25% 77,500 3,119,375
Merrill Lynch & Co., 6.5% 60,000 3,660,000
Penncorp Financial Group, $3.50## 79,900 4,554,300
Salomon, Inc., 7.625% 95,000 2,683,750
---------------
$ 20,175,175
----------------------------------------------------------------------------------------- ---------------- ---------------
Food and Beverage Products - 0.1%
Chiquita Brands, $3.75 10,000 $ 520,000
Dole Food Co., 7% 40,000 1,680,000
RJR Nabisco Holdings, 9.25%, "C" 604,700 3,250,263
---------------
$ 5,450,263
----------------------------------------------------------------------------------------- ---------------- ---------------
Insurance - 0.4%
Conseco, Inc., 7%, Prides 121,000 $ 10,738,750
St. Paul Capital LLC, 6%, MIPS 101,700 5,466,375
SunAmerica, Inc., $3.10, "E" 15,000 1,278,750
---------------
$ 17,483,875
----------------------------------------------------------------------------------------- ---------------- ---------------
Medical and Health Technology and Services - 0.1%
SCI Finance LLC, $3.125, "A" 35,000 $ 3,587,500
U.S. Surgical Corp., $2.20 15,000 620,625
---------------
$ 4,208,125
----------------------------------------------------------------------------------------- ---------------- ---------------
Metals and Minerals
Reynolds Metals Co., $3.31 13,000 $ 599,625
----------------------------------------------------------------------------------------- ---------------- ---------------
Oils - 0.1%
Atlantic Richfield Co., 9% 30,500 $ 716,750
Occidental Petroleum Corp., $3.00 10,000 587,500
Occidental Petroleum Corp., $3.875## 10,800 619,650
---------------
$ 1,923,900
----------------------------------------------------------------------------------------- ---------------- ---------------
Pollution Control - 0.1%
Browning-Ferris Industries, 7.25%, ACES* 80,000 $ 2,280,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Precious Metals and Minerals - 0.1%
Freeport-McMoRan Copper & Gold, Inc., 5% 95,000 $ 2,636,250
----------------------------------------------------------------------------------------- ---------------- ---------------
Real Estate Investment Trusts
Security Capital, $1.75, "A" 29,000 $ 757,625
----------------------------------------------------------------------------------------- ---------------- ---------------
Restaurants and Lodging
Wendy's Financing, Inc., 5% 20,000 $ 1,030,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Special Products and Services
Ceridian Corp., 5.5% 7,500 $ 810,000
Vanstar Financing Trust, 6.75%## 10,000 500,000
---------------
$ 1,310,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Steel - 0.1%
AK Steel Holdings Corp., 7% 141,600 $ 5,327,700
----------------------------------------------------------------------------------------- ---------------- ---------------
Stores - 0.1%
K Mart Financing, Inc., 7.75% 15,000 $ 733,125
TJX Cos., Inc., $7.00, "E" 11,000 2,197,250
---------------
$ 2,930,375
----------------------------------------------------------------------------------------- ---------------- ---------------
22
<PAGE>
Portfolio of Investments - continued
Convertible Preferred Stocks - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Issuer Shares Value
----------------------------------------------------------------------------------------- ---------------- ---------------
Telecommunications
Cablevision Systems Corp., 8.5% 30,000 $ 738,750
----------------------------------------------------------------------------------------- ---------------- ---------------
Utilities - Electric - 0.1%
Devon Financing Trust, $3.25## 40,000 $ 2,040,000
Williams Cos., Inc., $3.50## 38,000 3,078,000
---------------
$ 5,118,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Utilities - Gas - 0.5%
Enron Corp., 6.25% 319,200 $ 7,581,000
MCN Corp., 8.75%, Prides 55,200 1,545,600
Unocal Corp., 6.25% 212,040 11,317,635
---------------
$ 20,444,235
----------------------------------------------------------------------------------------- ---------------- ---------------
Utilities - Telephone - 0.1%
Cointel, 7%, Prides## 49,700 $ 2,547,125
----------------------------------------------------------------------------------------- ---------------- ---------------
Total Convertible Preferred Stocks
(Identified Cost, $118,936,694) $ 138,762,023
----------------------------------------------------------------------------------------- ---------------- ---------------
Short-Term Obligations - 3.7%
---------------------------------------------------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
----------------------------------------------------------------------------------------- ---------------- ---------------
Abbott Labs, due 10/22/96 $ 10,500 $ 10,467,905
Disney (Walt) Co., due 10/07/96 12,720 12,708,870
du Pont (E.I.) de Nemours, Inc., due 10/03/96 12,000 11,996,513
Federal Farm Credit Bank, due 10/01/96 11,980 11,980,000
Federal Home Loan Bank, due 10/08/96 - 10/28/96 11,952 11,928,098
Federal Home Loan Mortgage Corp., due 10/10/96 - 10/23/96 54,300 54,158,166
Heinz (H.J.) Co., due 10/24/96 13,900 13,852,400
Hershey Foods, Inc., due 10/15/96 9,000 8,981,660
PepsiCo., Inc., due 11/08/96 10,000 9,944,266
----------------------------------------------------------------------------------------- ---------------- ---------------
Total Short-Term Obligations, at Amortized Cost $ 146,017,878
----------------------------------------------------------------------------------------- ---------------- ---------------
Total Investments (Identified Cost, $3,387,269,994) $3,915,203,761
Other Assets, Less Liabilities - 0.5% 20,681,495
- ----------------------------------------------------------------------------------------------------------- ---------------
Net Assets - 100.0% $3,935,885,256
----------------------------------------------------------------------------------------- ---------------- ---------------
</TABLE>
*Non-income producing security.
+Restricted security.
##SEC Rule 144A restriction.
See notes to financial statements
23
<PAGE>
Financial Statements
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------- ---------------
September 30, 1996
------------------------------------------------------------------------------------- ---------------
<S> <C>
Assets:
Investments, at value (identified cost, $3,387,269,994) $3,915,203,761
Cash 3,635
Receivable for daily variation margin on open futures contracts 109,500
Receivable for Fund shares sold 5,318,951
Receivable for investments sold 49,133,876
Interest and dividends receivable 35,651,499
Other assets 71,968
---------------
Total assets $4,005,493,190
---------------
Liabilities:
Distributions payable $ 12,738,854
Payable for Fund shares reacquired 4,299,612
Payable for investments purchased 49,940,446
Payable to affiliates -
Management fee 103,101
Shareholder servicing agent fee 21,089
Distribution fee 79,026
Accrued expenses and other liabilities 2,425,806
---------------
Total liabilities $ 69,607,934
---------------
Net assets $3,935,885,256
---------------
Net assets consist of:
Paid-in capital $3,168,174,568
Unrealized appreciation on investments and translation of assets and liabilities in
foreign currencies 527,782,661
Accumulated undistributed net realized gain on investments and foreign currency
transactions 235,692,844
Accumulated undistributed net investment income 4,235,183
---------------
Total $3,935,885,256
---------------
Shares of beneficial interest outstanding 261,898,922
---------------
Class A shares:
Net asset value per share
(net assets of $2,568,010,072 / 170,867,867 shares of beneficial interest
outstanding) $15.03
---------------
Offering price per share (100/95.25) $15.78
---------------
Class B shares:
Net asset value and offering price per share
(net assets of $1,284,456,516 / 85,490,927 shares of beneficial interest
outstanding) $15.02
---------------
Class C shares:
Net asset value and offering price per share
(net assets of $83,418,668 / 5,540,128 shares of beneficial interest outstanding) $15.06
---------------
</TABLE>
On sales of $100,000 or more, the offering price of Class A shares is
reduced. A contingent deferred sales charge may be imposed on redemptions of
Class A, Class B and Class C shares.
See notes to financial statements
24
<PAGE>
Financial Statements - continued
Statement of Operations
<TABLE>
<CAPTION>
--------------------------------------------------------------------------- ---------------
Year Ended September 30, 1996
--------------------------------------------------------------------------- ---------------
<S> <C>
Net investment income:
Income -
Interest $120,797,212
Dividends 69,999,748
Foreign taxes withheld (1,027,783)
---------------
Total investment income $189,769,177
---------------
Expenses -
Management fee $ 13,607,772
Trustees' compensation 109,577
Shareholder servicing agent fee (Class A) 2,635,299
Shareholder servicing agent fee (Class B) 2,195,380
Shareholder servicing agent fee (Class C) 73,157
Distribution and service fee (Class A) 7,883,575
Distribution and service fee (Class B) 11,488,260
Distribution and service fee (Class C) 487,605
Custodian fee 662,530
Postage 640,642
Printing 255,071
Auditing fees 49,300
Legal fees 18,162
Miscellaneous 2,266,420
---------------
Total expenses $ 42,372,750
Fees paid indirectly (330,229)
---------------
Net expenses $ 42,042,521
---------------
Net investment income $147,726,656
---------------
Realized and unrealized gain (loss) on investments:
Realized gain (identified cost basis) -
Investment transactions $288,895,323
Foreign currency transactions 39,960
Futures contracts 1,307,705
---------------
Net realized gain on investments and foreign currency transactions $290,242,988
---------------
Change in unrealized appreciation (depreciation) -
Investments $ 5,219,111
Translation of assets and liabilities in foreign currencies (20,217)
Futures contracts (131,616)
---------------
Net unrealized gain on investments $ 5,067,278
---------------
Net realized and unrealized gain on investments and foreign currency $295,310,266
---------------
Increase in net assets from operations $443,036,922
---------------
</TABLE>
See notes to financial statements
25
<PAGE>
Financial Statements - continued
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Year Ended September 30, 1996 1995
----------------------------------------------- --------------- ---------------
<S> <C> <C>
Increase in net assets:
From operations -
Net investment income $ 147,726,656 $ 131,402,134
Net realized gain on investments and foreign
currency transactions 290,242,988 120,786,908
Net unrealized gain on investments and foreign
currency translation 5,067,278 242,624,905
--------------- ---------------
Increase in net assets from operations $ 443,036,922 $ 494,813,947
--------------- ---------------
Distributions declared to shareholders -
From net investment income (Class A) $ (103,128,807) $ (91,296,492)
From net investment income (Class B) (40,140,247) (33,884,609)
From net investment income (Class C) (1,719,502) (302,945)
From net realized gain on investments and
foreign currency transactions (Class A) (104,083,151) (1,471,111)
From net realized gain on investments and
foreign currency transactions (Class B) (47,213,572) (672,401)
From net realized gain on investments and
foreign currency transactions (Class C) (1,295,700) (2,050)
--------------- ---------------
Total distributions declared to shareholders $ (297,580,979) $ (127,629,608)
--------------- ---------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 883,738,695 $ 620,581,586
Net asset value of shares issued to
shareholders in reinvestment of distributions 250,392,788 108,185,007
Cost of shares reacquired (614,411,016) (526,677,345)
--------------- ---------------
Increase in net assets from Fund share
transactions $ 519,720,467 $ 202,089,248
--------------- ---------------
Total increase in net assets $ 665,176,410 $ 569,273,587
Net assets:
At beginning of period 3,270,708,846 2,701,435,259
--------------- ---------------
At end of period (including accumulated
undistributed net investment income of
$4,235,183 and $1,522,351, respectively) $3,935,885,256 $3,270,708,846
--------------- ---------------
</TABLE>
See notes to financial statements
26
<PAGE>
Financial Statements - continued
Financial Highlights
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Year Ended September 30, 1996 1995 1994 1993 1992
- ----------------------------------------------------- --------- --------- --------- --------- ----------
Class A
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 14.46 $12.80 $13.70 $12.42 $11.82
--------- --------- --------- --------- ----------
Income from investment operations# -
Net investment income[S.] $ 0.64 $ 0.64 $ 0.54 $ 0.45 $ 0.65
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 1.21 1.64 (0.69) 1.74 0.75
--------- --------- --------- --------- ----------
Total from investment operations $ 1.85 $ 2.28 $(0.15) $ 2.19 $ 1.40
--------- --------- --------- --------- ----------
Less distributions declared to shareholders -
From net investment income $ (0.62) $(0.61) $(0.54) $(0.59) $(0.66)
From net realized gain on investments and foreign
currency transactions (0.66) (0.01) (0.10) (0.32) (0.14)
In excess of net realized gain on investments and
foreign currency transactions -- -- (0.11) -- --
--------- --------- --------- --------- ----------
Total distributions declared to shareholders $ (1.28) $(0.62) $(0.75) $(0.91) $(0.80)
--------- --------- --------- --------- ----------
Net asset value - end of period $ 15.03 $14.46 $12.80 $13.70 $12.42
--------- --------- --------- --------- ----------
Total return++ 13.50% 18.36% (1.07)% 18.32% 12.26%
Ratios (to average net assets)/Supplemental data[S.]:
Expenses## 0.91% 0.87% 0.85% 0.84% 0.84%
Net investment income 4.35% 4.82% 4.26% 4.51% 5.40%
Portfolio turnover 140% 102% 91% 95% 84%
Average commission rate### $0.0547 -- -- -- --
Net assets at end of period (000,000 omitted) $ 2,568 $2,242 $1,857 $1,702 $1,198
[S.]The distributor did not impose a portion of its distribution fee for the periods indicated. If this
fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income -- $ 0.63 $ 0.52 -- --
Ratios (to average net assets):
Expenses## -- 0.97% 0.95% -- --
Net investment income -- 4.72% 4.16% -- --
</TABLE>
# Per share data for the periods subsequent to September 30, 1993 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
[S.] For the years ended September 30, 1992 and 1991, $0.0508 and $0.0596,
respectively, of per share distributions from net investment income have
been redesignated as distributions from capital gains.
++ Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been lower.
See notes to financial statements
27
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Year Ended September 30, 1991 1990 1989 1988 1987
- ---------------------------------------------------- --------- --------- --------- --------- ----------
Class A
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $10.25 $11.58 $10.13 $11.47 $ 9.77
--------- --------- --------- --------- ----------
Income from investment operations -
Net investment income $ 0.67 $ 0.64 $ 0.65 $ 0.62 $ 0.56
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 1.57 (1.25) 1.71 (1.07) 2.07
--------- --------- --------- --------- ----------
Total from investment operations $ 2.24 $(0.61) $ 2.36 $(0.45) $ 2.63
--------- --------- --------- --------- ----------
Less distributions declared to shareholders -
From net investment income[S.] $(0.61) $(0.66) $(0.63) $(0.60) $(0.56)
From net realized gain on investments and foreign
currency transactions (0.06) (0.06) (0.28) (0.08) (0.36)
From paid-in capital -- -- -- (0.21) (0.01)
--------- --------- --------- --------- ----------
Total distributions declared to shareholders $(0.67) $(0.72) $(0.91) $(0.89) $(0.93)
--------- --------- --------- --------- ----------
Net asset value - end of period $11.82 $10.25 $11.58 $10.13 $11.47
--------- --------- --------- --------- ----------
Total return++ 22.25% (5.59)% 23.46% (3.93)% 26.81%
Ratios (to average net assets)/Supplemental data:
Expenses 0.87% 0.85% 0.72% 0.71% 0.63%
Net investment income 5.89% 5.71% 5.97% 6.06% 5.05%
Portfolio turnover 74% 50% 53% 52% 58%
Net assets at end of period (000,000 omitted) $ 909 $ 707 $ 628 $ 508 $ 551
</TABLE>
[S.] For the years ended September 30, 1992 and 1991, $0.0508 and $0.0596,
respectively, of per share distributions from net investment income have
been redesignated as distributions from capital gains.
++ Total returns for Class A shares do not include the applicable sales
charge (except for reinvested dividends prior to October 1, 1989). If
the charge had been included, the results would have been lower.
See notes to financial statements
28
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Year Ended September 30, 1996 1995 1994 1993*
- ---------------------------------------------------- --------- --------- -------------------
Class B
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 14.46 $12.80 $13.70 $13.53
--------- --------- -------------------
Income from investment operations# -
Net investment income $ 0.52 $ 0.53 $ 0.39 $ 0.06
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 1.21 1.64 (0.65) 0.16
--------- --------- -------------------
Total from investment operations $ 1.73 $ 2.17 $(0.26) $ 0.22
--------- --------- -------------------
Less distributions declared to shareholders -
From net investment income $ (0.51) $(0.50) $(0.43) $(0.05)
From net realized gain on investments and foreign
currency transactions (0.66) -- -- --
In excess of net investment income -- (0.01) (0.10) --
From paid-in capital -- -- (0.11) --
--------- --------- -------------------
Total distributions declared to shareholders $ (1.17) $(0.51) $(0.64) $(0.05)
--------- --------- -------------------
Net asset value - end of period $ 15.02 $14.46 $12.80 $13.70
--------- --------- -------------------
Total return 12.49% 17.46% (1.93)% 15.24%+
Ratios (to average net assets)/Supplemental data:
Expenses## 1.67% 1.71% 1.70% 1.75%+
Net investment income 3.56% 3.97% 3.45% 3.98%+
Portfolio turnover 140% 102% 91% 95%
Averaage commission rate### $0.0547 $ -- $ -- $ --
Net assets at end of period (000,000 omitted) $ 1,284 $1,005 $ 843 $ 532
</TABLE>
* For the period from the commencement of offering of Class B shares,
August 23, 1993 to September 30, 1993.
+ Annualized.
# Per share data for the periods subsequent to September 30, 1993 is based
on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years
beginning on or after September 1, 1995.
See notes to financial statements
29
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Year Ended September 30, 1996 1995 1994*
- ---------------------------------------------------- --------- --------- ----------
Class C
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 14.49 $12.80 $12.92
--------- --------- ----------
Income from investment operations# -
Net investment income $ 0.53 $ 0.54 $ 0.08
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 1.22 1.66 (0.13)
--------- --------- ----------
Total from investment operations $ 1.75 $ 2.20 $(0.05)
--------- --------- ----------
Less distributions declared to shareholders -
From net investment income $ (0.52) $(0.50) $(0.07)
From net realized gain on investments and foreign
currency transactions (0.66) (0.01) --
--------- --------- ----------
Total distributions declared to shareholders $ (1.18) $(0.51) $(0.07)
--------- --------- ----------
Net asset value - end of period $ 15.06 $14.49 $12.80
--------- --------- ----------
Total return 12.67% 17.66% (0.41%)
Ratios (to average net assets)/Supplemental data:
Expenses## 1.63% 1.67% 1.76%+
Net investment income 3.67% 4.14% 4.08%+
Portfolio turnover 140% 102% 91%
Average commission rate### $0.0547 -- --
Net assets at end of period (000,000 omitted) $ 83 $ 23 $ 1
</TABLE>
* For the period from the commencement of offering of Class C shares,
August 1, 1994 to September 30, 1994.
+ Annualized.
# Per share data for the periods subsequent to September 30, 1993 is based
on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years
beginning on or after September 1, 1995.
See notes to financial statements
30
<PAGE>
Notes to Financial Statements
(1) Business and Organization
MFS Total Return Fund (the Fund) is a diversified series of MFS Series Trust
V (the Trust). The Trust is organized as a Massachusetts business trust and
is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Investments in foreign securities are vulnerable to the effects of
changes in the relative values of the local currency and the U.S. dollar and
to the effects of changes in each country's legal, political and economic
environment.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are
not available are valued at last quoted bid prices. Debt securities (other
than short-term obligations which mature in 60 days or less), including
listed issues and forward contracts, are valued on the basis of valuations
furnished by dealers or by a pricing service with consideration to factors
such as institutional-size trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading characteristics and
other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the
Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction
gains and losses. That portion of both realized and unrealized gains and
losses on investments that results from fluctuations in foreign currency
exchange rates is not separately disclosed.
31
<PAGE>
Notes to Financial Statements - continued
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties
to meet the terms of their contracts and from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar. The Fund will enter
into forward contracts for hedging purposes as well as for non-hedging
purposes. For hedging purposes, the Fund may enter into contracts to deliver
or receive foreign currency it will receive from or require for its normal
investment activities. It may also use contracts in a manner intended to
protect foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Fund may
enter into contracts with the intent of changing the relative exposure of the
Fund's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains
or losses are recorded for financial statement purposes as unrealized until
the contract settlement date.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities, currency, or contracts based on financial indices at
a fixed price on a future date. In entering such contracts, the Fund is
required to deposit either in cash or securities an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received
by the Fund each day, depending on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes as
unrealized gains or losses by the Fund. The Fund's investment in futures
contracts is designed to hedge against anticipated future changes in interest
or exchange rates or securities prices. Should interest or exchange rates or
securities prices move unexpectedly, the Fund may not achieve the anticipated
benefits of the futures contracts and may realize a loss.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the
value of the security on such date.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on
the Fund's average daily net assets. This fee is reduced according to an
expense offset arrangement with State Street Bank, the dividend disbursing
agent, which provides for partial reimbursement of custody fees based on a
formula developed to measure the value of cash deposited by the Fund with the
32
<PAGE>
Notes to Financial Statements - continued
custodian and with the dividend disbursing agent. This amount is shown as a
reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided. The Fund files a tax return
annually using tax accounting methods required under provisions of the Code
which may differ from generally accepted accounting principles, the basis on
which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial
statements may differ from that reported on the Fund's tax return and,
consequently, the character of distributions to shareholders reported in the
financial highlights may differ from that reported to shareholders on Form
1099-DIV. Foreign taxes have been provided for on interest and dividend
income earned on foreign investments in accordance with the applicable
country's tax rates and to the extent unrecoverable are recorded as a
reduction of investment income. Distributions to shareholders are recorded on
the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return
of capital. Differences in the recognition or classification of income
between the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes, are classified
as distributions in excess of net investment income or accumulated net
realized gains. During the year ended September 30, 1996, $25,268 was
reclassified to accumulated undistributed net realized gain on investments
from accumulated undistributed net investment income due to differences
between book and tax accounting for mortgage-backed securities and currency
transactions. This change had no effect on the net assets or net asset value
per share.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution and service fees. All
shareholders bear the common expenses of the Fund pro rata based on the
average daily net assets of each class, without distinction between share
classes. Dividends are declared separately for each class. No class has
preferential dividend rights; differences in per share dividend rates are
generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
33
<PAGE>
Notes to Financial Statements - continued
management fee is computed and paid monthly at an effective annual rate of
0.21% of average daily net assets and 3.09% of investment income.
The Fund pays no compensation directly to its Trustees who are officers of
the investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain of the officers
and Trustees of the Fund are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD) and MFS Service Center, Inc. (MFSC). The Fund has an
unfunded defined benefit plan for all its independent Trustees and Mr.
Bailey. Included in Trustees' compensation is a net periodic pension expense
of $35,302 for the year ended September 30, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$1,144,503 for the year ended September 30, 1996, as its portion of the sales
charge on sales of Class A shares of the Fund.
The Trustees have adopted separate distribution plans for Class A, Class B,
and Class C shares pursuant to Rule 12b-1 of the Investment Company Act of
1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service
fee to each securities dealer that enters into a sales agreement with MFD of
up to 0.25% per annum of the Fund's average daily net assets attributable to
Class A shares which are attributable to that securities dealer, a
distribution fee to MFD of up to 0.10% per annum of the Fund's average daily
net assets attributable to Class A shares, commissions to dealers and
payments to MFD wholesalers for sales at or above a certain dollar level, and
other such distribution-related expenses that are approved by the Fund. MFD
retains the service fee for accounts not attributable to a securities dealer
which amounted to $809,019 for the year ended September 30, 1996. Fees
incurred under the distribution plan during the year ended September 30, 1996
were 0.33% of average daily net assets attributable to Class A shares on an
annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD
a distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B and
Class C shares. MFD will pay to securities dealers who enter into a sales
agreement with MFD all or a portion of the service fee attributable to Class
B and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended
to be additional consideration for services rendered by the dealer with
respect to Class B and Class C shares. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $138,385
and $5,233 for Class B and
34
<PAGE>
Notes to Financial Statements - continued
Class C shares, respectively, for the year ended September 30, 1996. Fees
incurred under the distribution plans during the year ended September 30,
1996 were 1.00% and 1.00% of average daily net assets attributable to Class B
and Class C shares on an annualized basis, respectively.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the
event of a shareholder redemption within 12 months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of
Class B shares in the event of a shareholder redemption within six years of
purchase. A contingent deferred sales charge is imposed on shareholder
redemptions of Class C shares in the event of a shareholder redemption within
twelve months of purchases made on or after April 1, 1996. MFD receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the year ended September 30, 1996 were $13,595, $1,500,543 and $3,178
for Class A, Class B and Class C shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22% and up to 0.15%
attributable to Class A, Class B and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
Purchases Sales
- ---------------------------------------------- --------------- ---------------
U.S. government securities $2,288,572,918 $1,617,796,684
Investments (non-U.S. government securities) $2,909,176,637 $3,087,843,253
The cost and unrealized appreciation or depreciation in value of the
invest-ments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $3,390,188,400
---------------
Gross unrealized appreciation $ 564,473,842
Gross unrealized depreciation (39,458,481)
---------------
Net unrealized appreciation $ 525,015,361
---------------
35
<PAGE>
Notes to Financial Statements - continued
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares
1996 1995
-------------------------------- --------------------------------
Year Ended September 30, Shares Amount Shares Amount
------------------------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 32,544,619 $ 475,330,763 27,571,191 $ 366,257,248
Shares issued to shareholders
in reinvestment of
distributions 11,900,327 171,688,507 5,805,766 77,216,013
Shares reacquired (28,608,019) (418,045,276) (23,436,000) (309,567,243)
--------------- ---------------- --------------- ----------------
Net increase 15,836,927 $ 228,973,994 9,940,957 $ 133,906,018
--------------- ---------------- --------------- ----------------
Class B Shares
1996 1995
-------------------------------- --------------------------------
Year Ended September 30, Shares Amount Shares Amount
------------------------------- --------------- ---------------- --------------- ----------------
Shares sold 23,526,173 $ 343,774,175 17,488,663 $ 232,234,181
Shares issued to shareholders
in reinvestment of
distributions 5,276,202 76,064,908 2,308,539 30,683,046
Shares reacquired (12,818,714) (187,231,460) (16,113,302) (214,915,122)
--------------- ---------------- --------------- ----------------
Net increase 15,983,661 $ 232,607,623 3,683,900 $ 48,002,105
--------------- ---------------- --------------- ----------------
Class C Shares
1996 1995
-------------------------------- --------------------------------
Year Ended September 30, Shares Amount Shares Amount
------------------------------- --------------- ---------------- --------------- ----------------
Shares sold 4,404,959 $ 64,633,757 1,619,700 $ 22,090,157
Shares issued to shareholders
in reinvestment of
distributions 182,264 2,639,373 20,825 285,948
Shares reacquired (624,347) (9,134,280) (163,091) (2,194,980)
--------------- ---------------- --------------- ----------------
Net increase 3,962,876 $ 58,138,850 1,477,434 $ 20,181,125
--------------- ---------------- --------------- ----------------
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to
each fund, based on its borrowings, at a rate equal to the bank's base rate.
In addition, a commitment fee, based on the average daily unused portion of
the line of credit, is allocated among the participating funds at the end of
each quarter. The commitment fee allocated to the Fund for the year ended
September 30, 1996 was $40,695.
36
<PAGE>
Notes to Financial Statements - continued
(7) Financial Instruments
The Fund trades financial instruments with off-balance sheet risk in the
normal course of its investing activities in order to manage exposure to
market risks such as interest rates. These financial instruments include
futures contracts. The notional or contractual amounts of these instruments
represent the investment the Fund has in particular classes of financial
instruments and does not necessarily represent the amounts potentially
subject to risk. The measurement of the risks associated with these
instruments is meaningful only when all related and offsetting transactions
are considered.
Futures Contracts
Unrealized
Expiration Contracts Position Depreciation
- ---------------------------- --------- -------- -------------
U.S. Treasury Notes 12/31/96 584 Short $(131,616)
*At September 30, 1996, the Fund had sufficient cash and/or securities
to cover margin requirements on open future contracts.
(8) Restricted Security
The Fund may invest not more than 15% of its net assets in securities which
are subject to legal or contractual restrictions on resale. At September 30,
1996, the Fund owned the following restricted security (constituting 0.08% of
net assets). The value of this security is determined by valuations supplied
by a pricing service or brokers.
<TABLE>
<CAPTION>
Description Date of Acquisition Par Amount Cost Value
- ------------------------ -------------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Merrill Lynch Mortgage
Investors, Inc.,
94-M1, 8.073s, 2022 6/22/94 $4,000,000 $2,772,500 $2,985,000
------------
</TABLE>
37
<PAGE>
Independent Auditors' Report
To the Trustees of MFS Series Trust V and Shareholders of
MFS Total Return Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS Total Return Fund (one of the
series constituting MFS Series Trust V) as of September 30, 1996, the related
statement of operations for the year then ended, the statement of changes in
net assets for the years ended September 30, 1996 and 1995, and the financial
highlights for each of the years in the ten-year period ended September 30,
1996. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of the
securities owned at September 30, 1996 by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Total Return
Fund at September 30, 1996, the results of its operations, the changes in its
net assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 1, 1996
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
38
<PAGE>
The MFS Family of Funds(R)
America's Oldest Mutual Fund Group
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-637-2929
any business day from 9 a.m. to 5 p.m. Eastern time (or leave a message
anytime). This material should be read carefully before investing or sending
money.
<TABLE>
<S> <C>
Stock World
- ------------------------------------- ------------------------------------------
Massachusetts Investors Trust MFS(R)/Foreign & Colonial Emerging Markets
Equity Fund
Massachusetts Investors Growth Stock Fund
MFS(R)/Foreign & Colonial International
MFS(R) Capital Growth Fund Growth Fund
MFS(R) Emerging Growth Fund MFS(R)/Foreign & Colonial International
Growth and Income Fund
MFS(R) Gold & Natural Resources Fund
MFS(R) World Asset Allocation Fund (SM)
MFS(R) Growth Opportunities Fund
MFS(R) World Equity Fund
MFS(R) Managed Sectors Fund
MFS(R) World Governments Fund
MFS(R) OTC Fund
MFS(R) World Growth Fund
MFS(R) Research Fund
MFS(R) World Total Return Fund
MFS(R) Value Fund
Stock and Bond National Tax-Free Bond
- --------------------------------------- -------------------------------------------
MFS(R) Total Return Fund MFS(R) Municipal Bond Fund
MFS(R) Utilities Fund MFS(R) Municipal High Income Fund
Bond MFS(R) Municipal Income Fund
- ---------------------------------------
MFS(R) Bond Fund State Tax-Free Bond
--------------------------------------------
MFS(R) Government Mortgage Fund Alabama, Arkansas, California, Florida,
Georgia, Maryland, Massachusetts,
MFS(R) Government Securities Fund Mississippi, New York, North Carolina,
Pennsylvania, South Carolina, Tennesse
e,
MFS(R) High Income Fund Virginia, West Virginia
MFS(R) Intermediate Income Fund
Money Market
MFS(R) Strategic Income Fund --------------------------------------------
MFS(R) Cash Reserve Fund
Limited Maturity Bond
- --------------------------------------- MFS(R) Government Money Market Fund
MFS(R) Government Limited Maturity Fund
MFS(R) Money Market Fund
MFS(R) Limited Maturity Fund
MFS(R) Municipal Limited Maturity Fund
</TABLE>
39
<PAGE>
Ads Illustrate MFS' Unparalleled Experience
[round box]
MERCURY GEMINI APOLLO MFS
[long-distance shot of moon]
MFS' new advertisements look back at some of the most important events of the
twentieth century to demonstrate a simple point -- no other fund company can
match MFS' experience. MFS has been managing money for investors since 1924 when
we "invented" the nation's first fund, Massachusetts Investors Trust.
Print and broadcast ads will offer dramatic portraits of what that 72 years'
worth of experience means. By the time the Apollo rockets began taking off for
the moon, for example, MFS had already been exploring the universe of stocks for
more than four decades. The company was also on the scene, as other ads will
illustrate, when Louis Armstrong was redefining jazz and when the great
racehorse Whirlaway was galloping to a Triple Crown victory.
As MFS Chairman Keith Brodkin emphasizes, in today's increasingly competitive
mutual fund industry, it's important to have a recognizable brand name. The
goal of the MFS ad campaign is to increase public awareness of the company and
its unique role in the industry as the inventor of the mutual fund.
The across-the-board strength of the MFS Family of Funds(R) will be highlighted
in the print ads, which cite the performance results and Morningstar ratings of
various MFS funds.
The broadcast ads appear on a number of cable and network television news and
sports programs. The print ads appear in newspapers such as The Wall Street
Journal and USA Today; in financial magazines such as Kiplinger's Personal
Finance and Money, and in leisure magazines such as Golf Digest and Tennis.
(The cost of the campaign is being underwritten by MFS. It is neither a fund
shareholder nor an annuity contractholder expense.)
40
<PAGE>
MFS(R) Total Return Fund
Trustees
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor; Former Chairman and Director (until
1991), Massachusetts Financial Services Company; Director, Cambridge Bancorp;
Director, Cambridge Trust Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive Officer, Eastern Enterprises
Lawrence T. Perera - Partner, Hemenway & Barnes
William J. Poorvu - Adjunct Professor, Harvard University Graduate School of
Business Administration
Charles W. Schmidt - Private Investor
Arnold D. Scott* - Senior Executive Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director,
Massachusetts Financial Services Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American Management Corp. (investment
advisers)
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
Fund Managers*
David M. Calabro
Geoffrey L. Kurinsky
Judith N. Lamb
Lisa B. Nurme
Maura A. Shaughnessy
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
Custodian
Investors Bank & Trust Co.
Auditors
Deloitte & Touche LLP
Investor Information
For MFS stock and bond market outlooks, call toll free: 1-800-637-4458
anytime from a touch-tone telephone.
For information on MFS mutual funds, call your financial adviser or, for an
information kit, call toll free: 1-800-637-2929 any business day from 9 a.m.
to 5 p.m. Eastern time (or leave a message anytime).
Investor Service
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free: 1-800-225-2606 any business day from
8 a.m to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll free: 1-800-637-6576
any business day from 9 a.m. to 5 p.m. Eastern time. (To use this service,
your phone must be equipped with a Telecommunications Device for the Deaf.)
For share prices, account balances and exchanges, call toll free:
1-800-MFS-TALK (1-800-637-8255) anytime from a touch-tone telephone.
Web Site
http://www.mfs.com
[Dalbar logo]
For the third year in a row, MFS earned a #1 ranking in the DALBAR, Inc.
Broker/Dealer Survey, Main Office Operations Service Quality Category. The firm
achieved a 3.48 overall score on a scale of 1 to 4 in the 1996 survey. A total
of 110 firms responded, offering input on the quality of service they received
from 29 mutual fund companies nationwide. The survey contained questions about
service quality in 15 categories, including "knowledge of phone service
contacts," "accuracy of transaction processing," and "overall ease of doing
business with the firm."
41
<PAGE>
[back cover]
MFS(R) Total [Dalbar logo] Bulk Rate
Return Fund U.S. Postage
P A I D
500 Boylston Street Permit #55638
Boston, MA 02116 Boston, MA
[MFS logo]
(C) 1996 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
MTR-2-11/96 277M 15/215/315
<PAGE>
MFS RESEARCH FUND
SUPPLEMENT TO THE FEBRUARY 1, 1997 PROSPECTUS AND
STATEMENT OF ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED FEBRUARY 1,
1997, AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
<TABLE>
<CAPTION>
EXPENSE SUMMARY
CLASS I
SHAREHOLDER TRANSACTION EXPENSES: -------
<S> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price)........................................... None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable).................... None
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees........................................................................ 0.36%
Rule 12b-1 Fees........................................................................ None
Other Expenses(1)(2)................................................................... 0.23%
-----
Total Operating Expenses............................................................... 0.59%
.........
(1) "Other Expenses" is based on Class A expenses incurred during the fiscal year ended September 30, 1996.
(2) The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of
cash maintained by the Fund with its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the effect of reducing the Fund's
expenses). Any such fee reductions are not reflected under "Other Expenses."
</TABLE>
EXAMPLE OF EXPENSES
-------------------
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
PERIOD CLASS I
1 year........................................ $ 6
3 years....................................... 19
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. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
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.
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD;
(iii) any retirement plan which (a) purchases shares directly through MFD
(rather than through a third party broker or dealer or other financial
intermediary); (b) has, at the time of purchase of Class I shares,
aggregate assets of at least $100 million; and (c) invests at least $10
million in Class I shares of the Fund either alone or in combination with
investments in Class I shares of other MFS funds distributed by MFD
(additional investments may be made in any amount); provided that MFD may
accept purchases from smaller plans or in smaller amounts if it believes,
in its sole discretion, that the plan's aggregate assets will equal or
exceed $100 million, or that the plan will make additional investments
which will cause its total investment to equal or exceed $10 million,
within a reasonable period of time; and
(iv) bank trust departments which initially invest, on behalf of their trust
clients, at least $100,000 in Class I shares of the Fund (additional
investments may be made in any amount); provided that MFD may accept
smaller initial purchases if it believes, in its sole discretion, that the
bank trust department will make additional investments, on behalf of its
trust clients, which will cause its total investment to equal or exceed
$100,000 within a reasonable period of time.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 5.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") upon redemption of 1.00% during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans), and
are subject to an annual distribution fee and service fee up to a maximum of
0.35% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption of 1.00% during the first year and an annual distribution
fee and service fee up to a maximum of 1.00% per annum. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class C and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
THE DATE OF THIS SUPPLEMENT IS FEBRUARY 1, 1997
<PAGE>
PROSPECTUS
February 1, 1997
MFS(R) RESEARCH Class A Shares of Beneficial Interest
FUND Class B Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) Class C Shares of Beneficial Interest
- --------------------------------------------------------------------------------
Page
----
1. Expense Summary ...................................................... 2
2. The Fund ............................................................. 3
3. Condensed Financial Information ...................................... 4
4. Investment Objective and Policies .................................... 5
5. Investment Techniques and Risk Factors ............................... 6
6. Additional Risk Factors .............................................. 7
7. Management of the Fund ............................................... 9
8. Information Concerning Shares of the Fund ............................ 10
Purchases ........................................................ 10
Exchanges ........................................................ 15
Redemptions and Repurchases ...................................... 16
Distribution Plan ................................................ 18
Distributions .................................................... 19
Tax Status ....................................................... 20
Net Asset Value .................................................. 20
Description of Shares, Voting Rights and Liabilities ............. 20
Performance Information .......................................... 21
9. Shareholder Services ................................................. 21
Appendix A ........................................................... A-1
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 RESEARCH FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
The investment objective of MFS Research Fund (the "Fund") is to provide long-
term growth of capital and future income (see "Investment Objective and
Policies"). The Fund is a diversified series of MFS Series Trust V (the
"Trust"), an open-end investment company. The minimum initial investment is
generally $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.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT
AGENCY, AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY
FINANCIAL INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE
IN VALUE. YOU MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR
SHARES.
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,
1997, as amended or supplemented from time to time (the "SAI"), which contains
more detailed information about the Trust and the Fund. The SAI is
incorporated into this Prospectus by reference. See page 23 for a further
description of the information set forth in the SAI. A copy of the SAI may be
obtained without charge by contacting the Shareholder Servicing Agent (see
back cover for address and phone number). The SEC maintains an Internet World
Wide Web site that contains the SAI, materials that are incorporated by
reference into this Prospectus and the SAI, and other information regarding
the Fund. This Prospectus is available on the Adviser's Internet World Wide
Web site at http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
1. EXPENSE SUMMARY
CLASS A CLASS B CLASS C
------- ------- -------
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Initial Sales Charge
Imposed on Purchases of Fund
Shares
(as a percentage of offering
price) ....................... 5.75% 0.00% 0.00%
Maximum Contingent Deferred Sales
Charge (as a percentage of
original
purchase price or redemption
proceeds, as applicable) ..... See Below(1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees .................. 0.36% 0.36% 0.36%
Rule 12b-1 Fees .................. 0.34%(2) 1.00%(3) 1.00%(3)
Other Expenses(4) ................ 0.23% 0.31% 0.24%
--- --- ---
Total Operating Expenses ......... 0.93% 1.67% 1.60%
- ----------
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a Contingent Deferred
Sales Charge ("CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such
purchases. See "Information Concerning Shares of the Fund -- Purchases"
below.
(2) The Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), 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. The 0.35% per annum distribution/service fee is reduced to 0.25%
per annum for shares purchased prior to March 1, 1991. Distribution
expenses paid under the Plan, together with the initial sales charge, may
cause long-term shareholders to pay more than the maximum sales charge
that would have been permissible if imposed entirely as an initial sales
charge. See "Information Concerning Shares of the Fund -- Distribution
Plan" below.
(3) The Fund's Distribution Plan provides 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 Class B shares and
Class C shares, respectively. Distribution expenses paid under the
Distribution Plan with respect to Class B or Class C shares, together with
any CDSC payable upon redemption of Class B or Class C shares, may cause
long-term shareholders to pay more than the maximum sales charge that
would have been permissible if imposed entirely as an initial sales
charge. See "Information Concerning Shares of the Fund -- Distribution
Plan" below.
(4) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have
the effect of reducing the Fund's expenses). Any such fee reductions are
not reflected under "Other Expenses."
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
PERIOD CLASS A CLASS B CLASS C(3)
- ------ ------- ------------------- ----------------
(1) (1)
1 year ................. $ 66 $ 57 $ 17 $ 26 $ 16
3 years ................ 85 83 53 50 50
5 years ................ 106 111 91 87 87
10 years ................ 165 178(2) 178(2) 190 190
- ----------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
(3) Purchases subsequent to April 1, 1996 which are redeemed within 12 months
of purchase are subject to a 1% CDSC.
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 Plan."
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
The Fund is a diversified series of 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 Trust presently consists of two
series, each of which represents a portfolio with separate investment
objectives and policies. Shares of the Fund are continuously sold to the
public and the Fund then uses the proceeds to buy securities (stocks, bonds
and other instruments) for its portfolio. Three classes of shares of the Fund
currently are offered for sale to the general public. Class A shares are
offered at net asset value plus an initial sales charge up to a maximum of
5.75% of the offering price (or a CDSC upon redemption of 1.00% during the
first year in the case of purchases of $1 million or more and certain
purchases by retirement plans) and are subject to an annual distribution fee
and a service fee up to a maximum of 0.35% per annum. Class B shares are
offered at net asset value without an initial sales charge but are subject to
a CDSC upon redemption declining from 4.00% during the first year to 0% after
six years and an annual distribution fee and service fee up to a maximum of
1.00% per annum. 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 but are subject to a CDSC upon redemption of
1.00% during the first year and an annual distribution fee and service fee of
up to 1.00% per annum.
Class C shares do not convert to any other class of shares of the Fund. In
addition, the Fund offers an additional class of shares,
Class I shares, exclusively to certain institutional investors. Class I shares
are made available by means of a separate Prospectus Supplement provided to
institutional investors eligible to purchase Class I shares and are offered at
net asset value without an initial sales charge or CDSC upon redemption and
without an annual distribution and service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of
the Fund. MFS 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 its operations. The Adviser manages the portfolio from day to
day in accordance with the Fund's investment objective 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 Fund also offers to
buy back (redeem) its shares from its shareholders at any time at net asset
value, less any applicable CDSC.
<PAGE>
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and 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 SAI in reliance upon the report of the
Fund's independent auditors given upon their authority as experts in
accounting and auditing. The Fund's current independent auditors are Deloitte
& Touche LLP.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
CLASS A
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period $15.61 $12.59 $14.47 $12.18 $11.84 $ 9.62 $11.49 $10.20 $12.54 $10.42
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment
income(S) ........ $ 0.06 $ 0.08 $ 0.02 $ 0.11 $ 0.07 $ 0.27 $ 0.36 $ 0.39 $ 0.23 $ 0.19
Net realized and
unrealized gain on
investments and
foreign currency
transactions 3.88 2.99 1.01 3.15 1.27 2.21 (1.52) 2.30 (2.19) 4.43
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from
investment
operations ... $ 3.94 $ 3.07 $ 1.03 $ 3.26 $ 1.34 $ 2.48 $(1.16) $ 2.69 $(1.96) $ 4.62
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions
declared to
shareholders --
From net investment
income ...........
$(0.05) $(0.02) $(0.03) $(0.07) $ -- $(0.26) $(0.36) $(0.39) $(0.24) $(0.19)
From net realized
gain on
investments ...... (0.97) (0.03) (2.87) (0.90) (1.00) -- (0.35)* (1.01) (0.14) (2.31)
In excess of net
investment income -- -- (0.01) -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
distributions
declared to
shareholders . $(1.02) $(0.05) $(2.91) $(0.97) $(1.00) $(0.26) $(0.71) $(1.40) $(0.38) $(2.50)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value --
end of period .... $18.53 $15.61 $12.59 $14.47 $12.18 $11.84 $ 9.62 $11.49 $10.20 $12.54
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total return(+) ...... 26.54% 24.49% 7.72% 28.87% 11.79% 25.87% (12.73)% 26.91% (15.60)% 44.80%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ......... 0.91% 0.95% 0.91% 0.90% 0.84% 0.95% 0.83% 0.88% 0.86% 0.73%
Net investment
income ........... 0.36% 0.58% 0.14% 0.36% 0.59% 2.48% 3.21% 3.48% 2.36% 1.51%
PORTFOLIO TURNOVER ... 81% 94% 79% 93% 74% 177% 79% 99% 116% 101%
AVERAGE COMMISSION
RATE### ............ $0.0269 -- -- -- -- -- -- -- -- --
NET ASSETS AT END OF
PERIOD
(000 OMITTED)....... $972,353 $507,784 $318,170 $294,019 $240,366 $231,316 $202,377 $251,857 $239,616 $321,050
- ----------
(+)Total returns for Class A shares do not include the applicable sales charge
(except for reinvested dividends prior to October 1, 1989). If the charge had
been included, the results would have been lower.
*For the year ended September 30, 1990, the per share distribution from
paid-in capital was $0.0009.
#Per share data for the periods subsequent to September 30, 1993 is based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
(S)The distributor did not impose a portion of its distribution fee for the
periods indicated. If this fee had been incurred by the Fund, the net
investment income per share and the ratios would have been:
Net investment
income# ....... -- $ 0.07 $ 0.01 -- -- -- -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .... -- 1.05% 1.01% -- -- -- -- -- -- --
Net investment
income ...... -- 0.48% 0.04% -- -- -- -- -- -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------------
1996 1995 1994 1993** 1996 1995 1994***
------ ------ ------ ------ ------ ------ ------
CLASS B CLASS C
---------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period ..... $15.40 $12.50 $14.47 $13.95 $15.42 $12.51 $13.18
------ ------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment (loss) ..... $(0.06) $(0.03) $(0.08) $(0.04) $(0.06) $(0.02) $(0.04)
Net realized and unrealized
gain on investments and
foreign currency
transactions ............ 3.82 2.96 1.00 0.56 3.83 2.96 0.62
------ ------ ------ ------ ------ ------ ------
Total from investment
operations ............ $ 3.76 $ 2.93 $ 0.92 $ 0.52 $ 3.77 $ 2.94 $ 0.58
------ ------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders --
From net investment
income ................ $ -- $ -- ++ $(0.02) $ -- ++ $ -- $ -- +++ $ --
From net realized gain on
investments ........... $(0.97) $(0.03) $(2.87) $ -- $(0.97) $(0.03) $(1.25)
------ ------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders .............. $(0.97) $(0.03) $(2.89) -- $(0.97) $(0.03) $(1.25)
------ ------ ------ ------ ------ ------ ------
Net asset value --
end of period ......... $18.19 $15.40 $12.50 $14.47 $18.22 $15.42 $12.51
====== ====== ====== ====== ====== ====== ======
Total return .............. 25.59% 23.55% 6.91% 3.73% 25.67% 23.58% 4.43%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Expenses##............... 1.66% 1.78% 1.82% 2.33%+ 1.67% 1.71% 1.74%+
Net investment income
(loss) ................. (0.37)% (0.21)% (0.65)% (0.89)%+ (0.38)% (0.15)% (0.54%)+
PORTFOLIO TURNOVER......... 81% 94% 79% 93% 81% 94% 79%
AVERAGE COMMISSION RATE###. $0.0269 -- -- -- $0.0269 -- --
NET ASSETS AT END OF
PERIOD (000 OMITTED) .... $680,456 $178,117 $25,672 $ 447 $136,032 $25,737 $4,821
- ----------
#Per share data for the periods subsequent to September 30, 1993 is based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
+Annualized.
++For the year ended September 30, 1995, the per share distribution from net
investment income was $0.00003.
+++For the year ended September 30, 1996, the per share distribution in excess
of net investment income was $0.0027.
**For the period from the commencement of offering of Class B shares, September
7, 1993, to September 30, 1993.
***For the period from the commencement of offering of Class C shares, January
3, 1994, to September 30, 1994.
</TABLE>
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE The Fund's investment objective is to provide long-term
growth of capital and future income. Any investment involves risk and there
can be no assurance that the Fund will achieve its investment objective.
The portfolio securities of the Fund are selected by a committee of investment
research analysts. This committee includes investment analysts employed not
only by the Adviser but also by MFS International (U.K.) Limited, a wholly
owned subsidiary of MFS. The Fund's assets are allocated among industries by
the analysts acting together as a group. Individual analysts are then
responsible for selecting what they view as the securities best suited to meet
the Fund's investment objective within their assigned industry responsibility.
INVESTMENT POLICIES: The Fund's policy is to invest a substantial proportion
of its assets in the common stocks or securities convertible into common
stocks of companies believed to possess better than average prospects for
long-term growth. A smaller proportion of the assets may be invested in bonds,
short-term obligations, preferred stocks or common stocks whose principal
characteristic is income production rather than growth. Such securities may
also offer opportunities for growth of capital as well as income. In the case
of both growth stocks and income issues, emphasis is placed on the selection
of progressive, well-managed companies. The Fund's debt investments, if any,
may consist of "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 Services ("S&P") or Fitch Investors Service, Inc. ("Fitch")), and,
with respect to no more than 10% of its net assets, securities in the lower
rated categories (rated Ba or lower by Moody's or BB or lower by S&P or Fitch)
or securities which the Adviser believes to be of similar quality to these
lower rated securities (commonly known as "junk bonds"). For a description of
bond ratings, see Appendix A to the SAI. 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. The Fund's achievement of its investment objective
may be more dependent on the Adviser's own credit analysis than in the case of
a fund investing in primarily higher quality bonds. From time to time, the
Fund's management will exercise its judgment with respect to the proportions
invested in growth stocks, income-producing securities or cash (including
foreign currency) and cash equivalents depending on its view of their relative
attractiveness.
5. INVESTMENT TECHNIQUES AND RISK FACTORS
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order
to earn 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 SAI, the Fund has adopted certain procedures intended to
minimize risk.
LENDING OF SECURITIES: The Fund may make loans of its fixed income portfolio
securities. Such loans will usually be made only to member banks of the
Federal Reserve System and member firms (and subsidiaries thereof) of the New
York Stock Exchange under contracts only if collateralized by U.S. Government
securities, an irrevocable letter of credit or cash. The Fund will continue to
collect the equivalent of interest on the securities loaned and will also
receive compensation based on investment of cash collateral or a fee (if the
collateral is U.S. Government securities or a letter of credit). The Fund pays
finder's and other fees in connection with securities loans.
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 (described above) such as changes in exchange rates and more
limited information about foreign issuers.
EMERGING MARKET SECURITIES: Consistent with the Fund's investment objective
and policies, the Fund may invest in securities of issuers whose principal
activities are located in emerging market countries. Emerging market countries
include any country determined by the Adviser to have an emerging market
economy, taking into account a number of factors, including whether the
country has a low- to middle-income economy according to the International
Bank for Reconstruction and Development, the country's foreign currency debt
rating, its political and economic stability and the development of its
financial and capital markets. The Adviser determines whether an issuer's
principal activities are located in an emerging market country by considering
such factors as its country of organization, the principal trading market for
its securities and the source of its revenues and assets. The issuer's
principal activities generally are deemed to be located in a particular
country if: (a) the security is issued or guaranteed by the government of that
country or any of its agencies, authorities or instrumentalities; (b) the
issuer is organized under the laws of, and maintains a principal office in,
that country; (c) the issuer has its principal securities trading market in
that country; (d) the issuer derives 50% or more of its total revenues from
goods sold or services performed in that country; or (e) the issuer has 50% of
its assets in that country.
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"). A determination is made, based upon a continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to the Fund's limitation on investing not more
than 10% of its net assets in illiquid investments. 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, retains
oversight, focusing on factors, such as valuation, liquidity and availability
of information. Investing in Rule 144A securities could have the effect of
decreasing the level of liquidity in the 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 10% limitation
on investments in illiquid investments, and subject to the diversification
requirements of the Internal Revenue Code of 1986, as amended (the "Code"),
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.
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
other investment company clients of MFD 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 the SAI.
Since shares of the Fund represent an investment in securities with
fluctuating market prices, shareholders should understand that the value of
their shares will vary as the aggregate value of the Fund's portfolio
securities increases or decreases. Moreover, any dividends the Fund pays will
increase or decrease in relation to the income received from its investments.
The Fund does not intend to trade in securities for short-term profits.
However, the Fund will trade whenever it believes that changes are
appropriate.
6. ADDITIONAL RISK FACTORS
RISKS OF INVESTING IN FOREIGN SECURITIES: The Fund may invest up to 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 SAI for further discussion of foreign
securities and the holding of foreign currency, as well as the associated
risks.
RISKS OF INVESTING IN EMERGING MARKET SECURITIES: The risks of investing in
foreign securities may be intensified in the case of investments in emerging
markets. Securities of many issuers in emerging markets may be less liquid and
more volatile than securities of comparable domestic issuers. Emerging markets
also have different clearance and settlement procedures, and in certain
markets there have been times when settlements have been unable to keep pace
with the volume of securities transactions, making it difficult to conduct
such transactions. Delays in settlement could result in temporary periods when
a portion of the assets of the Fund is uninvested and no return is earned
thereon. The inability of the Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result in losses to the Fund due to subsequent declines in
value of the portfolio security, a decrease in the level of liquidity in the
Fund's portfolio, or, if the Fund has entered into a contract to sell the
security, in possible liability to the purchaser. Certain markets may require
payment for securities before delivery, and in such markets the Fund bears the
risk that the securities will not be delivered and that the Fund's payments
will not be returned. 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 on 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.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. The Fund could
be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the
application to the Fund of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls
may at times preclude investment in certain foreign emerging market debt
obligations and increase the expenses of the Fund.
RISKS OF INVESTING IN LOWER RATED BONDS: As described above, the Fund may
invest in fixed income (i.e., debt) securities rated Baa by Moody's or BBB by
S&P 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 fixed income securities that are rated Ba or lower
by Moody's or BB or lower by S&P or Fitch or comparable unrated securities
("junk bonds"). 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 as well as 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. 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
issuer 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. Therefore, judgment
may at times play a greater role in valuing these securities than in the case
of investment grade fixed income securities.
------------------------
The investment objective and policies described above are not fundamental and
may be changed without shareholder approval. A change in the Fund's investment
objective may result in the Fund having an investment objective different from
the objective which the Shareholder considered appropriate at the time of
investment in the Fund.
The SAI 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 SAI may be changed without
approval of the shareholders of the Fund, unless indicated otherwise (see
"Investment Restrictions" in the SAI). The Fund's investment limitations,
policies and ratings 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.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER The Adviser manages the Fund pursuant to an Investment
Advisory Agreement, dated September 1, 1993 (the "Advisory Agreement"). The
Adviser provides the Fund with overall investment advisory and administrative
services, as well as general office facilities. The Fund is currently managed
by a committee comprised of various equity research analysts employed by the
Adviser. 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 (i.e., income other than gains from the sale of securities) in each
case on an annualized basis for the Fund's then current fiscal year. 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
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C>
0.40% of the first $100 million 5.0% of the first $2 million
0.32% of the next $400 million 4.0% of the next $8 million
0.288% of average daily net assets in excess of $500 million 3.6% of gross income in excess of $10 million
</TABLE>
For the fiscal year ended September 30, 1996, MFS received management fees of
$4,095,566 (of which $3,518,278 was based on average daily net assets and
$577,288 on gross income), equivalent, on an annualized basis, to 0.36% 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"), to MFS(R) Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS
Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value Trust,
MFS Institutional Trust, MFS Union Standard Trust, MFS Variable Insurance
Trust, MFS/Sun Life Series Trust, 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
various fixed/variable annuity contracts. MFS and its wholly owned subsidiary,
MFS Institutional Advisors, Inc., also 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 $52.1 billion on behalf of over 2.2 million investor accounts as
of December 31, 1996. MFS is a subsidiary of Sun Life of Canada (U.S.) which
in turn is a wholly owned subsidiary of Sun Life Assurance Company of Canada
("Sun Life"). The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames,
John D. McNeil, Donald A. Stewart 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 Stewart 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 United States 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 also 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 also officers of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management
Ltd. ("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the
world's oldest financial services institutions, the London-based Foreign &
Colonial Investment Trust PLC, which pioneered the idea of investment
management in 1868, and HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG),
the oldest publicly listed bank in Germany, founded in 1835. As part of this
alliance, the portfolio managers and investment analysts of MFS and Foreign &
Colonial share their views on a variety of investment related issues, such as
the economy, securities markets, portfolio securities and their issuers,
investment recommendations, strategies and techniques, risk analysis, trading
strategies and other portfolio management matters. MFS has access to the
extensive international equity investment expertise of Foreign & Colonial, and
Foreign & Colonial has access to the extensive U.S. equity investment
expertise of MFS. MFS and Foreign & Colonial each have investment personnel
working in each other's offices in Boston and London, respectively.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial,
particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in
other cases, however, it may produce increased investment opportunities for
the Fund.
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.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, B and C shares of the Fund may be purchased at the public offering
price through any dealer and other financial institutions ("dealers") having a
selling agreement with MFD. Dealers may also charge their customers fees
relating to investments in the Fund.
This Prospectus offers Class A, B and C shares, which bear sales charges and
distribution fees in different forms and amounts, as described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus
an initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE* AS
PERCENTAGE OF:
-------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
- ------------------ -------------- ---------- -----------------
<S> <C> <C> <C>
Less than $50,000 .......................................................... 5.75% 6.10% 5.00%
$50,000 but 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 3.05 2.25
$500,000 but less than $1,000,000 .......................................... 2.20 2.25 1.70
$1,000,000 or more ......................................................... None** None** See Below**
- ----------
*Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above.
**A CDSC will apply to such purchases, as discussed below.
</TABLE>
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 5% 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 other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 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 Purchase privileges by which the
sales charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge).
In the following four circumstances, Class A shares are offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of
the lesser of the value of the shares redeemed (exclusive of reinvested
dividend and capital gain distributions) or the total cost of such shares, in
the event of a share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares; and
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if, prior to July 1, 1996: (a) the Plan had established an
account with the Shareholder Servicing Agent and (b) the sponsoring
organization has demonstrated to the satisfaction of MFD that either (i)
the employer had at least 25 employees or (ii) 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;
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing
Agent (the "MFS Participant Recordkeeping System"); (b) the plan
establishes an account with the Shareholder Servicing Agent on or
after July 1, 1996; and (c) the aggregate purchases by the
retirement plan of Class A shares of the MFS Funds will be in an
aggregate amount of at least $500,000 within a reasonable period of
time, as determined by MFD in its sole discretion; and
(iv) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1996 and (b) the plan
has, at the time of purchase, a market value of $500,000 or more
invested in shares of any class or classes of the MFS Funds. THE
RETIREMENT PLAN WILL QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR
ITS SPONSORING ORGANIZATION INFORMS THE SHAREHOLDER SERVICING AGENT
PRIOR TO THE PURCHASES THAT THE PLAN HAS A MARKET VALUE OF $500,000
OR MORE INVESTED IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS.
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO
DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY.
In the case of all such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
--------------------------------- --------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers
with respect to a shareholder's new investment in Class A shares made on or
after April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemptions of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus. In addition to these
circumstances, the CDSC imposed upon the redemption of Class A shares is
waived with respect to shares held by certain retirement plans qualified under
Section 401(a) or 403(b) of the Internal Revenue Code of 1986, as amended (the
"Code"), and subject to ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe
to the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to
the satisfaction of, and certifies to the Shareholder Servicing Agent
that the retirement plan has, at the time of certification or will
have pursuant to a purchase order placed with the certification, a
market value of $500,000 or more invested in shares of any class or
classes of the MFS Funds and aggregate assets of at least $10
million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated or partially terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or consolidated
with, any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC upon redemption 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%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below, 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 payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a
dealer upon the sale of Class B shares is 4% of the purchase price of the
shares (commission rate of 3.75% plus a service fee equal to 0.25% of the
purchase price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has
established its account with the Shareholder Servicing Agent on or after July
1, 1996, will be subject to the CDSC described above, only under limited
circumstances, as explained below under "Waivers of CDSC." With respect to
such purchases, MFD pays an amount to dealers equal to 3.00% of the amount
purchased through such dealers (rather than the 4.00% payment described
above), which is comprised of a commission of 2.75% plus the advancement of
the first year service fee equal to 0.25% of the purchase price payable under
the Fund's Distribution Plan. As discussed above, such retirement plans are
eligible to purchase Class A shares of the Fund at net asset value without an
initial sales charge but subject to a 1% CDSC if the plan has, at the time of
purchase, a market value of $500,000 or more invested in shares of any class
or classes of the MFS Funds. IN THIS EVENT, THE PLAN OR ITS SPONSORING
ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING AGENT THAT THE PLAN IS
ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY; THE SHAREHOLDER
SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH A
PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A SHARES.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class B shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class B shares is waived with respect to shares
held by a retirement plan whose sponsoring organization subscribes to the MFS
Participant Recordkeeping System and which has established an account with the
Shareholder Servicing Agent on or after July 1, 1996; provided, however, that
the CDSC will not be waived (i.e., it will be imposed) in the event that there
is a change in law or regulations which results in a material adverse change
to the tax advantaged nature of the plan, or in the event that the plan and/or
sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is terminated
or partially terminated under ERISA or is liquidated or dissolved; or (iii) is
acquired by, merged into, or consolidated with, any other entity.
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 Fund's Distribution
Plan. See "Distribution Plan" below. 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.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below
for further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Fund's Distribution Plan by
the Fund to MFD for the first year after purchase (see "Distribution Plan"
below).
CLASS C SHARES: Class C shares are offered at net asset value without an
initial sales charge or a CDSC but are subject to a CDSC upon redemption of
1.00% during the first year. 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 up to $1,000,000 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 Internal Revenue Code of
1986, as amended (the "Code"), if the retirement plan and/or the sponsoring
organization subscribe to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping program made available by the Shareholder Servicing Agent.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class C shares is waived. These circumstances are described in Appendix A to
this Prospectus.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. 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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-
free at (800) 225-2606. The minimum purchase amount is $50 and the maximum
purchase amount is $100,000. Shareholders wishing to avail themselves of this
telephone purchase privilege must so elect on their Account Application and
designate thereon a bank and account number from which purchases will be made.
If a telephone purchase request is received by the Shareholder Servicing Agent
on any business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the closing
net asset value of the shares purchased on that day. The Shareholder Servicing
Agent may be liable for any losses resulting from unauthorized telephone
transactions if it does not follow 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.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserves
the right to reject any specific purchase or exchange request. In the event
that the Fund or MFD rejects an exchange request, neither the redemption nor
the purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individudals, if (i) the individual or organization makes three or more
exchange requests out of the Fund per calender year and (ii) any one of such
exchange requests represents shares equal in value to 1/2 of 1% or more of
the Fund's net assets at the time of the request. Accounts under common
ownership or control, including accounts administered by market timers, will
be aggregated for purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose
specific limitations with respect to market timers, including delaying for up
to seven days the purchase side of an exchange request by market timers or
specifically rejecting or otherwise restricting purchase or exchange requests
by market timers. Other funds in the MFS Family of Funds may have different
and/or more or less restrictive policies with respect to market timers than
the Fund. These policies are disclosed in the prospectuses of these other MFS
Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with
respect to sales of Class A, Class B and Class C shares. In addition, 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 an additional commission equal to 0.50% of the net asset
value of all of the Class B and/or Class C 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. 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 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. 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. Other concessions may be offered to the
extent not prohibited by state laws or any self-regulatory agency, such as the
NASD.
SPECIAL INVESTMENT PROGRAMS. 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.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. 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. 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 in respect of Shareholders who invested in the Fund through a
national bank. 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.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a 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.
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 at net asset value (if available for sale). Shares of one class
may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING MFS MONEY MARKET FUNDS): No initial sales
charges or CDSC will be imposed in connection with an exchange from shares of
an MFS Fund to shares of any other MFS Fund, except with respect to exchanges
from an MFS money market fund to another MFS Fund which is not an MFS money
market fund (discussed below). With respect to an exchange involving shares
subject to a CDSC, the CDSC will be unaffected by the exchange and the holding
period for purposes of calculating the CDSC will carry over to the acquired
shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to
the imposition of an initial sales charge or a CDSC for exchanges from an MFS
money market fund to another MFS Fund which is not an MFS money market fund.
These rules are described under the caption "Exchanges" in the Prospectuses of
those MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of
participation of the MFS Fixed Fund (a bank collective investment fund) (the
"Units"), and Units may be exchanged for Class A shares of any MFS Fund. With
respect to exchanges between Class A shares subject to a CDSC and Units, the
CDSC will carry over to the acquired shares or Units and will be deducted from
the redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units
and then exchanges into Class A shares subject to an initial sales charge of
an MFS Fund, the initial sales charge shall be due upon such exchange, but
will not be imposed with respect to any subsequent exchanges between such
Class A shares and Units with respect to shares on which the initial sales
charge has already been paid. In the event that a shareholder initially
purchases Units and then exchanges into Class A shares subject to a CDSC of an
MFS Fund, the CDSC period will commence upon such exchange, and the
applicability of the CDSC with respect to subsequent exchanges shall be
governed by the rules set forth above in this paragraph.
GENERAL: A shareholder should read the prospectus of the other MFS Funds and
consider the differences in objectives, policies and restrictions before
making any exchange. 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 ($50 in the case 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
the Shareholder Servicing Agent) or all the shares in the account. If an
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 (generally, 4:00 p.m., Eastern time) (the "Exchange"), the exchange
will occur on that day if all the requirements set forth above have been
complied with at that time and subject to the Fund's right to reject purchase
orders. No more than five exchanges may be made in any one Exchange Request by
telephone. Additional information concerning this exchange privilege and
prospectuses for any of the other MFS Funds may be obtained from dealers or
the Shareholder Servicing Agent. 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.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on
any date on which the Fund is open for business by redeeming shares at their
net asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however,
subject to a CDSC. See "Contingent Deferred Sales Charge" below. Because the
net asset value of shares of the account fluctuates, 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 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 up to 15
days from the purchase date in an effort to assure that such check has
cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may 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 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 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" will 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 in "good order" by the Shareholder Servicing
Agent, 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 described above 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.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his
account by telephoning the Shareholder Servicing Agent 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 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 and the
amount of any income tax required to be withheld, are mailed by check to the
designated account, without charge, if the redemption proceeds do not exceed
$1,000, and are wired in federal funds to the designated account if the
redemption proceeds exceed $1,000. 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.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares
through his 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 BEFORE THE CLOSE OF BUSINESS ON THE SAME
DAY, THE SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY,
REDUCED BY THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX
REQUIRED TO BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B and Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of (i) with
respect to Class A and Class C shares, 12 months (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of
Class A shares or purchases by certain retirement plans of Class A shares) or
(ii) with respect to Class B shares, six years. 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 C shares and 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. Prior to April 1, 1996, Class C shares of the MFS Funds were
not subject to a CDSC upon redemption. In no event will Class C shares of the
MFS Funds purchased prior to this date be subject to a CDSC. For the purpose
of calculating the CDSC upon redemption of shares acquired in an exchange on
or after April 1, 1996, 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 (if such original purchase occurred prior to April 1,
1996, then no CDSC would be imposed upon such a redemption).
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases
exceeds the sum of the six calendar year aggregations (12 months in the case
of purchases of Class C shares and of purchases of $1 million or more of Class
A shares or purchases by certain retirement plans 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 a particular class, (i) any Free Amount is not
subject to the CDSC and (ii) the amount of the 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 of shares will be calculated as set forth in
"Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, 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.
REINSTATEMENT PRIVILEGE. 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 Class C shares and 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 SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund
solely in cash up to the lesser of $250,000 or 1% of the net asset value of
the Fund during any 90-day period for any one shareholder. The Fund has
reserved the right to pay other redemptions either totally or partially, by a
distribution in-kind of securities (instead of cash) from the Fund's
portfolio. The securities distributed in such a distribution 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 shareholder could incur brokerage or transaction charges when converting
the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in
any account for their then-current value if at any time the total investment
in such account drops below $500 because of redemptions, except in the case of
accounts being 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 -- General -- Minimum Investment." 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.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder
(the "Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Plan would benefit the Fund and its shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the
heading "Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are features of the
Distribution Plan that are common to each class of shares, as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, Class B
or Class C shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom
such dealer is the dealer or holder of record. MFD may from time to time
reduce the amount of the service fees paid for shares sold prior to a certain
date. Service fees may be reduced for a dealer that is the holder or dealer of
record for an investor who owns shares of the Fund having an aggregate 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
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 to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay
MFD a distribution fee based on the average daily net assets attributable to
the Designated Class as partial consideration for distribution services
performed and expenses incurred in the performance of MFD's obligations under
its distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plans, as does the
use by MFD of such distribution fees. Such amounts and uses are described
below in the discussion of the provisions of the Distribution Plan relating to
each class of shares. While the amount of compensation received by MFD in the
form of distribution fees during any year may be more or less than the expense
incurred by MFD under its distribution agreement with the Fund, the Fund is
not liable to MFD for any losses MFD may incur in performing services under
its distribution agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the Designated
Class. The provisions of the Distribution Plan relating to operating policies
as well as initial approval, renewal, amendment and termination are
substantially identical as they relate to each class of shares covered by the
Distribution Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered pursuant to an
initial sales charge, a substantial portion of which is paid to or retained by
the dealer making the sale (the remainder of which is paid to MFD). See
"Purchases -- Class A Shares" above. In addition to the initial sales charge,
the dealer also generally receives the ongoing 0.25% per annum service fee, as
discussed above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.10% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commissions to dealers with respect to
purchases of $1 million or more and purchases by certain retirement plans of
Class A shares which are sold at net asset value but which are subject to a 1%
CDSC for one year after purchase). See "Purchases -- Class A Shares" above.
In addition, to the extent that the aggregate service and distribution fees
paid under the Distribution Plan do 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 such distribution-related expenses or other distribution-
related expenses.
CLASS B SHARES. Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases -- Class B Shares"
above. MFD will advance to dealers the first year service fee described above
at a rate equal to 0.25% of the purchase price of such shares and, as
compensation therefore, MFD may retain the service fee paid by the Fund with
respect to such shares for the first year after purchase. Dealers will become
eligible to receive the ongoing 0.25% per annum service fee with respect to
such shares commencing in the thirteenth month following purchase.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES. Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases -- Class C shares"
above. MFD will pay a commission to dealers of 1.00% of the purchase price of
Class C shares purchased through dealers at the time of purchase. In
compensation for this 1.00% commission paid by MFD to dealers, MFD will retain
the 1.00% per annum Class C distribution and service fees paid by the Fund
with respect to such shares for the first year after purchase, and dealers
will become eligible to receive from MFD the ongoing 1.00% per annum
distribution and service fees paid by the Fund to MFD with respect to such
shares commencing in the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn
pays to dealers) under the Distribution Plan equal, on an annual basis, to
0.75% of the Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A, Class B
and Class C distribution and service fees for its current fiscal year are
0.35%, 1.00% and 1.00% per annum, respectively. The 0.35% per annum Class A
distribution/service fee is reduced to 0.25% per annum for shares purchased
prior to March 1, 1991.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income to its
shareholders as dividends on an annual basis. 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. The Fund has elected to be treated, and
intends to qualify each year as a "regulated investment company" under
Subchapter M of the Code. Because the Fund intends to distribute all of its
net investment income and net realized capital gains to its shareholders in
accordance with the timing requirements imposed by the Code, it is not
expected that the Fund will be required to pay any federal income or excise
taxes, although the Fund's foreign-source income 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 the dividends and capital gain distributions they
receive from the Fund, whether the distribution is in cash or in 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. Shortly after the end of each calendar year, each
shareholder will be sent 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, 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.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion
of the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and 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 treaty. The Fund is
also required in certain circumstances to apply backup withholding at the rate
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. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
Prospective investors should read the Fund's Account Application for
additional 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 the liabilities attributable to the class
from the value of the 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 SAI. The net asset value of each class of shares is effective for
orders received in "good order" 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 which it
offers to the general public, entitled Class A, Class B and Class C Shares of
Beneficial Interest (without par value). The Fund also has a class of shares
which it offers exclusively to certain institutional investors, entitled Class
I shares. 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 shares 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 or ratification of selection of accountants.
Additionally, each class of shares of a series will vote separately on any
material increases in the fees under the Distribution Plan or on any other
matter that affects solely its 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
SAI).
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 the
particular class. Shares have no pre-emptive or conversion rights (except as
described 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) exists and the Trust itself is unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide 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. Total rate of return quotations
reflect the average annual percentage change over stated periods in the value
of an investment in a 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 will give effect to the imposition of any applicable CDSC assessed
upon redemptions of the Fund's Class B and Class C 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 a CDSC, and which will thus be higher. The Fund offers multiple
classes of shares which were initially offered for sale to the public on
different dates. The calculation of total rate of return for a class of shares
which initially was offered for sale to the public subsequent to another class
of shares of the Fund is based both on (i) the performance of the Fund's newer
class from the date it initially was offered for sale to the public and (ii)
the performance of the Fund's oldest class from the date it initially was
offered for sale to the public up to the date that the newer class initially
was offered for sale to the public. See the SAI for further information on the
calculation of total rate of return for share classes initially offered for
sale to the public on different dates.
The Fund's total rate of return quotations are based on historical performance
and are not intended to indicate future performance. 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 total rate of return, see the SAI.
For further information about the Fund's performance for the fiscal year ended
September 30, 1996, 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.
9. 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 income tax information regarding
reportable dividends and capital gain distributions for that year (see "Tax
Status").
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 record date. 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 or the shareholder does not respond to mailings from the Shareholder
Servicing Agent with regard to uncashed distribution checks, such
shareholder'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 SAI) anticipates purchasing $50,000 or more of Class A shares
of the Fund alone or in combination with shares of Class B or Class C of the
Fund or any of the classes 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 of the Fund 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 Class A, B and C
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 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 and Class C 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 on any day of the month. If the shareholder
does not specify a date, the investment will automatically occur on the first
business day of the month. 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 shares of the same class
of shares of 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
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 if such fund is available for sale. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to six 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 and Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales
charge. For federal and (generally) state income tax purposes, a transfer 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 SAI 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 charges
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 which are subject to a CDSC.
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 advisers before establishing any of the tax-deferred retirement
plans described above.
------------------------
The Fund's SAI dated February 1, 1997, as amended or supplemented from time to
time, contains more detailed information about the Fund, including, but not
limited to, information related to (i) investment objective, policies and
restrictions, (ii) Trustees, officers and investment adviser, (iii) portfolio
transactions and brokerage commissions, (iv) the Distribution Plan and (v)
various services and privileges provided for the benefit of its shareholders,
including additional information with respect to the exchange privilege.
<PAGE>
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
contingent deferred sales charge ("CDSC") for Class A shares are waived
(Section II), and the CDSC for Class B and Class C shares is waived (Section
III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, is waived:
1. DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any MFS Fund in the MFS Family of Funds
("MFS Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
o Officers, eligible directors, employees (including retired employees)
and agents of Massachusetts Financial Services Company ("MFS"), Sun
Life Assurance Company of Canada ("Sun Life") or any of their
subsidiary companies;
o Trustees and retired trustees of any investment company for which MFS
Fund Distributors, Inc. ("MFD") serves as distributor;
o Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
o Employees or registered representatives of dealers and other financial
institution ("dealers") which have a sales agreement with MFD;
o Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to an MFS Fund; and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
("MFSI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/ Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
o Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
o Death, disability or retirement of 401 (a) or ESP Plan participant;
o Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
o Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1 (d)(2), as amended from time to time);
o Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
o Tax-free return of excess 401(a) or ESP Plan contributions;
o To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes
to the MFS FUNDamental 401 (k) Plan or another similar recordkeeping
system made available by the Shareholder Servicing Agent; and
o Distributions from a 401(a) or ESP Plan that has invested its assets
in 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 401(a) or ESP
Plan first invests its assets in one or more of the MFS Funds. The
sales charges will be waived in the case of a redemption of all of the
Plan's shares in all MFS Funds (i.e., all the assets of the 401 (a) or
ESP Plan invested in the MFS Funds are withdrawn), unless immediately
prior to the redemption, the aggregate amount invested by the 401(a)
or ESP Plan in shares of the MFS Funds (excluding the reinvestment of
distributions) during the prior four years equals 50% or more of the
total value of the 401(a) or ESP Plan's assets in the MFS Funds, in
which case the sales charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
o Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
o To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants of such Plan, provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemption of Class A shares are
waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
o Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or
managed by MFD or its affiliates if: (i) the investment is made
through a dealer and appropriate documentation is submitted to MFD;
(ii) the redeemed shares were subject to an initial sales charge or
deferred sales charge (whether or not actually imposed); (iii) the
redemption occurred no more than 90 days prior to the purchase of
Class A shares; and (iv) the MFS Fund, MFD or its affiliates have not
agreed with such company or its affiliates, formally or informally, to
waive sales charges on Class A shares or provide any other incentive
with respect to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
o Shares acquired by investments through certain dealers which have
entered into an agreement with MFD which includes a requirement that
such shares be sold for the sole benefit of clients participating in a
"wrap" account or a similar program under which such clients pay a fee
to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
o Shares acquired by retirement plans whose third party administrators,
or dealers have entered into an administrative services agreement with
MFD or one of its affiliates to perform certain administrative
services, subject to certain operational and minimum size requirements
specified from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
o Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
Shares redeemed on account of distributions made under the following
circumstances:
IRA'S
o Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
o Tax-free returns of excess IRA contributions.
401(A) PLANS
o Distributions made on or after the 401 (a) Plan participant has
attained the age of 59 1/2 years old; and
o Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a Plan.
ESP PLANS AND SRO PLANS
o Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C
shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year of the account value at the time of establishment.
2. DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made
under the following circumstances:
IRA'S, 401(A) PLANS, ESP PLANS AND SRO PLANS
o Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under
applicable Internal Revenue Code ("Code") rules.
SALARY REDUCTION EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
o Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
o Death or disability of a SAR-SEP Plan participant.
<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 Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
[logo] MFS(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund
MFS(RM) Research Fund
500 Boylston Street
Boston, MA 02116
MFR-1-2/97/560M 14/214/314
MFS(RM) Research Fund
Prospectus
February 1, 1997
<PAGE>
[logo]
MFS(R) RESEARCH STATEMENT OF
FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) February 1, 1997
- ------------------------------------------------------------------------------
Page
----
1. Definitions .................................................... 2
2. The Fund ....................................................... 2
3. Investment Objective, Policies and Restrictions ................ 2
4. Management of the Fund ......................................... 4
Trustees .................................................... 4
Officers .................................................... 5
Investment Adviser .......................................... 6
Custodian ................................................... 7
Shareholder Servicing Agent ................................. 7
Distributor ................................................. 7
5. Portfolio Transactions and Brokerage Commissions ............... 8
6. Shareholder Services ........................................... 9
Investment and Withdrawal Programs .......................... 9
Exchange Privilege .......................................... 11
Tax-Deferred Retirement Plans ............................... 11
7. Tax Status ..................................................... 12
8. Determination of Net Asset Value and Performance ............... 12
9. Distribution Plan .............................................. 14
10. Description of Shares, Voting Rights and Liabilities ........... 15
11. Independent Auditors and Financial Statements .................. 16
Appendix A -- Description of Bond Ratings ...................... A-1
Appendix B -- Performance Information .......................... B-1
MFS RESEARCH FUND
A Series of MFS Series Trust V
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus, dated
February 1, 1997. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
1. DEFINITIONS
"Fund" -- MFS Research Fund, a series of MFS
Series Trust V, a Massachusetts
business trust (the "Trust"). The
Trust was known as Massachusetts
Financial Total Return Trust until
August 3, 1992 and as MFS Total
Return Fund until August 23, 1993.
The Fund reorganized as a series of
the Trust on September 7, 1993.
"MFS" or the "Adviser" -- Massachusetts Financial Services
Company, a Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc., a
Delaware corporation.
"Prospectus" -- The Prospectus of the Fund, dated
February 1, 1997, as amended and
supplemented from time to time.
2. THE FUND
The Fund was known as "Massachusetts Financial Development Fund" until its name
was changed as of February 1, 1992. The predecessor of the Fund -- Massachusetts
Financial Development Fund, Inc. (the "Corporation") -- was incorporated under
the laws of The Commonwealth of Massachusetts in 1970. The Fund was reorganized
as a separate Massachusetts business trust on January 29, 1985, pursuant to an
Agreement and Plan of Reorganization, dated January 15, 1985. The Fund
reorganized as a series of the Trust on September 7, 1993. All references in
this SAI to the Fund's past activities are intended to include those of the
Corporation, unless the context indicates otherwise.
3. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE. The Fund's investment objective is to provide long-term
growth of capital and future income. Any investment involves risk and there can
be no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES. The Prospectus contains a discussion of the Fund's policies
with respect to investments in various types of securities, including repurchase
agreements, and the risks involved in such investments. Some of these policies
are further described below.
SECURITIES LENDING: The Fund may seek to increase its income by lending
portfolio securities. Such loans will usually be made only to member banks of
the Federal Reserve System and to member firms (and subsidiaries thereof) of the
New York Stock Exchange and would be required to be secured continuously by
collateral in cash, U.S. Government securities or an irrevocable letter of
credit, maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Fund would have the right to call a loan and
obtain the securities loaned at any time on customary industry settlement notice
(which usually will not exceed five days). During the existence of a loan, the
Fund would continue to receive the equivalent of the interest or dividends paid
by the issuer on the securities loaned and would also receive compensation based
on investment of cash collateral or a fee. The Fund would not, however, have the
right to vote any securities having voting rights during the existence of the
loan, but would call the loan in anticipation of an important vote to be taken
among holders of the securities or of the giving or withholding of their consent
on a material matter affecting the investment. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
loans would be made only to entities deemed by the Adviser to be of good
standing, and when, in the judgment of the Adviser, the consideration which can
be earned currently from securities loans of this type justifies the attendant
risk. If the Adviser determines to make securities loans, it is not intended
that the value of the securities loaned would exceed 30% of the value of the
Fund's total assets. The Fund did not lend any of its portfolio securities
during its fiscal year ended September 30, 1996.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
sellers who are member firms (or subsidiaries thereof) of the New York Stock
Exchange or members of the Federal Reserve System, recognized primary U.S.
Government securities dealers or institutions which the Adviser has determined
to be of comparable creditworthiness. The securities that the Fund purchases and
holds through its agent are U.S. Government securities, the values of which are
equal to or greater than the repurchase price agreed to be paid by the seller.
The repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Fund together with the repurchase price
on repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
FOREIGN SECURITIES: The Fund may invest up to 20% of its total assets in foreign
securities (not including American Depositary Receipts). As discussed in the
Prospectus, investing in foreign securities generally represents a greater
degree of risk than investing in domestic securities, due to possible exchange
rate fluctuations, less publicly available information, more volatile markets,
less securities regulation, less favorable tax provisions, war or expropriation.
As a result of its investments in foreign securities, the Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated.
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.
While the holding of currencies will permit the Fund to take advantage of
favorable movements in the applicable exchange rate, such strategy also exposes
the Fund to risk of loss if exchange rates move in a direction adverse to the
Fund's position. Such losses could reduce any profits or increase any losses
sustained by the Fund from the sale or redemption of securities and could reduce
the dollar value of interest or dividend payments received.
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. ADRs may be sponsored or
unsponsored. A sponsored ADR is issued by a depository which has an exclusive
relationship with the issuer of the underlying security. An unsponsored ADR may
be issued by any number of U.S. depositories. Under the terms of most sponsored
arrangements, depositories agree to distribute notices of shareholder meetings
and voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities. The depository of an unsponsored ADR, on the other hand, is under no
obligation to distribute shareholder communications received from the issuer of
the deposited securities or to pass through voting rights to ADR holders in
respect of the deposited securities. The Fund may invest in either type of ADR.
Although the U.S. investor holds a substitute receipt of ownership rather than
direct stock certificates, the use of the depositary receipts in the United
States can reduce costs and delays as well as potential currency exchange and
other difficulties. The Fund may purchase securities in local markets and direct
delivery of these ordinary shares to the local depository of an ADR agent bank
in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Fund's custodian in five days. The Fund may also execute
trades on the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting requirements in
the United States as a domestic issuer. Accordingly the information available to
a U.S. investor will be limited to the information the foreign issuer is
required to disclose in its own country and the market value of an ADR may not
reflect undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are denominated in foreign currency.
RISKS OF INVESTING IN LOWER RATED BONDS: The Fund may invest in fixed income
securities rated Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by
Standard & Poor's Ratings Services ("S&P") or Fitch Investors Service, Inc.
("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 up to 10% of its net assets 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"). 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 and because 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 the outlook for economic growth), short-term corporate and industry
developments and the market's perception of their credit quality (especially
during times of adverse publicity) 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). 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. The prices for these
securities may be affected by legislative and regulatory developments. The
market for these lower rated fixed income securities may be less liquid than the
market for investment grade fixed income securities. Furthermore, the liquidity
of these lower rated securities may be affected by the market's perception of
their credit quality. Therefore, the Adviser's judgment may at times play a
greater role in valuing these securities than in the case of investment grade
fixed income securities, and it also may be more difficult during times of
certain adverse market conditions to sell these lower rated securities to meet
redemption requests or to respond to changes in the market.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Fund's policy to rely exclusively on ratings issued by
these rating agencies, but rather to supplement such ratings with the Adviser's
own independent and ongoing review of credit quality. To the extent the Fund
invests in these lower rated securities, the achievement of its investment
objective may be more dependent on the Adviser's own credit analysis than in the
case of a fund investing in higher quality fixed income securities.
WARRANTS: The Fund will not invest more than 5% of its net assets, valued at the
lower of cost or market, in warrants. Included within such amount, but not to
exceed 2% of the value of its net assets, may be warrants which are not listed
on the New York or American Stock Exchange. Warrants acquired by the Fund in
units or attached to securities may be deemed to be without value.
THE POLICIES STATED ABOVE ARE NOT FUNDAMENTAL AND MAY BE CHANGED WITHOUT
SHAREHOLDER APPROVAL, AS MAY THE FUND'S INVESTMENT OBJECTIVE.
----------------
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
Fund's shares (which, as used in this SAI, means the lesser of (i) more than 50%
of the outstanding shares of the Trust (or a class or series, as applicable) or
(ii) 67% or more of the outstanding shares of the Trust (or a class or series,
as applicable) present at a meeting if holders of more than 50% of the
outstanding shares of the Trust (or a class or series, as applicable) are
represented at such meeting in person or by proxy):
The Fund may not:
(1) Borrow amounts in excess of 5% of its gross assets (taken at the lower
of cost or market value), and then only as a temporary measure for
extraordinary or emergency purposes;
(2) Pledge, mortgage or hypothecate an amount of assets which (taken at
market value) exceeds 15% of its gross assets (taken at the lower of cost or
market value);
(3) Underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security;
(4) Concentrate its investments in any particular industry, but if it is
deemed appropriate for the attainment of its investment objectives, up to 25%
of its assets, at market value at the time of each investment, may be invested
in any one industry;
(5) Purchase or sell real estate (including limited partnership interests
but excluding securities of companies, such as real estate investment trusts,
which deal in real estate or interests therein) or mineral leases, commodities
or commodity contracts in the ordinary course of its business. The Fund
reserves the freedom of action to hold and to sell real estate or mineral
leases, commodities or commodity contracts acquired as a result of the
ownership of securities. The Fund will not purchase securities for the purpose
of acquiring real estate or mineral leases, commodities or commodity
contracts;
(6) Make loans to other persons except through the lending of its portfolio
securities and by entering into repurchase agreements. See the discussion
above under the caption "Investment Policies." Not more than 10% of the Fund's
total assets will be invested in repurchase agreements maturing in more than
seven days. Subject to the limitation set forth in paragraph 16 below, the
Fund may purchase a portion of an issue of debt securities of types commonly
distributed privately to financial institutions. For these purposes the
purchase of short-term commercial paper or a portion of an issue of debt
securities which are part of an issue to the public shall not be considered
the making of a loan;
(7) Purchase the securities of any issuer if such purchase, at the time
thereof, would cause more than 5% of its total assets (taken at market value)
to be invested in the securities of such issuer, other than U.S.
Government securities;
(8) Purchase voting securities of any issuer if such purchase, at the time
thereof, would cause more than 10% of the outstanding voting securities of
such issuer to be held by the Fund; or purchase securities of any issuer if
such purchase at the time thereof would cause the Fund to hold more than 10%
of any class of securities of such issuer. For this purpose all indebtedness
of an issuer shall be deemed a single class and all preferred stock of an
issuer shall be deemed a single class;
(9) Invest for the purpose of exercising control or management;
(10) Purchase securities issued by any other investment company or
investment trust except by purchase in the open market where no commission or
profit to a sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase, though not made
in the open market, is part of a plan of merger or consolidation, provided,
however, that the Fund shall not purchase the securities of any investment
company or investment trust if such purchase at the time thereof would cause
more than 10% of the Fund's total assets (taken at market value) to be
invested in the securities of such issuer, and provided, further, that the
Fund shall not purchase securities issued by any open-end investment company;
(11) Invest more than 5% of its assets in companies which, including
predecessors, have a record of less than three years' continuous operation;
(12) Purchase or retain in its portfolio any securities issued by an issuer
any of whose officers, directors, trustees or security holders is an officer
or Trustee of the Trust, or is an officer or director of the Adviser, if after
the purchase of the securities of such issuer by the Fund one or more of such
persons owns beneficially more than 1/2 of 1% of the shares or securities, or
both, all taken at market value, of such issuer, and such persons owning more
than 1/2 of 1% of such shares or securities together own beneficially more
than 5% of such shares or securities, or both, all taken at market value;
(13) Purchase any securities on margin except that the Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of securities;
(14) Sell any security which the Fund does not own unless by virtue of its
ownership of other securities the Fund has at the time of sale a right to
obtain securities without payment of further consideration equivalent in kind
and amount to the securities sold and provided that if such right is
conditional the sale is made upon the same conditions;
(15) Purchase or sell any put or call options or any combination thereof,
provided, that this shall not prevent the purchase, ownership, holding or sale
of warrants where the grantor of the warrants is the issuer of the underlying
securities; or
(16) Invest in securities which are subject to legal or contractual
restrictions on resale, or for which there is no readily available market
(e.g., trading in the security is suspended, or, in the case of unlisted
securities, market makers do not exist or will not entertain bids or offers),
unless the Board of Trustees has determined that such securities are liquid
based upon trading markets for the specific security, if more than 10% of the
Fund's assets (taken at market value) would be invested in such securities.
APPLICABILITY OF RESTRICTIONS: These investment restrictions 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.
4. MANAGEMENT OF THE FUND
The Board of Trustees provides broad supervision over the affairs of the Fund.
The Adviser is responsible for the investment management of the Fund and the
officers of the Trust are responsible for its operations. The Trustees and
officers of the Trust are listed below, together with their principal
occupations during the past five years. (Their titles may have varied during
that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President (born 8/4/35)
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY* (born 9/14/26)
Private investor; Massachusetts Financial Services Company, former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
PETER G. HARWOOD (born 4/3/26)
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES (born 5/1/36)
Eastern Enterprises (diversified holding company), Chairman and Chief
Executive Officer; The Neiman Marcus Group, Inc., Vice Chairman and Chief
Financial Officer (prior to February 1992)
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA (born 6/23/35)
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU (born 4/10/35)
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge,
Massachusetts
CHARLES W. SCHMIDT (born 3/18/28)
Private investor; OHM Corporation, Director; The Boston Company, Director;
Boston Safe Deposit and Fund Company, Director; Mohawk Paper Company,
Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/32)
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, President
ELAINE R. SMITH (born 4/25/46)
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (prior to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Director
Address: 10 Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- ----------
*"Interested persons" (as defined in the Investment Company Act of 1940, as
amended ("1940 Act")) of the Adviser whose address is 500 Boylston Street,
Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS
affiliates or with certain other funds of which MFS or a subsidiary of MFS is
the investment adviser or distributor. Mr. Brodkin, the Chairman of MFD,
Messrs. Shames and Scott, Directors of MFD, and Mr. Cavan, the Secretary of
MFD hold similar positions with certain other MFS affiliates. Mr. Bailey is a
Director of Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada
(U.S.)"), the corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey who
currently receive a fee of $2,500 per year plus $135 per meeting and $100 per
committee meeting attended, together with such Trustee's out-of-pocket expenses.
The Trust has adopted a retirement plan for non-interested Trustees and Mr.
Bailey. Under this plan, a Trustee will retire upon reaching age 73 and if the
Trustee has completed at least five years of service, he or she would be
entitled to annual payments during his lifetime of up to 50% of such Trustee's
average annual compensation (based on the three years prior to his retirement)
depending on his length of service. A Trustee may also retire prior to age 73
and receive reduced payments if he or she has completed at least five years of
service. Under the plan, a Trustee (or his or her beneficiaries) will also
receive benefits for a period of time in the event the Trustee is disabled or
dies. These benefits will also be based on the Trustee's average annual
compensation and length of service. There is no retirement plan provided by the
Trust for Messrs. Brodkin, Scott and Shames. The Fund will accrue its allocable
share of compensation expenses each year to cover current year's service and
amortize past service cost.
Set forth below is certain information concerning the cash compensation paid to
the Trustees and benefits accrued, and estimated benefits payable, under the
retirement plan.
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $3,770 $ 726 8 $247,168
A. Keith Brodkin --0-- --0-- N/A --0--
Peter G. Harwood 4,170 477 5 105,995
J. Atwood Ives 3,710 757 17 98,750
Lawrence T. Perera 3,835 1,506 26 98,310
William J. Poorvu 4,170 1,576 25 102,840
Charles W. Schmidt 4,170 1,497 20 105,995
Arnold D. Scott --0-- --0-- N/A --0--
Jeffrey L. Shames --0-- --0-- N/A --0--
Elaine R. Smith 4,170 749 27 105,995
David B. Stone 4,240 1,579 14 108,710
(1) For fiscal year ended September 30, 1996.
(2) Based on normal retirement age of 73.
(3) For calendar year 1996. All Trustees receiving compensation served as Trustees of 23 funds within the MFS fund complex (having
aggregate net assets at December 31, 1996, of approximately $21.2 billion) except Mr. Bailey, who served as Trustee of
funds within the MFS fund complex (having aggregate net assets at December 31, 1996, of approximately $38.5 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
-------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- -----------------------------------------------------------------------------
$3,339 $501 $ 835 $1,169 $1,670
3,604 541 901 1,261 1,802
3,869 580 967 1,354 1,935
4,134 620 1,034 1,447 2,067
4,399 660 1,100 1,540 2,200
4,664 700 1,166 1,632 2,332
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of December 31, 1996, all Trustees and officers as a group owned less than 1%
of the Fund's shares outstanding.
As of December 31, 1996, Merrill Lynch Pierce Fenner & Smith Inc., Attn: Fund
Administration, 4800 Deer Lake Drive East, Jacksonville, FL 32232-6484 was the
record owner of 5.77% of the outstanding Class A shares of the Fund, 13.05% of
the outstanding Class B shares of the Fund and 28.94% of the outstanding Class C
shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless it
is finally adjudicated that they engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in their offices,
or with respect to any matter unless it is adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interests of the Trust. In the case of a settlement, such indemnification will
not be provided unless it has been determined pursuant to the Declaration of
Trust, that such officers or Trustees have not engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in
their offices.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Adviser manages the Fund pursuant to an Investment Advisory Agreement, dated
September 1, 1993 (the "Advisory Agreement"). The Adviser provides the Fund with
overall investment advisory and administrative services, as well as general
office facilities. 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 on
the basis of a formula based upon a percentage of the Fund's average daily net
assets plus a percentage of its gross income (i.e. income other than gains from
the sale of securities). The applicable percentages are reduced as assets and
income reach the following levels:
ANNUAL RATE OF MANAGEMENT FEE ANNUAL RATE OF MANAGEMENT FEE
BASED ON AVERAGE DAILY NET ASSETS BASED ON GROSS INCOME
- --------------------------------------------------------------------
0.40% of the first $100 million 5.0% of the first $2 million
0.32% of the next $400 million 4.0% of the next $8 million
0.288% of average daily net assets 3.6% of gross income in excess of
in excess of $500 million $10 million
For the fiscal year ended September 30, 1996, MFS received management fees of
$4,095,566 (of which $3,518,278 was based on average daily net assets and
$577,288 on gross income), equivalent on an annualized basis to 0.36% of the
Fund's average daily net assets. For the fiscal year ended September 30, 1995,
MFS received management fees under the Fund's Investment Advisory Agreement of
$1,910,078 (of which $1,588,228 was based on average daily net assets and
$321,850 on gross income), equivalent on an annualized basis to 0.41% of the
Fund's average daily net assets. For the fiscal year ended September 30, 1994,
MFS received management fees of $1,217,986 (of which $151,240 was based on
average daily net assets and $1,066,746 on gross income), equivalent on an
annualized basis to .39% of the Fund's average daily net assets. In order to
comply with the expense limitations of certain state securities commissions, the
Adviser will reduce its management fee or otherwise reimburse the Fund for any
expenses, exclusive of interest, taxes and brokerage commissions, incurred by
the Fund in any fiscal year to the extent such expenses exceed the most
restrictive of such state expense limitations. The Adviser will make appropriate
adjustments to such reimbursements in response to any amendment or recission of
the various state requirements. Any such adjustment would not become effective
until the beginning of the Fund's next fiscal year following the date of such
amendments or the date on which such requirements become no longer applicable.
The Fund pays its expenses (other than those assumed by MFS or MFD), including:
governmental fees; interest charges; taxes; membership dues in the Investment
Company Institute allocable to the Fund; fees and expenses of independent
auditors, of legal counsel, and of any transfer agent, registrar or dividend
disbursing agent of the Fund; expenses of repurchasing and redeeming shares;
expenses of preparing, printing and mailing share certificates, shareholder
reports, notices, proxy statements and reports to governmental officers and
commissions; brokerage and other expenses connected with the execution,
recording and settlement of portfolio security transactions; insurance premiums;
fees and expenses of Investors Bank & Trust Company, the Fund's custodian, for
all services to the Fund, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of calculating the net asset
value of shares of the Fund; and expenses of shareholder meetings. Expenses
relating to the issuance, registration and qualification of shares of the Fund
and the preparation, printing and mailing of prospectuses for such purposes are
borne by the Fund except that its Distribution Agreement with MFD, the Fund's
principal underwriter, requires MFD to pay for prospectuses that are to be used
for sales purposes. Expenses of the Trust which are not attributable to a
specific series are allocated among the series in a manner believed by
management of the Trust to be fair and equitable. For a list of the Fund's
expenses, including the compensation paid to the Trustees who are not officers
of MFS, during the fiscal year ended September 30, 1995, see "Financial
Statements -- Statement of Operations" in the Annual Report to shareholders.
Payment by the Fund of brokerage commissions for brokerage and research services
of value to the Adviser in serving its clients is discussed under the caption
"Portfolio Transactions and Brokerage Commissions."
MFS pays the compensation of the Trust's officers and any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing the Fund's investments, effecting its portfolio
transactions, and, in general, administering its affairs.
The Advisory Agreement will remain in effect until August 1, 1997, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Advisory Agreement or
interested persons of any such party. The Advisory Agreement terminates
automatically if it is assigned and may be terminated without penalty by vote of
a majority of the Fund's shares (as defined in "Investment Restrictions") or by
either party on not more than 60 days' nor less than 30 days' written notice.
The Advisory Agreement provides that neither the Adviser nor its personnel shall
be liable for any error of judgment or mistake of law or for any loss arising
out of any investment or for any act or omission in the execution and management
of the Fund, except for willful misfeasance, bad faith or gross negligence in
the performance of its or their duties or by reason of reckless disregard of its
or their obligations and duties under the Advisory Agreement.
CUSTODIAN
Investors Bank & Trust Company (the "Custodian") is the custodian of the Fund's
assets. The Custodian's responsibilities include safekeeping and controlling the
Fund's cash and securities, handling the receipt and delivery of securities,
determining income and collecting interest and dividends on the Fund's
investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agreement, effective August 1, 1985 (the "Agency
Agreement"). The Shareholder Servicing Agent's responsibilities under the Agency
Agreement include administering and performing transfer agent functions and
keeping records in connection with the issuance, transfer and redemption of each
class of shares of the Fund. For these services, the Shareholder Servicing Agent
will receive a fee calculated as a percentage of the average daily net assets of
the Fund at an effective annual rate of 0.13%. In addition, the Shareholder
Servicing Agent will be reimbursed by the Fund for certain expenses incurred by
the Shareholder Servicing Agent on behalf of the Fund. State Street Bank and
Trust Company, the dividend and distribution disbursing agent of the Fund, has
contracted with the Shareholder Servicing Agent to administer and perform
certain dividend and distribution disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement, dated
January 1, 1995 as amended and restated (the "Distribution Agreement"). Prior to
January 1, 1995, MFS Financial Services, Inc. ("FSI"), another wholly owned
subsidiary of MFS, was the Fund's distributor. Where this SAI refers to MFD in
relation to the receipt or payment of money with respect to a period or periods
prior to January 1, 1995, such reference shall be deemed to include FSI, as the
predecessor in interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of Class A shares of the Fund is their net
asset value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share of the
Fund is calculated by dividing the net asset value of a Class A share by the
difference (expressed as a decimal) between 100% and the sales charge percentage
of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any person, including
members of a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs" below). A group
might qualify to obtain quantity sales charge discounts (see "Investment and
Withdrawal Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons or in certain circumstances, as described in the Prospectus. Such sales
are made without a sales charge to promote good will with employees and others
with whom MFS, MFD and/or the Fund have business relationships, and because the
sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of offering price or as a percentage of the net amount invested
as listed in the Prospectus. In the case of the maximum sales charge, the dealer
retains 5% and MFD retains approximately 3/4 of 1% of the public offering price.
In addition, MFD on behalf of the Fund pays a commission on purchases of $1
million or more as described in the Prospectus.
CLASS B SHARES, CLASS C SHARES AND CLASS I SHARES: MFD acts as agent in selling
Class B, Class C and Class I shares of the Fund to dealers. The public offering
price of Class B, Class C and Class I shares is their net asset value next
computed after the sale (see "Purchases" in the Prospectus and the Prospectus
Supplement pursuant to which Class I shares are offered).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
During the Fund's fiscal year ended September 30, 1996, MFD received net
commissions of $1,332,269 and dealers received net commissions of $8,647,645 (as
their concession on gross commissions of $9,979,914) for selling Class A shares
of the Fund; the Fund received $333,855,871 representing the aggregate net asset
value of such shares. During the Fund's fiscal year ended September 30, 1995,
MFD received net commissions of $218,078 and dealers received net commissions of
$3,222,518 (as their concession on gross commissions of $3,440,596) for selling
Class A shares of the Fund; the Fund received $114,399,469 representing the
aggregate net asset value of such shares. During the Fund's fiscal year ended
September 30, 1994, MFD received net commissions of $50,210 and dealers received
net commissions of $469,118 (as their concession on gross commissions of
$540,772) for selling Class A shares of the Fund; the Fund received $31,765,695
representing the aggregate net asset value of such shares.
During the Fund's fiscal year ended September 30, 1996, the Contingent Deferred
Sales Charge ("CDSC") imposed on redemption of Class A, B and C shares was
$3,234, $407,275 and $6,647, respectively. During the Fund's fiscal year ended
September 30, 1995, the CDSC imposed on redemption of Class A and Class B shares
was $654 and $109,742, respectively. During the Fund's fiscal year ended
September 30, 1994, the CDSC imposed on redemption of Class A and Class B shares
was $128 and $7,566, respectively.
The Distribution Agreement will remain in effect until August 1, 1997, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's outstanding voting securities and, in either case, by a majority of the
Trustees who are not parties to the Distribution Agreement or interested persons
of any such party. The Distribution Agreement terminates automatically if it is
assigned and may be terminated without penalty by either party on not more than
60 days' nor less than 30 days' notice.
5. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by a
portfolio committee consisting of persons who are employees of the Adviser and
who are appointed and supervised by its senior officers. Changes in the Fund's
investments are reviewed by the Board of Trustees. Members of the Fund's
portfolio committee may serve other clients of the Adviser or any subsidiary of
the Adviser in a similar capacity.
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. The Adviser attempts to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of the Fund and other
clients of the Adviser on the basis of their professional capability, the value
and quality of their brokerage services, and the general level of their
brokerage commissions. In the case of securities traded in the over-the-counter
market (where no stated commissions are paid but the prices include a dealer's
markup or markdown), the Adviser normally seeks to deal directly with the
primary market makers, unless in its opinion, best execution is available
elsewhere. In the case of securities purchased from underwriters, the cost of
such securities generally includes a fixed underwriting commission or
concession. From time to time, soliciting dealer fees are available to the
Adviser on the tender of the Fund's portfolio securities in so-called tender or
exchange offers. Such soliciting dealer fees are in effect recaptured for the
Fund by the Adviser. At present no other recapture arrangements are in effect.
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 other investment company clients of MFD as a factor in
the selection of broker-dealers to execute the Fund's portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the Securities
Exchange Act of 1934, the Adviser may cause the Fund to pay a broker-dealer
which provides brokerage and research services to the Adviser an amount of
commission for effecting a securities transaction for the Fund in excess of the
amount other broker-dealers would have charged for the transaction if the
Adviser determines in good faith that the greater commission is reasonable in
relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of either a particular transaction or
the Adviser's overall responsibilities to the Fund or to its other clients. Not
all of such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing, or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to the
availability of securities or of purchasers or sellers of securities and
services in effecting securities transactions and performing functions
incidental thereto such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser for no consideration other
than brokerage or underwriting commissions. Securities may be bought or sold
from time to time through such broker-dealers on behalf of the Fund. The Trust's
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $39,100 of commission business from the MFS Funds
to the Pershing Division of Donaldson, Lufkin & Jenrette as consideration for
the annual renewal of certain publications provided by Lipper Analytical
Securities Corporation (which provides information useful to the Trustees in
reviewing the relationship between the Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. The Adviser sometimes uses evaluations resulting
from this effort as a consideration in the selection of brokers to execute
portfolio transactions. However, the Adviser is unable to quantify the amount of
commissions set forth below which were paid as a result of such Research because
a substantial number of transactions were effected through brokers which provide
Research but which were selected principally because of their execution
capabilities.
The management fee that the Fund pays to the Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research services. To the
extent the Fund's portfolio transactions are used to obtain such services, the
brokerage commissions paid by the Fund will exceed those that might otherwise be
paid, by an amount which cannot be presently determined. Such services would be
useful and of value to the Adviser in serving both the Fund and other clients
and, conversely, such services obtained by the placement of brokerage business
of other clients would be useful to the Adviser in carrying out its obligations
to the Fund. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through use of the services, avoid the additional
expenses which would be incurred if it should attempt to develop comparable
information through its own staff.
For the Fund's fiscal years ended September 1996, 1995 and 1994, total brokerage
commissions of $3,831,659, $1,378,386 and $814,169, respectively were paid on
total transactions of $2,556,113,000, $770,648,324 and $354,434,695. During the
Fund's fiscal year ended September 30, 1996, the Fund did not acquire or sell
securities issued by affiliates of regular broker-dealers of the Fund.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, the Fund believes that its ability to
participate in volume transactions will produce better executions for the Fund.
6. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available programs designed
to enable shareholders to add to their investment 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 described
below) anticipates purchasing $50,000 or more of Class A shares of the Fund
alone or in combination with shares of Class B or Class C of the Fund or any of
the classes of other MFS Funds or MFS Fixed Fund (a bank collective investment
fund) within a 13-month period (or 36 month period, in the case of purchases of
$1 million or more), the shareholder may obtain Class A shares of the Fund at
the same reduced sales charge as though the total quantity were invested in one
lump sum by completing the Letter of Intent section of the Fund's Account
Application or filing a separate Letter of Intent application (available from
the Shareholder Servicing Agent) within 90 days of the commencement of
purchases. Subject to acceptance by MFD and the conditions mentioned below, each
purchase will be made at a public offering price applicable to a single
transaction of the dollar amount specified in the Letter of Intent application.
The shareholder or his dealer must inform MFD that the Letter of Intent is in
effect each time shares are purchased. The shareholder makes no commitment to
purchase additional shares, but if his purchases within 13 months (or 36 months
in the case of purchases of $1 million or more) plus the value of shares
credited toward completion of the Letter of Intent do not total the sum
specified, he will pay the increased amount of the sales charge as described
below. Instructions for issuance of shares in the name of a person other than
the person signing the Letter of Intent application must be accompanied by a
written statement from the dealer stating that the shares were paid for by the
person signing such Letter. Neither income dividends nor capital gain
distributions taken in additional shares will apply toward the completion of the
Letter of Intent. Dividends and distributions of other MFS Funds automatically
reinvested in shares of the Fund pursuant to the Distribution Investment Program
will also not apply toward completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when that shareholder's new
investment, together with the current offering price value of all holdings of
Class A, B and C shares of that shareholder in the MFS Funds or MFS Fixed Fund
(a bank collective investment fund) reaches a discount level. See "Purchases" in
the Prospectus for the sales charges on quantity discounts. For example, if a
shareholder owns shares valued at public offering price at $37,500 and purchases
an additional $12,500 of Class A shares of the Fund, the sales charge for the
$12,500 purchase would be at the rate of 4.75% (the rate applicable to single
transactions of $50,000). A shareholder must provide the Shareholder Servicing
Agent (or his investment dealer must provide MFD) with information to verify
that the quantity sales charge discount is applicable at the time the investment
is made.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow 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.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS Funds
if shares of such fund are available for sale. Such investments will be subject
to additional purchase minimums. Distributions will be invested at net asset
value (exclusive of any sales charge) and will not be subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other MFS fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments, based
upon the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B shares in any year pursuant to a Plan generally
are limited to 10% of the value of the account at the time of the establishment
of the SWP. SWP payments are drawn from the proceeds of share redemptions (which
would be a return of principal and, if reflecting a gain, would be taxable).
Redemptions of Class B and Class C shares will be made in the following order:
(i) any "Free Amount"; (ii) to the extent necessary any "Reinvested Shares";
(iii) to the extent necessary, the "Direct Purchase" subject to the lowest CDSC
(as such terms are defined in "Contingent Deferred Sales Charge" in the
Prospectus). The CDSC will be waived in the case of redemptions of Class B and
Class C shares pursuant to a SWP, but will not be waived in the case of SWP
redemptions of Class A shares which are subject to a CDSC. To the extent that
redemptions for such periodic withdrawals exceed dividend income reinvested in
the account, such redemptions will reduce and may eventually exhaust the number
of shares in the shareholder's account. All dividend and capital gain
distributions for an account with a SWP will be reinvested in full and
fractional shares of the Fund at the net asset value in effect at the close of
business on the record date for such distributions. To initiate this service,
shares having an aggregate value of at least $5,000 either must be held on
deposit by, or certificates for such shares must be deposited with, the
Shareholder Servicing Agent. With respect to Class A shares, maintaining a
withdrawal plan concurrently with an investment program would be disadvantageous
because of the sales charges included in share purchases and the imposition of a
CDSC on certain redemptions. The shareholder may deposit into the account
additional shares of the Fund, change the payee or change the dollar amount of
each payment. The Shareholder Servicing Agent may charge the account for
services rendered and expenses incurred beyond those normally assumed by the
Fund with respect to the liquidation of shares. No charge is currently assessed
against the account, but one could be instituted by the Shareholder Servicing
Agent on 60 days' notice in writing to the shareholder in the event that the
Fund ceases to assume the cost of these services. The Fund may terminate any SWP
for an account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of shares of
the Fund for shares of another MFS Fund. Any SWP may be terminated at any time
by either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not a Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
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
other MFS Funds (if available for sale) 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 six different funds effective on the seventh
day of each month or of every third month, depending whether monthly or
quarterly exchanges are elected by the shareholder. If the seventh day of the
month is not a business day, the transaction will be processed on the next
business day. Generally, the initial exchange will occur after receipt and
processing by the Shareholder Servicing Agent of an application in good order.
Exchanges will continue to be made from a shareholder's account in any MFS Fund
as long as the balance of the account is sufficient to complete the exchanges.
Additional payments made to a shareholder's account will extend the period that
exchanges will continue to be made under the Automatic Exchange Plan. However,
if additional payments are added to an account subject to the Automatic Exchange
Plan shortly before an exchange is scheduled, such funds may not be available
for exchanges until the following month; therefore, care should be used to avoid
inadvertently terminating the Automatic Exchange Plan through exhaustion of the
account balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the program)
must involve at least $50. Generally, if an Exchange Change Request is received
by telephone or in writing before the close of business on the last business day
of a month, the Exchange Change Request will be effective for the following
month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the
other MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund
and holders of Class A shares of MFS Cash Reserve Fund in the case where such
shares are acquired through direct purchase or reinvested dividends) 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 the fund are
available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid. In the case of proceeds reinvested in
shares of MFS Money Market Fund, MFS Government Money Market Fund and Class A
shares of MFS Cash Reserve Fund, the shareholder has the right to exchange such
shares for shares of another MFS Fund at net asset value pursuant to the
exchange privilege described below. Such a reinvestment must be made within 90
days of the redemption and is limited to the amount of the redemption proceeds.
If the shares credited for any CDSC paid are then redeemed within six years of
the initial purchase for Class B shares (or within 12 months of the initial
purchase of Class C shares and certain Class A shares), a CDSC will be imposed
upon redemption. Although redemptions and repurchases of shares are taxable
events, a reinvestment within a certain period of time in the same fund may be
considered a "wash sale" and may result in the inability to recognize currently
all or a portion of a loss realized on the original redemption for federal
income tax purposes. Please see your tax advisor for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares 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 and if the purchaser is eligible to
purchase the class of shares) at net asset value. Exchanges will be made only
after instructions in writing or by telephone (an "Exchange Request") for an
established account are received by the Shareholder Servicing Agent.
Each Exchange Request must be 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 the 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 the Shareholder Servicing Agent). Each
exchange involves the redemption of the shares of the Fund to be exchanged and
the purchase at net asset value (i.e., without a sales charge) of shares of the
same class of the other MFS Fund. Any gain or loss on the redemption of the
shares exchanged is reportable on the shareholder's federal income tax return,
unless both the shares received and the shares surrendered are held in a
tax-deferred retirement plan or other tax-exempt account. No more than five
exchanges may be made in any one Exchange Request by telephone. If an Exchange
Request is received by the Shareholder Servicing Agent 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 restrictions set forth above have been
complied with at that time. However, payment of the redemption proceeds by the
Fund, and thus the purchase of shares of another MFS Fund, may be delayed for up
to seven days if the Fund determines that such a delay would be in the best
interest of all its shareholders. Investment dealers which have satisfied
criteria established by MFD may also communicate a shareholder's Exchange
Request to MFD by facsimile subject to the restrictions and requirements set
forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged 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.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other MFS Fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except shares of MFS Money Market Fund, MFS Government Money Market
Fund and Class A shares of MFS Cash Reserve Fund acquired through direct
purchase and dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of the Fund, subject to the conditions, if any,
set forth in their respective prospectuses. In addition, unitholders of the MFS
Fixed Fund (a bank collective investment fund) have the right to exchange their
units (except units acquired through direct purchases) for shares of the Fund,
subject to the conditions, if any, imposed upon such unitholders by the MFS
Fixed Fund.
Any state income tax advantages for investment in shares of each state-specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Except as noted below, shares of the Fund may
be purchased by all types of tax-deferred retirement plans. MFD makes available
through investment dealers plans and/or custody agreements for the following:
Individual Retirement Accounts ("IRAs") (for individuals and their
non-employed spouses who desire to make limited contributions to a
tax-deferred retirement program and, if eligible, to receive a federal income
tax deduction for amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code");
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain qualified corporate pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any retirement plan
qualified under Internal Revenue Code section 401(a) or 403(b) 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.
7. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, by meeting all
applicable requirements of Subchapter M, including requirements as to the nature
of the Fund's gross income, the amount of Fund distributions, and the
composition and holding period of the Fund's portfolio assets. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to shareholders in accordance with the timing requirements imposed by the
Code, it is not expected that the Fund will be required to pay any federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income (including certain foreign
currency gains), and any distributions from net short-term capital gains are
taxable to shareholders as ordinary income for federal income tax purposes
(whether paid in cash or reinvested in additional shares). A portion of the
Fund's ordinary income dividends is normally eligible for the dividends received
deduction for corporations if the recipient otherwise qualifies for that
deduction with respect to its holding of Fund shares. Availability of the
deduction for particular corporate shareholders is subject to certain
limitations, and deducted amounts may be subject to the alternative minimum tax
and may result in certain basis adjustments. Distributions of net capital gains
(i.e., the excess of net long-term capital gains over net short-term capital
losses), whether paid in cash or reinvested in additional shares, are taxable to
shareholders as long-term capital gains without regard to the length of time the
shareholders have held shares in the Fund. Any Fund dividend that is declared in
October, November or December of any calendar year that is payable to
shareholders of record in such a month, and that is paid the following January
will be treated as if received by shareholders on December 31 of the year in
which the dividend is declared. The Fund will notify shareholders regarding the
federal tax status of its distributions after the end of each calendar year.
Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss.
However, any loss realized upon a disposition of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within 90 days after their purchase
followed by any purchase without payment of an additional sales charge
(including purchases by exchange or by reinvestment) of Class A shares of the
Fund or of another MFS Fund (or any other shares of an MFS Fund generally sold
subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing and character of distributions to shareholders and may, under certain
circumstances, make an economic return of capital taxable to shareholders. The
Fund's investment in debt securities providing for deferred interest and certain
securities purchased at market discount will cause the Fund to recognize income
prior to the receipt of cash payments with respect to those securities. In order
to distribute this income and avoid a tax on the Fund, the Fund may be required
to liquidate portfolio securities that it might otherwise have continued to
hold, potentially resulting in additional taxable gain or loss to the Fund.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. Use of foreign currencies and investment
by the Fund in certain "passive foreign investment companies" may be limited in
order to avoid a tax on the Fund. Investment income received by the Fund from
foreign securities may be subject to foreign income taxes withheld at the
source; the Fund does not expect to be able to pass through to shareholders
foreign tax credits with respect to such foreign taxes. The United States has
entered into tax treaties with many foreign countries that may entitle the Fund
to a reduced rate of tax or an exemption from tax on such income; the Fund
intends to qualify for treaty reduced rates where available. It is not possible,
however, to determine the Fund's effective rate of foreign tax in advance since
the amount of the Fund's assets to be invested within various countries is not
known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Fund intends
to withhold U.S. federal income tax at the rate of 30% on taxable dividends and
other payments to Non-U.S. persons that are subject to such withholding,
regardless of whether a lower rate may be permitted under an applicable treaty.
Any amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period appropriate
to such claims. Distributions received from the Fund by Non-U.S. persons also
may be subject to tax under the laws of their own jurisdictions. The Fund is
also required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a Non-U.S. Person) who does not furnish to the Fund certain
information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be subject to Massachusetts income or excise taxes.
8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for regular trading. (As of the date of this
SAI, the Exchange is open for regular trading every weekday except for the
following holidays or days on which they are observed: New Year's Day;
Presidents' Day; Good Friday; Memorial Day; Independence Day; Labor Day;
Thanksgiving Day and Christmas Day.) This determination is made once each day as
of the close of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets attributable
to the class and dividing the difference by the number of shares of the class
outstanding. Equity securities in the Fund's portfolio are valued at the last
sale price on the exchange on which they are primarily traded or on the NASDAQ
system for unlisted national market issues, or at the last quoted bid price for
securities in which there were no sales during the day or for unlisted
securities not reported on the NASDAQ system.
Bonds and other fixed income securities in the Fund's portfolio are valued on
the basis of valuations furnished by a pricing service which utilizes both
dealer-supplied valuations and electronic data processing techniques which take
into account appropriate factors such as institution-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
exchange or over-the-counter prices, since such valuations are believed to
reflect more accurately the fair value of such securities. Use of the pricing
service has been approved by the Trust's Board of Trustees. Short-term
obligations with a remaining maturity in excess of 60 days will be valued upon
dealer supplied valuations. Other short-term obligations are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees.
Portfolio securities for which there are no such quotations or valuations are
valued at fair value as determined in good faith by or at the direction of the
Board of Trustees.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (4% maximum for Class B shares and 1% maximum for Class C
shares purchased after April 1, 1996) and therefore may result in a higher rate
of return, (ii) a total rate of return assuming an initial account value of
$1,000, which will result in a higher rate of return since the value of the
initial account will not be reduced by the maximum sales charge (currently 5.75%
on Class A shares), and/or (iii) total rates of return which represent aggregate
performance over a period or year-by-year performance, and which may or may not
reflect the effect of the maximum or other sales charge or CDSC. Prior to March
1, 1991, the maximum sales charge on Class A shares was 7.25%. On March 1, 1991,
the maximum sales charge on Class A shares was lowered to 5.75%, the sales
charge was eliminated on reinvested dividends and a Distribution Plan pursuant
to Rule 12b-1 under the 1940 Act was implemented with respect to Class A shares.
The Fund offers multiple classes of shares which were initially offered for sale
to the public on different dates. The calculation of total rate of return for a
class of shares which initially was offered for sale to the public subsequent to
another class of shares of the Fund is based both on (i) the performance of the
Fund's newer class from the date it initially was offered for sale to the public
and (ii) the performance of the Fund's oldest class from the date it initially
was offered for sale to the public up to the date that the newer class initially
was offered for sale to the public.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest shares (e.g., Rule 12b-1 fees). Therefore, the total
rate of return quoted for a newer class of shares will differ from the return
that would be quoted had the newer class of shares been outstanding for the
entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would have
been quoted had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for the newer
class are higher than the class specific expenses of the oldest class, and the
total rate of return quoted for the newer class will be lower than the return
that would be quoted had the newer class of shares been outstanding for this
entire period if the class specific expenses for the newer class are lower than
the class specific expenses of the oldest class).
Total rate of return quotations for each class are presented in Appendix B
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS: The performance results for Class A shares presented in
Appendix B attached hereto under the heading "Performance Results" assume an
initial investment of $10,000 in Class A shares, and cover the period from
January 1, 1987 through December 31, 1996. It has been assumed that dividends
and capital gain distributions were reinvested in additional shares. These
performance results, as well as any total rate of return quotations provided by
the Fund, should not be considered as representative of the performance of the
Fund in the future since the net asset value and public offering price of shares
of the Fund will vary based not only on the type, quality and maturities of the
securities held in the Fund's portfolio, but also on changes in the current
value of such securities and on changes in the expenses of the Fund. These
factors and possible differences in the methods used to calculate total rates of
return should be considered when comparing the total rate of return of the Fund
to total rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value of shares and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
GENERAL: From time to time each Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks and similar or related matters.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planningsm program, an inter-generational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; and other
similar or related matters.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established
as the first open-end mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund
to make full public disclosure of its operations in shareholder
reports.
-- 1932 -- One of the first internal research departments is
established to provide in-house analytical capability for an
investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund
to register under the Securities Act of 1933 ("Truth in
Securities Act" or "Full Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund
to allow shareholders to take capital gain distributions either
in additional shares or in cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal
bond funds established.
-- 1979 -- Spectrum becomes the first combination fixed/ variable
annuity with no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as
America's first globally diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end
mutual fund to seek high tax-free income from lower-rated
municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual
fund to target and shift investments among industry sectors for
shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock
Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first
closed-end, multimarket high income fund listed on the New York
Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified
market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first
global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging
markets fund to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard
Trust, the first Trust to invest in companies deemed to be
union-friendly by an Advisory Board of senior labor officials,
senior managers of companies with significant labor contracts,
academics and other national labor leaders or experts.
9. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares (the "Distribution Plan") 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 Distribution Plan would benefit the Fund and each
respective class of shareholders. The provisions of the Distribution Plan are
severable with respect to each class of shares offered by the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the expense ratio to the extent
the Fund's fixed costs are spread over a larger net asset base. Also, an
increase in net assets may lessen the adverse effects that could result were the
Fund required to liquidate portfolio securities to meet redemptions. There is,
however, no assurance that the net assets of the Fund will increase or that the
other benefits referred to above will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to Class A Shares, no service fees will be paid: (i)
to any dealer who is the holder or dealer of record for investors who own Class
A shares having an aggregate net asset value less than $750,000, or such other
amount as may be determined from time to time by MFD (MFD, however, may waive
this minimum amount requirement from time to time); or (ii) to any insurance
company which has entered into an agreement with the Fund and MFD that permits
such insurance company to purchase Class A shares from the Fund at their net
asset value in connection with annuity agreements issued in connection with the
insurance company's separate accounts. Dealers may from time to time be required
to meet certain other criteria in order to receive service fees.
With respect to Class B Shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder or
dealer of record for investors who own Class B shares having an aggregate net
asset value of less than $750,000 or such other amount as may be determined by
MFD from time to time. MFD, however, may waive this minimum amount requirement
from time to time. Dealers may from time to time be required to meet certain
other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
the 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.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plans is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of 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 cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended September 30, 1996, the Fund paid the following
Distribution Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
CLASSES OF SHARES BY FUND BY MFD BY DEALERS
- ----------------- ------------ ------------- -------------
Class A Shares $2,257,754 $324,818 $1,932,936
Class B Shares $3,750,472 $ 28,216 $3,722,256
Class C Shares $ 658,367 $ 29,789 $ 628,578
GENERAL: The Distribution Plan will remain in effect until August 1, 1997, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the Trustees
shall review, at least quarterly, a written report of the amounts expended (and
purposes therefor) under such Plan. The Distribution Plan may be terminated at
any time by vote of a majority of the Distribution Plan Qualified Trustees or by
vote of the holders of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions"). All agreements relating to the
Distributions Plan entered into between the Fund or MFD and other organizations
must be approved by the Board of Trustees, including a majority of the
Distribution Plan Qualified Trustees. Agreements under the Distribution Plan
must be in writing, will be terminated automatically if assigned, and may be
terminated at any time without payment of any penalty, by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions") or may not be materially amended in
any case without a vote of the Trustees and a majority of the Distribution Plan
Qualified Trustees. The selection and nomination of Distribution Plan Qualified
Trustees shall be committed to the discretion of the non-interested Trustees
then in office. No Trustee who is not an "interested person" has any financial
interest in the Distribution Plan or in any related agreement.
10. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES The Declaration of
Trust permits the Trustees to issue an unlimited number of full and fractional
Shares of Beneficial Interest (without par value) of one or more separate series
and to divide or combine the shares of any series into a greater or lesser
number of shares without thereby changing the proportionate beneficial interests
in that series. The Trustees have currently authorized shares of the Fund and
one other series. The Declaration of Trust further authorizes the Trustees to
classify or reclassify any series of shares into one or more classes. Pursuant
thereto, the Trustees have authorized the issuance of four classes of shares of
each series of the Trust (Class A, Class B and Class C shares as well as Class I
shares for the Fund). Each share of a class of the Fund represents an equal
proportionate interest in the assets of the Fund allocable to that class. Upon
liquidation of the Fund, the shareholders of each class of the Fund are entitled
to share pro rata in the net assets of the Fund allocable to such class
available for distribution to its shareholders. The Trust reserves the right to
create and issue additional classes or series of shares, in which case the
shares of each class would participate equally in the earnings, dividends and
assets allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have, under certain circumstances, the right to remove one or more Trustees. No
material amendment may be made to the Declaration of Trust without the
affirmative vote of the holders of a majority of the Trust's shares or by an
instrument in writing without a meeting, signed by a majority of Trustees and
consented to by the holders of more than 50% of the shares of the Fund
outstanding and entitled to vote. Shares have no preemptive or conversion rights
(except as described in "Purchases -- Conversion of Class B Shares" in the
Prospectus). Shares when issued are fully paid and non-assessable.
The Trust may enter into a merger or consolidation, or sell all or substantially
all of its assets (or all or substantially all of the assets belonging to any
series of the Trust), if approved by the vote of the holders of two-thirds of
the Trust's outstanding shares voting as a single class, or of the affected
series of the Trust, as the case may be, except that if the Trustees of the
Trust recommend such merger, consolidation or sale, the approval by vote of the
holders of a majority of the Trust's or the affected series' outstanding shares
(as defined in "Investment Objective, Policies and Restrictions -- Investment
Restrictions") will be sufficient. The Trust or any series of the Trust may also
be terminated (i) upon liquidation and distribution of its assets, if approved
by the vote of the holders of two-thirds of its outstanding shares, or (ii) by
the Trustees by written notice to the shareholders of the Trust or the affected
series. If not so terminated the Trust will continue indefinitely.
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 Declaration of Trust contains an express disclaimer of shareholder
liability for acts, obligations or affairs of the Trust and provides for
indemnification and reimbursement of expenses out of the Trust property for any
shareholder held personally liable for the obligations of the Fund. The
Declaration of Trust also provides that the Trust shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust, its shareholders, Trustees, officers, employees and
agents covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
11. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, tax return preparation, and assistance and consultation with respect
to the preparation of filings with the SEC.
The Portfolio of Investments at September 30, 1996, the Statement of Assets and
Liabilities at September 30, 1996, the Statement of Operations for the year
ended September 30, 1996, the Statement of Changes in Net Assets for each of the
two years in the period ended September 30, 1996, the Notes to Financial
Statements and the Independent Auditors' Report, each of which is included in
the Annual Report to shareholders of the Fund, are incorporated by reference
into this SAI and have been so incorporated in reliance upon the report of
Deloitte & Touche LLP, independent auditors, as experts in accounting and
auditing. A copy of the Annual Report accompanies this SAI.
<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 bonds. IT SHOULD BE EMPHASIZED, HOWEVER, THAT RATINGS ARE NOT
ABSOLUTE STANDARDS OF QUALITY. CONSEQUENTLY, BONDS WITH THE SAME MATURITY,
COUPON AND RATING MAY HAVE DIFFERENT YIELDS WHILE BONDS 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 in 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: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
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 very strong capacity to pay interest and repay principal
and differ 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 (+) 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.
NR: 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
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
PERFORMANCE RESULTS -- CLASS A SHARES
VALUE OF VALUE OF VALUE OF
INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
December 31, 1987 $ 8,268 $ 1,536 $ 130 $ 9,934
December 31, 1988 8,727 1,814 416 10,957
December 31, 1989 9,714 3,211 894 13,819
December 31, 1990 8,606 3,172 1,211 12,989
December 31, 1991 10,337 5,185 1,704 17,226
December 31, 1992 10,640 6,652 1,852 19,144
December 31, 1993 11,497 9,147 2,649 23,293
December 31, 1994 10,415 10,090 2,790 23,295
December 31, 1995 13,541 14,272 4,472 32,285
December 31, 1996 16,034 17,685 6,468 40,187
Explanatory Notes: The results in the table assume that income dividends and
capital gain distributions were invested in additional shares. The results also
assume that the initial investment in Class A shares was reduced by the current
maximum applicable sales charge. No adjustment has been made for income taxes,
if any, payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are for the fiscal year ended September 30, 1996.
AVERAGE ANNUAL TOTAL RETURNS
----------------------------------------
10 YEAR OR
1 YEAR 5 YEAR LIFE OF FUND
------ ------ ------------
Class A shares with sales charge .... 19.28% 18.06% 14.91%
Class A shares without sales charge . 26.54% N/A N/A
Class B shares with CDSC ............ 21.59% N/A N/A
Class B shares without CDSC ......... 25.59% 18.92%(1) 15.34%(1)
Class C shares with CDSC ............ 24.67% N/A N/A
Class C shares without CDSC ......... 25.67% 18.99%(2) 15.37%(2)
(1) Class B share performance includes the performance of the Fund's Class A
shares for periods prior to the commencement of offering of Class B shares
on September 7, 1993. Sales charges, expenses and expense ratios, and
therefore performance, for Class A and Class B shares differ. Class B share
performance has been adusted to reflect that Class B shares generally are
subject to CDSC (unless the performance quotation does not give effect to
the CDSC) whereas Class A shares generally are subject to an initial sales
charge. Class B share performance has not, however, been adjusted to reflect
differences in operating expenses (e.g., Rule 12b-1 fees), which generally
are lower for Class A shares.
(2) Class C share performance includes the performance of the Fund's Class A
shares for periods prior to the commencement of offering of Class C shares
on January 3, 1994. Sales charges, expenses and expense ratios, and
therefore performance, for Class A and Class C shares differ. Class C shares
performance has been adjusted to reflect that Class C shares generally are
subject to a CDSC (unless the performance quotation does not give effect to
the CDSC) whereas Class A shares generally are subject to an initial sales
charge. Class C share performance has not, however, been adjusted to reflect
differences in operating expenses (e.g., Rule 12b-1 fees), which generally
are lower for Class A shares.
<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 AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
RESEARCH
FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[logo]
We invented the mutual fund(SM)
[recycle symbol] Printed on recycled paper. MFR-13-2/97/500 14/214/314
<PAGE>
- --------------------------------------------------------------------------------
[MFS(SM) Annual Report
INVESTMENT MANAGEMENT LOGO] for Year Ended
September 30, 1996
- --------------------------------------------------------------------------------
MFS(R) Research Fund
- --------------------------------------------------------------------------------
[PHOTO OF CIRCUIT BOARD]
<PAGE>
Table of Contents
Letter from the Chairman 1
A Discussion with the Director of Research 3
Portfolio Concentration 6
Fund Facts 6
Performance Summary 7
Portfolio of Investments 9
Financial Statements 14
Notes to Financial Statements 21
Independent Auditors' Report 27
Trustees and Officers 29
- --------------------------------------------------------------------------------
Highlights
o For the past 12 months, the net asset value of Class A shares of the Fund
provided a total return of 26.54%, Class B shares 25.59%, and Class C shares
25.67%, while the S&P 500 returned 20.32%.
o Strategic overweightings in technology, retail, and leisure enhanced
performance, while companies in the consumer staples, industrial goods and
services, and financial services sectors provided strong earnings growth and
price appreciation.
o The Fund has been overweighted in technology for the past two years,
reflecting our belief that many of these companies consistently offer superior
growth at reasonable valuations.
o The Fund also remains overweighted in the health care sector based on our
confidence in the long-term prospects for companies such as Pfizer,
Rhone-Poulenc Rorer, Pacificare, and United Healthcare.
- --------------------------------------------------------------------------------
<PAGE>
Letter from the Chairman
[PHOTO OF Dear Shareholders:
A. KEITH
BRODKIN] As we enter the last quarter of 1996, the U.S. economy
appears to have settled into a pattern of moderate growth
and inflation -- two factors that we think can be important
contributors to a favorable long-term investment climate.
During the first quarter of 1996, real (inflation-adjusted)
economic growth was 2.3% on an annualized basis, followed by
a rate of 4.7% in the second quarter. Real growth in gross
domestic product has surpassed our expectations this year,
and we now expect that growth for all of 1996 could exceed 2.5%. Although the
individual consumer appears to be carrying an excessive debt load, the consumer
sector itself, which represents two-thirds of the economy, continues to be
impressive in its support of the automobile and housing markets. Consumer
spending has also been positively impacted by widespread job growth and, more
recently, increasing wages. The latest statistics appear to show signs of slower
consumer spending, especially in overall retail sales, which have been flat for
several months. Furthermore, the European and Japanese economies continue to be
in the doldrums, weakening U.S. export markets while subduing the capital
spending plans of American corporations. Economic growth should continue, but we
expect it could slacken toward the end of the year.
While we do not anticipate this year's U.S. stock market to match the
extraordinary performance of 1995, we continue to be positive about the equity
market for the remainder of 1996. We believe the equity market currently
represents fair value. However, the expected slowdown in corporate earnings
growth and interest rate increases earlier in the year have raised some
near-term concerns, as was seen in July's stock market correction. Further
increases in interest rates, and an acceleration of inflation coupled with an
additional slowdown in corporate earnings growth, could have a negative effect
on the stock market in the near term. To the extent that some earnings
disappointments are taken as a sign that the economy is not overheating, this
may prove beneficial for the longer-term health of the equity market. We believe
that many of the technology-driven productivity gains U.S. companies have made
in recent years will continue to enhance corporate America's competitiveness and
profitability. Therefore, while we have some near-term concerns, we continue to
advance on the long-term viability of the equity market.
Finally, this report to shareholders incorporates several changes which we
hope you will find informative and useful. Following the discussion with
1
<PAGE>
Letter from the Chairman - continued
the Director of Research, we have added new information on the Fund's
holdings, including a chart illustrating the portfolio's concentration in the
investments that meet its criteria. Near the back of the report, telephone
numbers and addresses are listed if you would like to contact MFS.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
October 15, 1996
2
<PAGE>
A Discussion with the Director of Research
[PHOTO OF For the 12 months ended September 30, 1996, the Fund
KEVIN R. significantly outperformed the overall stock market as
PARKE] measured by the Standard & Poor's 500 Composite Index (the
S&P 500). For the same period the S&P 500, a popular,
unmanaged index of common stock performance, returned
20.32%. Class A shares of the Fund provided a total return
of 26.54%, Class B shares 25.59%, and Class C shares 25.67%.
All of these returns assume the reinvestment of distributions but exclude the
effects of any sales charges.
Q. Why do you think the Fund performed so well this year, Kevin?
A. The Fund's favorable performance can be attributed to four factors.
Primarily, strategic overweightings in technology, retail, and leisure
enhanced the portfolio's performance. Secondly, within the consumer staples,
industrial goods and services, and financial services sectors, the analysts
uncovered companies which provided strong earnings growth and price
appreciation given the market environment. Thirdly, exposure to the utilities
and communications, autos and housing, and basic materials sectors was low as
a result of what we considered to be dismal earnings prospects for many of
these companies. Finally, the stock market's rally, as well as the strong
business and economic environment over the past year, continued to be
positive factors for the Fund.
Q. Can you briefly describe the process the committee of research analysts
goes through in selecting stocks for the Fund?
A. The Fund is most accurately described as a "best ideas" portfolio, based
on a bottom-up, fundamental research process. The Fund is managed by a
committee of experienced industry analysts, each of whom includes in the
portfolio those securities within his or her industry that he or she believes
offer the highest probability of capital appreciation. Each analyst conducts
rigorous fundamental analysis, including on-site visits and meetings with
company management, to select companies with strong balance sheets, dynamic
management, and a competitive advantage within their respective industries.
Once an analyst selects a company for inclusion in the Fund, he or she can
finance it by selling an existing holding in his or her industry. Otherwise,
the analyst must ask for an additional weighting in that industry and present
the idea to the entire group, which considers the analyst's presentation and
analyzes the company before voting on the new idea.
3
<PAGE>
A Discussion with the Director of Research - continued
Q. We noticed that technology is the Fund's largest sector. What do the
analysts like about this sector, and are any segments of technology favored
more than others?
A. The Fund has been overweighted in technology for the past two years. It is
our belief that many companies which shape the technology sector consistently
offer superior growth at reasonable valuations compared to other sectors of
the economy. Our emphasis continues to be on computer software companies such
as Oracle Corporation, Microsoft, and BMC Software. We believe the current
levels of earnings growth for these companies are sustainable given their
current management structure, industry positioning, new product development,
and established pipeline.
Q. What other sectors do the analysts like?
A. We remain confident about the leisure sector. HFS, Inc., MGM Grand, and
Jacor Communications have made notable gains over the past 12 months. HFS,
Inc., one of the top positions in the Fund, continues to make strategic
acquisitions which the committee believes will help enhance the company's
earnings growth over the next 12 to 18 months.
The Fund remains overweighted in the health care sector based on our
confidence in the long-term growth prospects of select companies within the
group. Pharmaceutical companies such as Pfizer, Inc. exceeded analysts'
earnings expectations this past year through concentrated cost-cutting
efforts, strong sales momentum, and strategic positioning in the marketplace.
We also believe well-managed companies such as Pacificare and United
Healthcare offer substantial long-term growth potential within the health
maintenance organization (HMO) industry.
Q. What sectors are the analysts avoiding or de-emphasizing now, and why?
A. We are currently underweighted in the utilities, communications, energy,
basic materials, and automotive sectors due to the cyclical commodity nature
of many companies in these groups.
Q. Can you name some stocks or sectors that performed as well as or better
than expected, and tell us why you think they did well?
A. Nike, Inc. led the charge in earnings growth within the retail sector over
the past year. Its consistent dominance in the domestic U.S. market as well
as its continued penetration abroad allowed it to remain the world's leading
footwear maker. Within the financial services sector, consolidations such as
Chase Manhattan and, more recently, BankBoston have performed well as a
result of the market's acceptance of their mergers and their ability to cut
costs and increase revenues. Union Planters' recent acquisition of Leader
Financial was
4
<PAGE>
A Discussion with the Director of Research - continued
also well received by Wall Street. We believe Union Planters' fundamental
improvements and low valuation make it an attractive stock with strong
fundamentals.
Q. Now how about some stocks or sectors that did not perform as well as
expected?
A. While we continue to believe that select stocks within the health care
sector offer tremendous future growth potential, their marketplace value has
yet to be realized. As a result, some of the health care stocks within the
Fund underperformed during the year.
Q. As you look ahead, what changes do you see in the overall market or
economic environment as it relates to the Fund, and how are you positioning
the Fund to try and take advantage of those changes?
A. While recent economic data suggest some possible easing of economic growth
and labor supply shortages, we expect more volatility is likely for the rest
of the year. Many economists on Wall Street are also anticipating an interest
rate hike by the Federal Reserve Board. We will continue to focus on
well-positioned and attractively valued stocks that we believe will strongly
perform regardless of the economic backdrop. Within the technology, health
care, consumer staples, industrial goods and services, and financial services
sectors, we have identified companies that we think can grow earnings in the
current market environment. Through close examination of long-term company
fundamentals, we will seek to provide robust relative performance in what
could be a more challenging environment for the U.S. equity market in the
months ahead.
/s/ Kevin R. Parke
Kevin R. Parke
Director of Research
The Committee of MFS Research Analysts is responsible for the day-to-day
management of the Fund under the general supervision of Mr. Parke.
- --------------------------------------------------------------------------------
Tax Form Summary
In January 1997, shareholders will be mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1996. For
the year ended September 30, 1996, the amount of distributions from income
eligible for the 70% dividends-received deduction for corporations came to
14.14%.
- --------------------------------------------------------------------------------
5
<PAGE>
Portfolio Concentration as of September 30, 1996
Ten Largest Holdings
Philip Morris Companies, Inc.
Tobacco, food, and beverage
conglomerate
Praxair Inc.
Manufactures industrial gas
supplies
Oracle Corporation
Develops and manufactures
database software
McDonnell Douglas
Commercial and defense aircraft manufacturer
Kimberly Clark
Paper products company
HFS, Inc.
Franchiser of hotels and real estate companies
United Technologies
Aerospace, defense, and building equipment conglomerate
Colgate-Palmolive
Cosmetics and toiletries company
Penncorp Financial Group
Underwrites and markets life and health insurance
St. Jude Medical
Manufactures medical instruments
Largest Holdings
- --------------------------------------------------------------------------------
[DESCRIPTION OF PIE CHART]
Other 39.80%
Industrial Goods
and Services 8.40%
Health Care 10.60%
Consumer Staples 11.80%
Financial Services 12.20%
Technology 17.20%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Fund Facts
Strategy: The Fund's investment objective is to provide
long-term growth of capital and future income.
Commencement of
investment operations: October 13, 1971
Size: $1.8 billion as of September 30, 1996
- --------------------------------------------------------------------------------
6
<PAGE>
Performance Summary
The information below and on the following page illustrates the historical
performance of MFS Research Fund Class A shares in comparison to various
market indicators. Benchmark comparisons are unmanaged and do not reflect any
fees or expenses. You cannot invest in an index. All results reflect the
reinvestment of all dividends and capital gains.
Class B shares were offered effective September 7, 1993. Information on Class
B share performance appears on the next page. Class C shares were offered
effective January 3, 1994. Information on Class C share performance appears
on the next page.
- --------------------------------------------------------------------------------
[DESCRIPTION OF LINE CHART]
Growth of a Hypothetical $10,000 Investment
(For the 5-Year Period Ended September 30, 1996)
9/91 9427 10000 10000
9/92 10538 10299 11099
9/93 13517 10576 12542
9/94 14561 10889 13000
9/95 18128 11166 16850
9/96 22939 11486 20260
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[DESCRIPTION OF LINE CHART]
Growth of a Hypothetical $10,000 Investment
(For the 10-Year Period Ended September 30, 1996)
9/30/86 9421 10000 10000
9/30/87 13631 10430 14335
9/30/88 11514 10866 12555
9/29/89 14612 11337 16684
9/28/90 13085 12036 15139
9/30/91 16494 12444 19849
9/30/92 18439 12815 22030
9/30/93 23651 13160 24893
9/30/94 25478 13550 25803
9/29/95 31718 13895 33445
9/30/96 40137 14293 40213
- --------------------------------------------------------------------------------
7
<PAGE>
Performance Summary - continued
<TABLE>
<CAPTION>
Average Annual Total Returns 1 Year 3 Years 5 Years 10 Years
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Research Fund (Class A) including 5.75%
sales charge +19.28% +16.96% +18.06% +14.91%
- ---------------------------------------------------------------------------------------------
MFS Research Fund (Class A) at net asset value +26.54% +19.28% +19.46% +15.60%
- ---------------------------------------------------------------------------------------------
MFS Research Fund (Class B) without CDSC +25.59% +18.38% +18.92% +15.34%
- ---------------------------------------------------------------------------------------------
MFS Research Fund (Class B) with CDSC +21.59% +17.66% +18.72% +15.34%
- ---------------------------------------------------------------------------------------------
MFS Research Fund (Class C) without CDSC +25.67% +18.49% +18.99% +15.37%
- ---------------------------------------------------------------------------------------------
MFS Research Fund (Class C) with CDSC +24.67% +18.49% +18.99% +15.37%
VAverage growth fund +15.89% +14.11% +13.69% +13.28%
- ---------------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index +20.32% +17.34% +15.17% +14.93%
- ---------------------------------------------------------------------------------------------
Consumer Price Index* +2.85% +2.79% +2.81% +3.64%
- ---------------------------------------------------------------------------------------------
</TABLE>
*The Consumer Price Index is a popular measure of change in prices.
Class A SEC results include the maximum 5.75% sales charge. Class B SEC
results reflect the applicable contingent deferred sales charge (CDSC), which
declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. See the
prospectus for details. Class C shares along with Class B shares, have higher
annual fees and expenses than Class A shares. Class C share purchases made on
or after April 1, 1996 will be subject to a 1% CDSC if redeemed within 12
months of purchase.
Class B and Class C share performance includes the performance of the Fund's
Class A shares for periods prior to the commencement of offering of Class B
shares on September 7, 1993 and of Class C shares on January 3, 1994. Sales
charges and operating expenses for Class A, Class B, and Class C shares
differ. The Class A share performance, which is included within the Class B
and Class C share SEC performance, has been adjusted to reflect the CDSC
generally applicable to Class B and Class C shares rather than the initial
sales charge generally applicable to Class A shares. Class B and Class C
share performance has not been adjusted, however, to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for
Class A shares.
All results are historical and, therefore, are not an indication of future
results. The principal value and income return of an investment in a mutual
fund will vary with changes in market conditions, and shares, when redeemed,
may be worth more or less than their original cost.
8
<PAGE>
Portfolio of Investments - September 30, 1996
<TABLE>
<CAPTION>
Common Stocks - 96.3%
=========================================================================================
Issuer Shares Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Stocks - 84.8%
Aerospace - 5.6%
General Dynamics Corp. 204,600 $14,091,825
Lockheed Martin Corp. 279,100 25,153,887
McDonnell Douglas Corp. 611,500 32,103,750
United Technologies Corp. 238,500 28,649,812
---------------
$99,999,274
- -----------------------------------------------------------------------------------------
Agricultural Products - 1.4%
Case Corp. 511,600 $24,940,500
- -----------------------------------------------------------------------------------------
Apparel and Textiles - 0.7%
Nike, Inc., "B" 100,000 $12,150,000
- -----------------------------------------------------------------------------------------
Automotive - 0.5%
Goodrich (B.F.) Co. 205,300 $ 9,264,163
- -----------------------------------------------------------------------------------------
Banks and Credit Companies - 4.1%
Bank of Boston Corp. 375,120 $21,710,070
Chase Manhattan Corp. 279,604 22,403,271
Crestar Financial Corp. 76,100 4,489,900
Fleet Financial Group, Inc. 219,900 9,785,550
Leader Financial Corp. 287,500 15,525,000
---------------
$73,913,791
- -----------------------------------------------------------------------------------------
Biotechnology - 0.4%
Guidant Corp.* 144,500 $ 7,983,625
- -----------------------------------------------------------------------------------------
Business Machines - 2.3%
Affiliated Computer Services Co.* 165,400 $ 9,717,250
Digital Equipment Corp.* 259,500 9,277,125
Sun Microsystems, Inc.* 366,700 22,781,238
---------------
$41,775,613
- -----------------------------------------------------------------------------------------
Business Services - 2.4%
Alco Standard Corp. 339,000 $16,907,625
DST Systems, Inc.* 407,500 13,040,000
Technology Solutions Co.* 367,550 12,818,306
---------------
$42,765,931
- -----------------------------------------------------------------------------------------
Chemicals - 3.4%
Air Products & Chemicals, Inc. 444,300 $25,880,475
Polymer Group, Inc.* 81,200 1,136,800
Praxair, Inc. 805,500 34,636,500
---------------
$61,653,775
- -----------------------------------------------------------------------------------------
Computer Software - Personal Computers - 3.3%
Electronic Arts, Inc.* 422,400 $15,787,200
First Data Corp. 197,100 16,088,288
Microsoft Corp.* 201,400 26,559,625
---------------
$58,435,113
- -----------------------------------------------------------------------------------------
Computer Software - Systems - 6.7%
Adobe Systems, Inc. 307,900 $11,469,275
BMC Software, Inc.* 220,200 17,505,900
Cadence Design Systems, Inc.* 607,675 21,724,381
</TABLE>
9
<PAGE>
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Common Stocks - continued
=========================================================================================
Issuer Shares Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Stocks - continued
Computer Software - Systems - continued
Computer Associates International, Inc. 234,350 $ 14,002,412
Compuware Corp.* 124,400 5,691,300
Oracle Corp.* 778,325 33,127,457
Sybase, Inc.* 253,900 3,776,762
Synopsys, Inc.* 266,700 12,301,537
---------------
$119,599,024
- -----------------------------------------------------------------------------------------
Consumer Goods and Services - 9.6%
Colgate-Palmolive Co. 321,800 $ 27,956,375
Estee Lauder Cos., "A" 186,400 8,364,700
Gillette Co. 355,700 25,654,863
Philip Morris Cos., Inc. 390,200 35,020,450
Procter & Gamble Co. 270,400 26,364,000
Revlon, Inc.* 270,100 8,373,100
Sherwin-Williams Co. 279,800 12,975,725
Tyco International Ltd. 477,100 20,574,938
UST, Inc. 239,900 7,107,038
---------------
$172,391,189
- -----------------------------------------------------------------------------------------
Defense Electronics - 0.6%
Loral Space & Communications* 694,700 $ 10,941,525
- -----------------------------------------------------------------------------------------
Electronics - 1.4%
Analog Devices, Inc.* 254,200 $ 6,895,175
LSI Logic Corp.* 130,800 3,041,100
Xilinx, Inc.* 441,400 15,007,600
---------------
$ 24,943,875
- -----------------------------------------------------------------------------------------
Entertainment - 2.4%
Cox Radio, Inc., "A"* 28,900 $ 630,006
Harrah's Entertainment, Inc.* 322,600 6,008,425
Jacor Communications, Inc., "A"* 316,200 10,908,900
Showboat, Inc. 439,500 9,669,000
Viacom, Inc.* 419,000 14,874,500
---------------
$ 42,090,831
- -----------------------------------------------------------------------------------------
Financial Institutions - 0.9%
Advanta Corp., "B" 367,800 $ 15,723,450
- -----------------------------------------------------------------------------------------
Food and Beverage Products - 1.4%
Earthgrains Co. 9,100 $ 350,350
McCormick & Co. Inc. 439,700 10,277,988
Tyson Foods, Inc. 520,700 13,896,181
---------------
$ 24,524,519
- -----------------------------------------------------------------------------------------
Forest and Paper Products - 1.7%
Kimberly Clark Corp. 335,800 $ 29,592,375
- -----------------------------------------------------------------------------------------
Insurance - 5.2%
Allstate Corp. 179,010 $ 8,816,243
Amerin Corp.* 186,200 4,189,500
CIGNA Corp. 213,200 25,557,350
Chartwell Re Corp. 196,600 4,988,725
</TABLE>
10
<PAGE>
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Common Stocks - continued
=========================================================================================
Issuer Shares Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Stocks - continued
Insurance - continued
Equitable of Iowa Cos. 211,600 $ 8,781,400
Everest Re Holdings, Inc. 292,300 7,234,425
ITT Hartford Group, Inc. 40,000 2,360,000
LaSalle Re Holdings Ltd. 202,100 4,749,350
Penncorp Financial Group, Inc. 834,200 26,902,950
---------------
$93,579,943
- -----------------------------------------------------------------------------------------
Medical and Health Products - 3.7%
Pfizer, Inc. 158,000 $12,501,750
Pharmacia & Upjohn, Inc. 306,100 12,626,625
Rhone-Poulenc Rorer, Inc. 133,800 9,851,025
Uromed Corp.* 1,351,000 14,861,000
Ventritex, Inc.* 786,500 13,763,750
Zoll Medical Corp.* 176,000 2,728,000
---------------
$66,332,150
- -----------------------------------------------------------------------------------------
Medical and Health Technology and Services - 4.4%
Coventry Corp.* 483,700 $ 5,774,168
Healthsource, Inc.* 83,200 1,227,200
Living Centers of America* 192,400 4,810,000
Mariner Health Group, Inc.* 46,300 711,862
Pacificare Health Systems, Inc., "A"* 91,800 7,596,450
Pacificare Health Systems, Inc., "B"* 158,800 13,736,200
St. Jude Medical, Inc.* 662,650 26,754,493
United Healthcare Corp. 432,300 17,994,487
---------------
$78,604,860
- -----------------------------------------------------------------------------------------
Oils - 2.5%
Barrett Resources Corp.* 398,700 $14,054,175
Exxon Corp. 89,200 7,425,900
Mobil Corp. 118,400 13,704,800
Newfield Exploration Co.* 219,400 9,873,000
---------------
$45,057,875
- -----------------------------------------------------------------------------------------
Railroads - 3.3%
Burlington Northern Santa Fe 186,400 $15,727,500
CSX Corp. 337,700 17,053,850
Wisconsin Central Transportation Corp.* 707,600 25,385,150
---------------
$58,166,500
- -----------------------------------------------------------------------------------------
Restaurants and Lodging - 3.8%
HFS, Inc.* 438,400 $29,318,000
Host Marriott Corp.* 1,205,100 17,473,950
MGM Grand, Inc.* 374,600 15,826,850
Promus Hotel Corp.* 182,650 5,159,863
---------------
$67,778,663
- -----------------------------------------------------------------------------------------
Special Products and Services - 1.1%
Sphere Drake Holdings Ltd. 263,400 $ 2,370,600
Stanley Works 605,900 17,040,938
---------------
$19,411,538
- -----------------------------------------------------------------------------------------
Stores - 4.7%
CompUSA, Inc.* 463,800 $25,045,200
</TABLE>
11
<PAGE>
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Common Stocks - continued
=========================================================================================
Issuer Shares Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Stocks - continued
Stores - continued
Gymboree Corp.* 483,500 $ 14,686,312
Hollywood Entertainment Corp.* 393,500 8,066,750
Home Depot, Inc. 207,800 11,818,625
Lowe's Cos., Inc. 240,800 9,842,700
Micro Warehouse, Inc.* 255,200 6,571,400
Staples, Inc.* 397,850 8,827,297
---------------
$ 84,858,284
- ------------------------------------------------------------------------------------------
Supermarkets - 1.3%
Safeway, Inc.* 524,600 $ 22,361,075
- ------------------------------------------------------------------------------------------
Telecommunications - 3.4%
Ascend Communications, Inc.* 44,675 $ 2,954,134
Cabletron Systems, Inc.* 179,300 12,259,638
Cisco Systems, Inc.* 269,200 16,707,225
Glenayre Technologies, Inc.* 389,200 8,951,600
Lucent Technologies, Inc. 256,300 11,757,763
U.S. Robotics Corp.* 135,700 8,769,613
---------------
$ 61,399,973
- ------------------------------------------------------------------------------------------
Utilities - Gas - 1.7%
Coastal Corp. 404,300 $ 16,677,375
PanEnergy Corp. 416,400 14,417,850
---------------
$ 31,095,225
- ------------------------------------------------------------------------------------------
Utilities - Telephone - 0.9%
MCI Communications Corp. 641,600 $ 16,441,000
- ------------------------------------------------------------------------------------------
Total U.S. Stocks (Identified Cost, $1,254,965,267) $1,517,775,659
- ------------------------------------------------------------------------------------------
Foreign Stocks - 11.5%
Denmark - 0.7%
ISS International Service System (Commercial
Services) 507,400 $ 12,999,131
- ------------------------------------------------------------------------------------------
Finland - 0.7%
Huhtamaki Free Shares, "I" (Food Processing) 259,300 $ 9,769,024
TT Tieto OY (Computer Software) 64,300 3,549,212
---------------
$ 13,318,236
- ------------------------------------------------------------------------------------------
France - 0.5%
Union des Assurances Federal (Insurance) 68,800 $ 8,047,089
- ------------------------------------------------------------------------------------------
Germany - 0.2%
SAP AG (Computer Software) 17,800 $ 2,984,934
- ------------------------------------------------------------------------------------------
Greece - 0.3%
Hellenic Telephone (Telecommunications) 301,100 $ 5,063,900
- ------------------------------------------------------------------------------------------
Hong Kong - 2.1%
Dah Sing Financial Group (Banking) 592,000 $ 2,082,301
Giordano Holdings Ltd. (Retail - Apparel) 11,691,000 10,279,896
Wharf Holdings (Diversified Holdings) 4,877,000 20,182,001
Wing Hang Bank Ltd. (Banking) 1,160,000 4,350,232
---------------
$ 36,894,430
- ------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Common Stocks - continued
=========================================================================================
Issuer Shares Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Foreign Stocks - continued
Italy - 0.7%
Olivetti S.p.A. (Office Automation and Furnishings)* 17,644,400 $ 6,463,144
Telecom Italia Mobile S.p.A. (Telecommunications) 4,639,800 5,757,064
---------------
$ 12,220,208
- ------------------------------------------------------------------------------------------
Malaysia - 0.4%
New Straits Times Press Holdings Ltd. (Publishing) 1,398,000 $ 7,363,685
- ------------------------------------------------------------------------------------------
Philippines - 0.8%
Pilipino Telephone Corp. (Telecommunications)* 9,949,700 $ 13,670,888
- ------------------------------------------------------------------------------------------
South Korea - 0.4%
Korea Mobile Telecommunications
(Telecommunications)* 506,150 $ 7,655,519
- ------------------------------------------------------------------------------------------
Sweden - 1.9%
Astra AB, Free Shares, "B" (Medical and Health Products) 514,260 $ 21,149,354
Enator AB (Computer Services)* 187,400 4,129,246
Nobel Biocare (Medical Products) 488,000 9,206,120
---------------
$ 34,484,720
- ------------------------------------------------------------------------------------------
United Kingdom - 2.8%
British Petroleum PLC, ADR (Oils) 158,000 $ 19,750,000
Jarvis Hotels PLC (Lodging)*+ 4,938,595 12,127,397
Kwik-Fit Holdings PLC (Automotive Services) 2,341,200 8,331,160
Lloyds TSB Group PLC (Banking) 1,782,000 10,536,431
---------------
$ 50,744,988
- ------------------------------------------------------------------------------------------
Total Foreign Stocks (Identified Cost, $193,876,724) $ 205,447,728
- ------------------------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $1,448,841,991) $1,723,223,387
- ------------------------------------------------------------------------------------------
Short-Term Obligations - 1.9%
- ------------------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- ------------------------------------------------------------------------------------------
Federal Farm Credit, due 10/01/96 $ 2,720 $ 2,720,000
Federal Home Loan Bank, due 10/18/96 180 179,553
Federal Home Loan Mortgage Corp., due
10/18/96 1,000 997,516
H. J. Heinz Co., due 10/29/96 12,700 12,647,450
Transamerica Corp., due 10/15/96 6,300 6,286,967
Transamerica Corp., due 10/23/96 10,700 10,665,017
- ------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost and Value $ 33,496,503
- ------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,482,338,494) $1,756,719,890
Other Assets, Less Liabilities - 1.8% 32,120,611
- ------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,788,840,501
- ------------------------------------------------------------------------------------------
</TABLE>
*Non-income producing security.
+Restricted security.
See notes to financial statements
13
<PAGE>
Financial Statements
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
September 30, 1996
- -----------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $1,482,338,494) $1,756,719,890
Cash 34,740
Receivable for Fund shares sold 19,832,153
Receivable for investments sold 28,993,229
Interest and dividends receivable 1,811,779
Other assets 8,971
---------------
Total assets $1,807,400,762
---------------
Liabilities:
Payable for Fund shares reacquired $ 3,677,900
Payable for investments purchased 14,571,079
Payable to affiliates -
Management fee 49,416
Shareholder servicing agent fee 23,514
Distribution fee 48,559
Accrued expenses and other liabilities 189,793
---------------
Total liabilities $ 18,560,261
---------------
Net assets $1,788,840,501
---------------
Net assets consist of:
Paid-in capital $1,406,095,540
Unrealized appreciation on investments and translation of assets and liabilities in
foreign currencies 274,380,764
Accumulated undistributed net realized gain on investments and foreign currency
transactions 107,963,964
Accumulated undistributed net investment income 400,233
---------------
Total $1,788,840,501
---------------
Shares of beneficial interest outstanding 97,362,965
---------------
Class A shares:
Net asset value and redemption price per share (net assets of $972,352,732 /
52,486,783 shares of beneficial interest outstanding) $18.53
---------------
Offering price per share (100/94.25) $19.66
---------------
Class B shares:
Net asset value and offering price per share (net assets of $680,456,245 /
37,409,007 shares of beneficial interest outstanding) $18.19
---------------
Class C shares:
Net asset value and offering price per share (net assets of $136,031,524 /
7,467,175 shares of beneficial interest outstanding) $18.22
---------------
</TABLE>
On sales of $50,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A,
Class B, and Class C shares.
See notes to financial statements
14
<PAGE>
Financial Statements - continued
<TABLE>
<CAPTION>
Statement of Operations
- -----------------------------------------------------------------------------------------
Year Ended September 30, 1996
- -----------------------------------------------------------------------------------------
<S> <C>
Net investment income:
Income -
Dividends $ 12,285,153
Interest 2,454,776
Foreign taxes withheld (295,476)
---------------
Total investment income $ 14,444,453
---------------
Expenses -
Management fee $ 4,277,357
Trustees' compensation 12,774
Shareholder servicing agent fee (Class A) 982,983
Shareholder servicing agent fee (Class B) 807,550
Shareholder servicing agent fee (Class C) 97,859
Distribution and service fee (Class A) 2,271,075
Distribution and service fee (Class B) 3,722,595
Distribution and service fee (Class C) 653,213
Custodian fee 228,370
Postage 117,571
Printing 34,446
Auditing fees 11,132
Legal fees 5,469
Miscellaneous 370,523
---------------
Total expenses $ 13,592,917
Fees paid indirectly (37,095)
---------------
Net expenses $ 13,555,822
---------------
Net investment income $ 888,631
---------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $110,009,030
Foreign currency transactions (155,240)
---------------
Net realized gain on investments and foreign currency transactions $109,853,790
---------------
Change in unrealized appreciation (depreciation) -
Investments $148,651,932
Translation of assets and liabilities in foreign currencies (1,422)
---------------
Net unrealized gain on investments $148,650,510
---------------
Net realized and unrealized gain on investments and foreign
currency $258,504,300
---------------
Increase in net assets from operations $259,392,931
---------------
</TABLE>
See notes to financial statements
15
<PAGE>
Financial Statements - continued
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Year Ended September 30, 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets:
From operations -
Net investment income $ 888,631 $ 2,005,330
Net realized gain on investments and foreign
currency transactions 109,853,790 47,454,687
Net unrealized gain on investments and foreign
currency translation 148,650,510 68,894,341
--------------- ----------------
Increase in net assets from operations $ 259,392,931 $ 118,354,358
--------------- ----------------
Distributions declared to shareholders -
From net investment income (Class A) $ (1,746,150) $ (481,316)
From net investment income (Class B) -- (14,893)
From net realized loss on investments and
foreign currency transactions (Class A) (33,116,571) (820,736)
From net realized loss on investments and
foreign currency transactions (Class B) (13,804,424) (118,230)
From net realized loss on investments and
foreign currency transactions (Class C) (1,987,076) (16,120)
In excess of net investment income (Class C) (5,537) --
--------------- ----------------
Total distributions declared to shareholders $ (50,659,758) $ (1,451,295)
--------------- ----------------
Fund share (principal) transactions -
Net proceeds from sale of shares $1,101,792,673 $ 353,872,982
Net asset value of shares issued to
shareholders in reinvestment of distributions 43,699,368 1,571,633
Cost of shares reacquired (277,022,647) (109,372,045)
--------------- ----------------
Increase in net assets from Fund share
transactions $ 868,469,394 $ 246,072,570
--------------- ----------------
Total increase in net assets $1,077,202,567 $ 362,975,633
Net assets:
At beginning of period 711,637,934 348,662,301
--------------- ----------------
At end of period (including accumulated
undistributed net investment income of
$400,233 and $1,418,529, respectively) $1,788,840,501 $ 711,637,934
--------------- ----------------
</TABLE>
See notes to financial statements
16
<PAGE>
Financial Statements - continued
<TABLE>
<CAPTION>
Financial Highlights
======================================================================================================
Year Ended September 30, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 15.61 $ 12.59 $ 14.47 $ 12.18 $ 11.84
-------- -------- -------- -------- --------
Income from investment operations# -
Net investment incomeS. $ 0.06 $ 0.08 $ 0.02 $ 0.11 $ 0.07
Net realized and unrealized gain
on investments and foreign
currency transactions 3.88 2.99 1.01 3.15 1.27
-------- -------- -------- -------- --------
Total from investment operations $ 3.94 $ 3.07 $ 1.03 $ 3.26 $ 1.34
-------- -------- -------- -------- --------
Less distributions declared to
shareholders -
From net investment income $ --
$ (0.05) $ (0.02) $ (0.03) $ (0.07)
From net realized gain on investments (0.97) (0.03) (2.87) (0.90) (1.00)
In excess of net investment income -- -- (0.01) -- --
-------- -------- -------- -------- --------
Total distributions declared to
shareholders $ (1.02) $ (0.05) $ (2.91) $ (0.97) $ (1.00)
-------- -------- -------- -------- --------
Net asset value - end of period $ 18.53 $ 15.61 $ 12.59 $ 14.47 $ 12.18
-------- -------- -------- -------- --------
Total return++ 26.54% 24.49% 7.72% 28.87% 11.79%
Ratios (to average net assets)/Supplemental dataS.:
Expenses## 0.91% 0.95% 0.91% 0.90% 0.84%
Net investment income 0.36% 0.58% 0.14% 0.36% 0.59%
Portfolio turnover 81% 94% 79% 93% 74%
Average commission rate### $ 0.0269 -- -- -- --
Net assets at end of period (000 omitted) $972,353 $507,784 $318,170 $294,019 $240,366
++Total returns for Class A shares do not include the applicable sales charge (except for reinvested dividends
prior to October 1, 1989). If the charge had been included, the results would have been lower.
#Per share data for the periods subsequent to September 30, 1993 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
S.The distributor did not impose a portion of its distribution fee for the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income# -- $ 0.07 $ 0.01 -- --
Ratios (to average net assets):
Expenses## -- 1.05% 1.01% -- --
Net investment income -- 0.48% 0.04% -- --
</TABLE>
See notes to financial statements
17
<PAGE>
Financial Statements - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
=======================================================================================================
Year Ended September 30, 1991 1990 1989 1988 1987
- -------------------------------------------------------------------------------------------------------
Class A
- -------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 9.62 $ 11.49 $ 10.20 $ 12.54 $ 10.42
-------- -------- -------- -------- --------
Income from investment operations -
Net investment income $ 0.27 $ 0.36 $ 0.39 $ 0.23 $ 0.19
Net realized and unrealized gain
(loss) on investments and foreign currency
transactions 2.21 (1.52) 2.30 (2.19) 4.43
-------- -------- -------- -------- --------
Total from investment operations $ 2.48 $ (1.16) $ 2.69 $ (1.96) $ 4.62
-------- -------- -------- -------- --------
Less distributions declared to
shareholders -
From net investment income $ (0.26) $ (0.36) $ (0.39) $ (0.24) $ (0.19)
From net realized gain on investments -- (0.35)* (1.01) (0.14) (2.31)
-------- -------- -------- -------- --------
Total distributions declared to
shareholders $ (0.26) $ (0.71) $ (1.40) $ (0.38) $ (2.50)
-------- -------- -------- -------- --------
Net asset value - end of period $ 11.84 $ 9.62 $ 11.49 $ 10.20 $ 12.54
-------- -------- -------- -------- --------
Total return++ 25.87% (12.73)% 26.91% (15.60)% 44.80%
Ratios (to average net assets)/Supplemental data:
Expenses 0.95% 0.83% 0.88% 0.86% 0.73%
Net investment income 2.48% 3.21% 3.48% 2.36% 1.51%
Portfolio turnover 177% 79% 99% 116% 101%
Net assets at end of period (000 omitted) $231,316 $202,377 $251,857 $239,616 $321,050
</TABLE>
*For the year ended September 30, 1990, the per share distribution from paid-in
capital was $0.0009.
++Total returns for Class A shares do not include the applicable sales charge
(except for reinvested dividends prior to October 1, 1989). If the charge had
been included, the results would have been lower.
See notes to financial statements
18
<PAGE>
Financial Statements - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
======================================================================================================
Year Ended September 30, 1996 1995 1994 1993**
- ------------------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 15.40 $ 12.50 $ 14.47 $ 13.95
-------- -------- -------- --------
Income from investment operations# -
Net investment loss $ (0.06) $ (0.03) $ (0.08) $ (0.04)
Net realized and unrealized gain on
investments and foreign currency transactions 3.82 2.96 1.00 0.56
-------- -------- -------- --------
Total from investment operations $ 3.76 $ 2.93 $ 0.92 $ 0.52
-------- -------- -------- --------
Less distributions declared to shareholders -
From net investment income $ -- $ -- +++ $ (0.02) $ --
From net realized gain on investments (0.97) (0.03) (2.87) --
-------- -------- -------- --------
Total distributions declared to shareholders $ (0.97) $ (0.03) $ (2.89) $ --
-------- -------- -------- --------
Net asset value - end of period $ 18.19 $ 15.40 $ 12.50 $ 14.47
-------- -------- -------- --------
Total return 25.59% 23.55% 6.91% 3.73%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.66% 1.78% 1.82% 2.33%+
Net investment loss (0.37)% (0.21)% (0.65)% (0.89)%+
Portfolio turnover 81% 94% 79% 93%
Average commission rate### $ 0.0269 -- -- --
Net assets at end of period (000 omitted) $680,456 $178,117 $ 25,672 $ 447
</TABLE>
#Per share data for the periods subsequent to September 30, 1993 is based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
+Annualized.
+++For the year ended September 30, 1995, the per share distribution from net
investment income was $0.00003.
**For the period from the commencement of offering of Class B shares,
September 7, 1993 to September 30, 1993.
See notes to financial statements
19
<PAGE>
Financial Statements - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
=========================================================================================
Year Ended September 30, 1996 1995 1994***
- -----------------------------------------------------------------------------------------
Class C
- -----------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $ 15.42 $ 12.51 $ 13.18
-------- -------- --------
Income from investment operations# -
Net investment loss $ (0.06) $ (0.02) $ (0.04)
Net realized and unrealized gain on
investments and foreign currency transactions 3.83 2.96 0.62
-------- -------- --------
Total from investment operations $ 3.77 $ 2.94 $ 0.58
-------- -------- --------
Less distributions declared to shareholders+++
In excess of net investment income $ -- +++ $ -- $ --
from net realized gain on investments (0.97) (0.03) (1.25)
-------- -------- --------
Total distributions declared to shareholders $ (0.97) $ (0.03) $ (1.25)
-------- -------- --------
Net asset value - end of period $ 18.22 $ 15.42 $ 12.51
-------- -------- --------
Total return 25.67% 23.58% 4.43%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.67% 1.71% 1.74%+
Net investment loss (0.38)% (0.15)% (0.54)%+
Portfolio turnover 81% 94% 79%
Average commission rate### $ 0.0269 -- --
Net assets at end of period (000 omitted) $136,032 $ 25,737 $ 4,821
</TABLE>
#Per share data for the periods subsequent to September 30, 1993 is based
on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses
are calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
+Annualized.
***For the period from the commencement of offering of Class C shares,
January 3, 1994 to September 30, 1994.
+++For the year ended September 30, 1996, the per share distribution in
excess of net investment income was $0.0027.
See notes to financial statements
20
<PAGE>
Notes to Financial Statements
(1) Business and Organization
MFS Research Fund (the Fund) is a diversified series of MFS Series Trust V
(the Trust). The Trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Investments in foreign securities are vulnerable to the effects of
changes in the relative values of the local currency and the U.S. dollar and
to the effects of changes in each country's legal, political, and economic
environment.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are
not available are valued at last quoted bid prices. Debt securities (other
than short-term obligations which mature in 60 days or less), including
listed issues and forward contracts, are valued on the basis of valuations
furnished by dealers or by a pricing service with consideration to factors
such as institutional-size trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading characteristics and
other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Non-U.S.
dollar denominated short-term obligations are valued at amortized cost as
calculated in the base currency and translated into U.S. dollars at the
closing daily exchange rate. Securities for which there are no such
quotations or valuations are valued at fair value as determined in good faith
by or at the direction of the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction
gains and losses. That portion of both
21
<PAGE>
Notes to Financial Statements - continued
realized and unrealized gains and losses on investments that result from
fluctuations in foreign currency exchange rates is not separately disclosed.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the
value of the security on such date.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on
the Fund's average daily net assets. This fee is reduced according to an
expense offset arrangement with State Street Bank, the dividend disbursing
agent, which provides for partial reimbursement of custody fees based on a
formula developed to measure the value of cash deposited by the Fund with the
custodian and with the dividend disbursing agent. This amount is shown as a
reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the
basis on which these financial statements are prepared. Accordingly, the
amount of net investment income and net realized gain reported on these
financial statements may differ from that reported on the Fund's tax return
and, consequently, the character of distributions to shareholders reported in
the financial highlights may differ from that reported to shareholders on
Form 1099-DIV.
Foreign taxes have been provided for on interest and dividend income earned
on foreign investments in accordance with the applicable country's tax rates
and to the extent unrecoverable are recorded as a reduction of investment
income. Distributions to shareholders are recorded on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return
of capital. Differences in the recognition or classification of income
between the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes, are classified
as distributions in excess of net investment income or accumulated net
realized gains. During the year ended September 30, 1996, $155,240 was
reclassified
22
<PAGE>
Notes to Financial Statements - continued
to accumulated undistributed net investment income from accumulated net
realized gain on investments due to differences between book and tax
accounting for currency transactions. This change had no effect on the net
assets or net asset value per share.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B, and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, and distribution and service fees.
All shareholders bear the common expenses of the Fund pro rata based on the
average daily net assets of each class, without distinction between share
classes. Dividends are declared separately for each class. No class has
preferential dividend rights; differences in per share dividend rates are
generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed and paid monthly at an effective annual rate of
0.31% of average daily net assets and 4.03% of investment income.
The Fund pays no compensation directly to its Trustees who are officers of
the investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain of the officers
and Trustees of the Fund are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD), and MFS Service Center, Inc. (MFSC). The Fund has
an unfunded defined benefit plan for all its independent Trustees and Mr.
Bailey. Included in Trustees' compensation is a net periodic pension expense
of $16,939 for the year ended September 30, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$1,332,269 for the year ended September 30, 1996, as its portion of the sales
charge on sales of Class A shares of the Fund.
The Trustees have adopted separate distribution plans for Class A, Class B
and Class C shares pursuant to Rule 12b-1 of the Investment Company Act of
1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service
fee to each securities dealer who enters into a sales agreement with MFD of
up to 0.25% per annum of the Fund's average daily net assets attributable to
Class A shares which are attributable to that securities dealer, a
distribution fee to MFD of up to 0.10% per annum of the Fund's average daily
net assets attributable to Class A shares, commissions to dealers and
payments to MFD
23
<PAGE>
Notes to Financial Statements - continued
wholesalers for sales at or above a certain dollar level, and other such
distribution-related expenses that are approved by the Fund. MFD retains the
service fee for accounts not attributable to a securities dealer which
amounted to $324,818 for the year ended September 30, 1996. Fees incurred
under the distribution plan during the year ended September 30, 1996 were
0.25% of average daily net assets attributable to Class A shares on an
annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD
a distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B and
Class C shares. MFD will pay to securities dealers who enter into a sales
agreement with MFD all or a portion of the service fee attributable to Class
B and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended
to be additional consideration for services rendered by the dealer with
respect to Class B and Class C shares. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $28,216
and $29,789 for Class B and Class C shares, respectively, for the year ended
September 30, 1996. Fees incurred under the distribution plans during the
year ended September 30, 1996 were 1.00% of average daily net assets
attributable to Class B and Class C shares on an annualized basis.
Purchases over $1 million of Class A shares are subject to a contingent
deferred sales charge in the event of a shareholder redemption within 12
months following such purchase. A contingent deferred sales charge is imposed
on shareholder redemptions of Class B shares in the event of a shareholder
redemption within six years of purchase. A contingent deferred sales charge
is imposed on shareholder redemptions of Class C shares in the event of a
shareholder redemption within 12 months of purchases made on or after April
1, 1996. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended September 30, 1996 were
$3,234, $407,275, and $6,647 for Class A, Class B, and Class C shares,
respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22%, and up to 0.15%
attributable to Class A, Class B, and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, aggregated
$1,666,170,520 and $889,942,490, respectively.
24
<PAGE>
Notes to Financial Statements - continued
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $1,484,842,215
--------------
Gross unrealized appreciation $ 310,134,357
Gross unrealized depreciation (38,256,682)
--------------
Net unrealized appreciation $ 271,877,675
--------------
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares Year Ended Year Ended
September 30, 1996 September 30, 1995
------------------------------ ----------------------------
Shares Amount Shares Amount
=================================================================================================
<S> <C> <C> <C> <C>
Shares sold 28,748,439 $ 487,826,641 12,798,218 $172,943,634
Shares issued to shareholders in
reinvestment of distributions 1,940,972 30,104,947 119,182 1,423,980
Shares reacquired (10,737,215) (180,437,578) (5,659,542) (74,912,826)
----------- ------------- --------- ------------
Net increase 19,952,196 $ 337,494,010 7,257,858 $ 99,454,788
----------- ------------- --------- ------------
Class B Shares Year Ended Year Ended
September 30, 1996 September 30, 1995
------------------------------ ----------------------------
Shares Amount Shares Amount
=================================================================================================
Shares sold 29,925,009 $ 502,583,896 11,678,569 $158,403,133
Shares issued to shareholders in
reinvestment of distributions 788,392 12,070,744 11,368 135,681
Shares reacquired (4,869,789) (81,458,430) (2,178,275) (29,569,820)
----------- ------------- --------- ------------
Net increase 25,843,612 $ 433,196,210 9,511,662 $128,968,994
----------- ------------- --------- ------------
Class C Shares Year Ended Year Ended
September 30, 1996 September 30, 1995
------------------------------ ----------------------------
Shares Amount Shares Amount
=================================================================================================
Shares sold 6,609,234 $ 111,382,136 1,642,158 $ 22,526,215
Shares issued to shareholders in
reinvestment of distributions 99,391 1,523,677 1,007 11,972
Shares reacquired (910,720) (15,126,639) (359,369) (4,889,399)
----------- ------------- --------- ------------
Net increase 5,797,905 $ 97,779,174 1,283,796 $ 17,648,788
----------- ------------- --------- ------------
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to the
25
<PAGE>
Notes to Financial Statements - continued
Fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating classes at the end of
each quarter. The commitment fee allocated to the Fund for the year ended
September 30, 1996 was $12,970.
(7) Restricted Securities
The Fund may invest not more than 10% of its net assets in securities which
are subject to legal or contractual restrictions on resale. At September 30,
1996, the Fund owned the following restricted security (constituting 0.68% of
net assets) which may not be publicly sold without registration under the
Securities Act of 1933. The Fund does not have the right to demand that such
security be registered. The value of this security is determined by
valuations supplied by a pricing service or brokers or, if not available, in
good faith by or at the direction of the Trustees.
Date of Share
Description Acquisition Amount Cost Value
- -----------------------------------------------------------------------------
Jarvis Hotels PLC 6/21/96-9/26/96 4,938,595 $13,369,991 $12,127,397
-----------
26
<PAGE>
Independent Auditors' Report
To the Trustees of MFS Series Trust V and Shareholders of MFS Research Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS Research Fund (one of the
series constituting MFS Series Trust V) as of September 30, 1996, the related
statement of operations for the year then ended, the statement of changes in
net assets for the years ended September 30, 1996 and 1995, and the financial
highlights for each of the years in the ten-year period ended September 30,
1996. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of the
securities owned at September 30, 1996 by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Research Fund
at September 30, 1996, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE llp
Boston, Massachusetts
November 1, 1996
--------------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
27
<PAGE>
The MFS Family of Funds(R)
America's Oldest Mutual Fund Group
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-637-2929
any business day from 9 a.m. to 5 p.m. Eastern time (or leave a message
anytime). This material should be read carefully before investing or sending
money.
Stock
- -----------------------------------------------------
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS(R) Capital Growth Fund
MFS(R) Emerging Growth Fund
MFS(R) Gold & Natural Resources Fund
MFS(R) Growth Opportunities Fund
MFS(R) Managed Sectors Fund
MFS(R) OTC Fund
MFS(R) Research Fund
MFS(R) Value Fund
Stock and Bond
- -----------------------------------------------------
MFS(R) Total Return Fund
MFS(R) Utilities Fund
Bond
- -----------------------------------------------------
MFS(R) Bond Fund
MFS(R) Government Mortgage Fund
MFS(R) Government Securities Fund
MFS(R) High Income Fund
MFS(R) Intermediate Income Fund
MFS(R) Strategic Income Fund
Limited Maturity Bond
- -----------------------------------------------------
MFS(R) Government Limited Maturity Fund
MFS(R) Limited Maturity Fund
MFS(R) Municipal Limited Maturity Fund
World
- -----------------------------------------------------
MFS(R)/Foreign & Colonial Emerging Markets Equity Fund
MFS(R)/Foreign & Colonial International Growth Fund
MFS(R)/Foreign & Colonial International Growth and Income Fund
MFS(R) World Asset Allocation FundSM
MFS(R) World Equity Fund
MFS(R) World Governments Fund
MFS(R) World Growth Fund
MFS(R) World Total Return Fund
National Tax-Free Bond
- -----------------------------------------------------
MFS(R) Municipal Bond Fund
MFS(R) Municipal High Income Fund
MFS(R) Municipal Income Fund
State Tax-Free Bond
- -----------------------------------------------------
Alabama, Arkansas, California, Florida, Georgia,
Maryland, Massachusetts, Mississippi, New York, North
Carolina, Pennsylvania, South Carolina, Tennessee,
Virginia, West Virginia
Money Market
- -----------------------------------------------------
MFS(R) Cash Reserve Fund
MFS(R) Government Money Market Fund
MFS(R) Money Market Fund
28
<PAGE>
MFS(R) Research Fund
Trustees
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991),
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director,
Cambridge Trust Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive
Officer, Eastern Enterprises
Lawrence T. Perera - Partner,
Hemenway & Barnes
William J. Poorvu - Adjunct Professor,
Harvard University Graduate School of
Business Administration
Charles W. Schmidt - Private Investor
Arnold D. Scott* - Senior Executive
Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director,
Massachusetts Financial Services Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American
Management Corp. (investment advisers)
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
Director of Research
Kevin R. Parke*
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Auditors
Deloitte & Touche LLP
*Affiliated with the Investment Adviser
Custodian
State Street Bank and Trust Company
Investor Information
For MFS stock and bond market outlooks,
call toll free: 1-800-637-4458 anytime
from a touch-tone telephone.
For information on MFS mutual funds, call
your financial adviser or, for an information
kit, call toll free: 1-800-637-2929 any
business day from 9 a.m. to 5 p.m. Eastern
time (or leave a message anytime).
Investor Service
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For current account service, call toll free:
1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired,
call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
(To use this service, your phone must be
equipped with a Telecommunications Device
for the Deaf.)
For share prices, account balances, and
exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
telephone.
Web Site
http://www.mfs.com
- --------------------------------------------------------------------------------
[DALBAR For the third year in a row, MFS earned a #1 ranking in the
LOGO] DALBAR, Inc. Broker/Dealer Survey, Main Office Operations
Service Quality Category. The firm achieved a 3.48 overall
score on a scale of 1 to 4 in the 1996 survey. A total of
110 firms responded, offering input on the quality of
service they received from 29 mutual fund companies
nationwide. The survey contained questions about service
quality in 15 categories, including "knowledge of phone
service contacts," "accuracy of transaction processing," and
"overall ease of doing business with the firm."
- --------------------------------------------------------------------------------
29
<PAGE>
- --------------------------------------------------------------------------------
-------------
MFS(R) [DALBAR Bulk Rate
Research LOGO] U.S. Postage
Fund P A I D
Permit #55638
500 Boylston Street Boston, MA
Boston, MA 02116 -------------
[MFS INVESTMENT MANAGEMENT LOGO]
(C)1996 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
MFR-2-11/96 170.5M 14/214/314
- --------------------------------------------------------------------------------
<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
MFS TOTAL RETURN FUND
(A) FINANCIAL STATEMENTS INCLUDED IN PARTS A AND B:
INCLUDED IN PART A OF THIS REGISTRATION STATEMENT:
For the ten years ended September 30, 1996:
Financial Highlights
INCLUDED IN PART B OF THIS REGISTRATION STATEMENT:
At September 30, 1996:
Portfolio of Investments*
Statements of Assets and Liabilities*
For the year ended September 30, 1996:
Statement of Operations*
For the two years ended September 30, 1996:
Statement of Changes in Net Assets*
MFS RESEARCH FUND
(A) FINANCIAL STATEMENTS INCLUDED IN PARTS A AND B:
INCLUDED IN PART A OF THIS REGISTRATION STATEMENT:
For the ten years ended September 30, 1996:
Financial Highlights
INCLUDED IN PART B OF THIS REGISTRATION STATEMENT:
At September 30, 1996:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the year ended September 30, 1996:
Statement of Operations*
For the two years ended September 30, 1996:
Statement of Changes in Net Assets*
- -----------------------------
* Incorporated by reference to each of the Fund's Annual Reports to Shareholders
dated September 30, 1996 filed with the SEC via EDGAR on December 6, 1996.
(B) EXHIBITS:
1 (a) Amended and Restated Declaration of Trust,
dated December 21, 1994. (5)
(b) Amendment to Declaration of Trust, dated
June 20, 1996. (7)
(c) Amendment to Declaration of Trust, dated
December 19, 1996; filed herewith.
2 Amended and Restated By-Laws, dated
December 21, 1994. (5)
3 Not Applicable
4 Form of Certificate representing ownership
of the Registrant's Classes of Shares. (6)
5 (a) Investment Advisory Agreement for MFS
Total Return Fund, a series of the Trust,
dated January 18, 1985. (5)
(b) Amendment No. 1 to Investment Advisory
Agreement, dated November 19, 1985. (5)
(c) Investment Advisory Agreement for MFS
Research Fund, a Series of the Trust,
dated September 1, 1993. (5)
6 (a) Distribution Agreement between the Trust
and MFS Fund Distributors, Inc., dated
January 1, 1995. (5)
(b) Dealer Agreement between MFS Fund
Distributors, Inc. and a dealer, dated
December 28, 1994 and the Mutual Fund
Agreement between MFD and a bank or NASD
affiliate, dated December 28, 1994. (1)
7 Retirement Plan for Non-Interested Person
Trustees, dated January 1, 1991. (5)
8 (a) Custodian Contract between Registrant
(formerly known as Massachusetts Financial
Total Return Trust) and Investors Bank and
Trust Company, dated October 1, 1991. (5)
(b) Amendment No. 1 to Custodian Contract,
dated April 21, 1992. (5)
9 (a) Shareholder Servicing Agent Agreement
between the Registrant and Massachusetts
Financial Service Center, Inc., dated
August 1, 1985. (5)
(b) Amendment to Shareholder Servicing Agent
Agreement to add Class P shares, dated
September 3, 1996; filed herewith.
(c) Exchange Privilege Agreement, dated
September 1, 1995. (2)
(d) Loan Agreement by and among the Banks named
therein, the MFS Funds named therein and
The First National Bank of Boston dated
February 21, 1995. (3)
(e) Agreement and Plan of Reorganization dated
January 15, 1985 between Registrant and
Massachusetts Financial Development Fund,
Inc. (5).
(f) Dividend Disbursing Agency Agreement dated
February 1, 1986. (5)
10 Opinion and Consent of Counsel for the
fiscal year ended September 30, 1996 filed
with Registrant's Rule 24f-2 Notice on
November 25, 1996.
11 Consent of Deloitte & Touche, LLP - MFS
Total Return Fund and Research Fund; filed
herewith.
12 Not Applicable.
13 Not Applicable.
14 (a) Forms for Individual Retirement Account
Disclosure Statement as currently in
effect. (4)
(b) Forms for MFS 403(b) Custodial Account
Agreement as currently in effect. (4)
(c) Forms for MFS Prototype Paired Defined
Contribution Plans and Trust Agreement as
currently in effect. (4)
15 Master Distribution Plan pursuant to Rule
12b-1 under the Investment Company Act of
1940, effective January 1, 1997. (8)
16 Schedule of Computation for Performance
Quotations - Average Annual Total Rate of
Return, Aggregate Total Rate of Return,
Standardized Yield and Current Distribution
Rate. (1)
17 Financial Data Schedules for Class A, B and
C of each Series; filed herewith.
18 Plan pursuant to Rule 18f-3(d) under the
Investment Company Act of 1940. (6)
Power of Attorney dated September 21, 1994. (5)
(1) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915
and 811-4096) Post-Effective Amendment No. 26 filed with the SEC on February
22, 1995.
(2) Incorporated by reference to MFS Series Trust X (File Nos. 33-1657 and
811-4492) Post-Effective Amendment No. 13 filed with the SEC via EDGAR on
November 28, 1995.
(3) Incorporated by reference to Post-Effective Amendment No. 28 on Form N-2 for
MFS Municipal Income Trust (File No. 811-4841) filed with the SEC via EDGAR
on February 28, 1995.
(4) Incorporated by reference to MFS Series Trust IX (File Nos. 2-50409 and
811-2464) Post-Effective Amendment No. 32 filed with the SEC via EDGAR on
August 28, 1995.
(5) Incorporated by reference to Registrant's Post-Effective Amendment No. 41
filed with the SEC via EDGAR on January 26, 1996.
(6) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 25 filed with the SEC via EDGAR on
August 27, 1996.
(7) Incorporated by reference to Registrant's Post-Effective Amendment No. 42
filed with the SEC via EDGAR on August 28, 1996.
(8) Incorporated by reference to MFS Series Trust IV (File No. 33-34502 and
811-2594) Post-Effective Amendment No. 30 filed with the SEC via EDGAR on
December 27, 1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
FOR MFS TOTAL RETURN FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 154,479
(without par value) (as of December 31, 1996)
Class B Shares of Beneficial Interest 91,851
(without par value) (as of December31, 1996)
Class C Shares of Beneficial Interest 4,722
(without par value) (as of December 31, 1996)
Class I Shares of Beneficial Interest 0
(without par value) (as of December 31, 1996)
FOR MFS RESEARCH FUND
Class A Shares of Beneficial Interest 73,700
(without par value) (as of December 31, 1996)
Class B Shares of Beneficial Interest 73,054
(without par value) (as of December 31, 1996)
Class C Shares of Beneficial Interest 10,348
(without par value) (as of December 31, 1996)
Class I Shares of Beneficial Interest 0
(without par value) (as of December 31, 1996)
ITEM 27. INDEMNIFICATION
Reference is hereby made to (a) Article V of Registrant's
Declaration of Trust amended and restated, December 21, 1994, filed with
Registrant's Post-Effective Amendment No. 41 filed with the SEC via EDGAR on
January 26, 1996; (b) Section 9 of the Shareholder Servicing Agent Agreement
filed with Registrant's Post-Effective Amendment No. 41, filed with the SEC via
EDGAR on January 26, 1996; and (c) the undertaking of the Registrant regarding
indemnification set forth in its Registration Statement on Form S-5.
The Trustees and officers of the Registrant and the personnel
of the Registrant's investment adviser and distributor are insured under an
errors and omissions liability insurance policy. The Registrant and its officers
are also insured under the fidelity bond required by Rule 17g-1 under the
Investment Company Act of 1940.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
MFS serves as investment adviser to the following open-end
Funds comprising the MFS Family of Funds: Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Growth Opportunities Fund, MFS
Government Securities Fund, MFS Government Limited Maturity Fund, MFS Series
Trust I (which has thirteen series: MFS Managed Sectors Fund, MFS Cash Reserve
Fund, MFS World Asset Allocation Fund, MFS Aggressive Growth Fund, MFS Research
Growth and Income Fund, MFS Core Growth Fund, MFS Equity Income Fund, MFS
Special Opportunities Fund, MFS Convertible Securities Fund, MFS Blue Chip Fund,
MFS New Discovery Fund, MFS Science and Technology Fund and MFS Research
International Fund), MFS Series Trust II (which has four series: MFS Emerging
Growth Fund, MFS Capital Growth Fund, MFS Intermediate Income Fund and MFS Gold
& Natural Resources Fund), MFS Series Trust III (which has two series: MFS High
Income Fund and MFS Municipal High Income Fund), MFS Series Trust IV (which has
four series: MFS Money Market Fund, MFS Government Money Market Fund, MFS
Municipal Bond Fund and MFS OTC Fund), MFS Series Trust V (which has two series:
MFS Total Return Fund and MFS Research Fund), MFS Series Trust VI (which has
three series: MFS World Total Return Fund, MFS Utilities Fund and MFS World
Equity Fund), MFS Series Trust VII (which has two series: MFS World Governments
Fund and MFS Value Fund), MFS Series Trust VIII (which has two series: MFS
Strategic Income Fund and MFS World Growth Fund), MFS Series Trust IX (which has
three series: MFS Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited
Maturity Fund), MFS Series Trust X (which has four series: MFS Government
Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign
& Colonial International Growth Fund and MFS/Foreign & Colonial International
Growth and Income Fund), and MFS Municipal Series Trust (which has 16 series:
MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS
California Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia
Municipal Bond Fund, MFS Maryland Municipal Bond Fund, MFS Massachusetts
Municipal Bond Fund, MFS Mississippi Municipal Bond Fund, MFS New York Municipal
Bond Fund, MFS North Carolina Municipal Bond Fund, MFS Pennsylvania Municipal
Bond Fund, MFS South Carolina Municipal Bond Fund, MFS Tennessee Municipal Bond
Fund, MFS Virginia Municipal Bond Fund, MFS West Virginia Municipal Bond Fund
and MFS Municipal Income Fund) (the "MFS Funds"). The principal business address
of each of the MFS Funds is 500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following
no-load, open-end Funds: MFS Institutional Trust ("MFSIT") (which has seven
series), MFS Variable Insurance Trust ("MVI") (which has twelve series) and MFS
Union Standard Trust ("UST") (which has two series). The principal business
address of each of the aforementioned funds is 500 Boylston Street, Boston,
Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life
Series Trust ("MFS/SL"), Money Market Variable Account, High Yield Variable
Account, Capital Appreciation Variable Account, Government Securities Variable
Account, World Governments Variable Account, Total Return Variable Account and
Managed Sectors Variable Account. The principal business address of each of the
aforementioned funds is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company
organized under the laws of Bermuda and a subsidiary of MFS, whose principal
business address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves
as investment adviser to and distributor for MFS American Fund (which has six
portfolios: MFS American Funds-U.S. Equity Fund, MFS American Funds-U.S.
Emerging Growth Fund, MFS American Funds-U.S. High Yield Bond Fund, MFS American
Funds - U.S. Dollar Reserve Fund, MFS American Funds-Charter Income Fund and MFS
American Funds-U.S. Research Fund) (the "MIL Funds"). The MIL Funds are
organized in Luxembourg and qualify as an undertaking for collective investments
in transferable securities (UCITS). The principal business address of the MIL
Funds is 47, Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for
MFS Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund, MFS Meridian World Total
Return Fund, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund and MFS
Emerging Markets Debt Fund (collectively the "MFS Meridian Funds"). Each of the
MFS Meridian Funds is organized as an exempt company under the laws of the
Cayman Islands. The principal business address of each of the MFS Meridian Funds
is P.O. Box 309, Grand Cayman, Cayman Islands, British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited
company registered with the Registrar of Companies for England and Wales whose
current address is 4 John Carpenter Street, London, England ED4Y 0NH, is
involved primarily in marketing and investment research activities with respect
to private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary
of MFS, serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned
subsidiary of MFS, serves as distributor for certain life insurance and annuity
contracts issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary
of MFS, serves as shareholder servicing agent to the MFS Funds, the MFS
Closed-End Funds, MFSIT, MVI and UST.
MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned
subsidiary of MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned
subsidiary of MFS, markets MFS products to retirement plans and provides
administrative and record keeping services for retirement plans.
MFS
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames,
Arnold D. Scott, Donald A. Stewart and John D. McNeil. Mr. Brodkin is the
Chairman, Mr. Shames is the President, Mr. Scott is a Senior Executive Vice
President and Secretary, Bruce C. Avery, William S. Harris, William W. Scott,
Jr., and Patricia A. Zlotin are Executive Vice Presidents, Stephen E. Cavan is a
Senior Vice President, General Counsel and an Assistant Secretary, Robert T.
Burns is a Senior Vice President, Associate General Counsel and an Assistant
Secretary of MFS, and Thomas B. Hastings is a Vice President and Treasurer of
MFS.
<PAGE>
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST X
MFS GOVERNMENT LIMITED MATURITY FUND
A. Keith Brodkin is the Chairman and President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice
President of MFS, is the Assistant Treasurer, James R. Bordewick, Jr., Senior
Vice President and Associate General Counsel of MFS, is the Assistant Secretary.
MFS SERIES TRUST II
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg, Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg, Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST III
A. Keith Brodkin is the Chairman and President, James T.
Swanson, Robert J. Manning, Cynthia M. Brown and Joan S. Batchelder, Senior Vice
Presidents of MFS, Bernard Scozzafava, Vice President of MFS, and Matthew
Fontaine, Assistant Vice President of MFS, are Vice Presidents, Sheila
Burns-Magnan, Assistant Vice President of MFS, and Daniel E. McManus, Vice
President of MFS, are Assistant Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
A. Keith Brodkin is the Chairman and President, Robert A.
Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr.,
is the Assistant Secretary.
MFS SERIES TRUST VII
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg and Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr.,
is the Assistant Secretary.
MFS SERIES TRUST VIII
A. Keith Brodkin is the Chairman and President, Jeffrey L.
Shames, Leslie J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D.
Laupheimer, Jr., Vice President of MFS, are Vice Presidents, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M.
Brown and Robert A. Dennis are Vice Presidents, David B. Smith, Geoffrey L.
Schechter and David R. King, Vice Presidents of MFS, are Vice Presidents, Daniel
E. McManus, Vice President of MFS, is an Assistant Vice President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS VARIABLE INSURANCE TRUST
MFS UNION STANDARD TRUST
MFS INSTITUTIONAL TRUST
A. Keith Brodkin is the Chairman and President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M.
Brown and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg and James T. Swanson are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice President of
MFS, is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS SPECIAL VALUE TRUST
A. Keith Brodkin is the Chairman and President, Jeffrey L.
Shames and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, and James O. Yost, is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MIL
A. Keith Brodkin is a Director and the Chairman, Arnold D.
Scott and Jeffrey L. Shames are Directors, Ziad Malek, Senior Vice President of
MFS, is the President, Thomas J. Cashman, Jr., a Senior Vice President of MFS,
is a Senior Vice President, Stephen E. Cavan is a Director, Senior Vice
President and the Clerk, James R. Bordewick, Jr. is a Director, Vice President
and an Assistant Clerk, Robert T. Burns is an Assistant Clerk, Joseph W. Dello
Russo, Senior Vice President and Chief Financial Officer of MFS, is the
Treasurer and Thomas B. Hastings is the Assistant Treasurer.
MIL-UK
A. Keith Brodkin is a Director and the Chairman, Arnold D.
Scott, Jeffrey L. Shames, and James R. Bordewick, Jr., are Directors, Stephen E.
Cavan is a Director and the Secretary, Ziad Malek is the President, James E.
Russell is the Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL FUNDS
A. Keith Brodkin is the Chairman, President and a Director,
Richard B. Bailey, John A. Brindle, Richard W. S. Baker and William F. Waters
are Directors, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr.,
is the Assistant Secretary, and Ziad Malek is a Senior Vice President.
MFS MERIDIAN FUNDS
A. Keith Brodkin is the Chairman, President and a Director,
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott,
Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James R. Bordewick, Jr., is the
Assistant Secretary, James O. Yost is the Assistant Treasurer, and Ziad Malek is
a Senior Vice President.
MFD
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, William W. Scott, Jr., an Executive
Vice President of MFS, is the President, Stephen E. Cavan is the Secretary,
Robert T. Burns is the Assistant Secretary, Joseph W. Dello Russo is the
Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
CIAI
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, Cynthia Orcott is President, Bruce C.
Avery is the Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and
Robert T. Burns is the Assistant Secretary.
MFSC
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, Joseph A. Recomendes, a Senior Vice
President of MFS, is Vice Chairman and a Director, Janet A. Clifford is the
Executive Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and
Robert T. Burns is the Assistant Secretary.
MFSI
A. Keith Brodkin is the Chairman and a Director, Jeffrey L.
Shames, and Arnold D. Scott are Directors, Thomas J. Cashman, Jr., is the
President and a Director, Leslie J. Nanberg is a Senior Vice President, a
Managing Director and a Director, George F. Bennett, Carol A. Corley, John A.
Gee, Brianne Grady and Kevin R. Parke are Senior Vice Presidents and Managing
Directors, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Secretary.
RSI
William W. Scott, Jr. and Bruce C. Avery are Directors, Arnold
D. Scott is the Chairman and a Director, Joseph W. Dello Russo is the Treasurer,
Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is the
Secretary, Robert T. Burns is the Assistant Secretary and Sharon A. Brovelli and
Martin E. Beaulieu are Senior Vice Presidents.
In addition, the following persons, Directors or officers of
MFS, have the affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance Company
of Canada (U.S.), One Sun Life
Executive Park, Wellesley Hills,
Massachusetts Director, Sun Life
Insurance and Annuity Company of New
York, 67 Broad Street, New York, New
York
Donald A. Stewart President and a Director, Sun Life
Assurance Company of Canada, Sun Life
Centre, 150 King Street West, Toronto,
Ontario, Canada (Mr. Stewart is also
an officer and/or Director of various
subsidiaries and affiliates of Sun
Life)
John D. McNeil Chairman, Sun Life Assurance Company
of Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada
(Mr. McNeil is also an officer and/or
Director of various subsidiaries and
affiliates of Sun Life)
Joseph W. Dello Russo Director of Mutual Fund Operations,
The Boston Company, Exchange Place,
Boston, Massachusetts (until August,
1994)
ITEM 29. DISTRIBUTORS
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above; the
principal business address of each of these persons is 500 Boylston Street,
Boston, Massachusetts 02116.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are located, in
whole or in part, at the office of the Registrant and the following locations:
NAME ADDRESS
Massachusetts Financial 500 Boylston Street
Services Company Boston, MA 02116
(investment adviser)
<PAGE>
MFS Fund Distributors, Inc. 500 Boylston Street
(principal underwriter) Boston, MA 02116
Investors Bank & Trust 89 South Street
Company Boston, MA 02111
(custodian)
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, Mass. 02116
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Not Applicable.
(b) Not Applicable.
(c) Insofar as indemnification for liability arising
under the Securities Act of 1933 may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the provisions set forth in
Item 27 of this Part C, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a trustee,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being Registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(d) The registrant undertakes to furnish each person
to whom a prospectus is delivered with a copy of the Registrant's latest annual
report to shareholders upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 27th day of January, 1997.
MFS SERIES TRUST V
By: JAMES R. BORDEWICK, JR.
-----------------------
Name: James R. Bordewick, Jr.
Title: Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities indicated on January 27, 1997.
SIGNATURE TITLE
A. KEITH BRODKIN*
- ---------------------------- Chairman, President (Principal
A. Keith Brodkin Executive Officer) and Trustee
W. THOMAS LONDON*
- ---------------------------- Treasurer (Principal Financial Officer
W. Thomas London and Principal Accounting Officer)
RICHARD B. BAILEY*
- ---------------------------- Trustee
Richard B. Bailey
PETER G. HARWOOD*
- ---------------------------- Trustee
Peter G. Harwood
J. ATWOOD IVES*
- ---------------------------- Trustee
J. Atwood Ives
LAWRENCE T. PERERA*
- ---------------------------- Trustee
Lawrence T. Perera
WILLIAM J. POORVU*
- ---------------------------- Trustee
William J. Poorvu
CHARLES W. SCHMIDT*
- ---------------------------- Trustee
Charles W. Schmidt
ARNOLD D. SCOTT*
- ---------------------------- Trustee
Arnold D. Scott
JEFFREY L. SHAMES*
- ---------------------------- Trustee
Jeffrey L. Shames
ELAINE R. SMITH*
- ---------------------------- Trustee
Elaine R. Smith
DAVID B. STONE*
- ---------------------------- Trustee
David B. Stone
*By: JAMES R. BORDEWICK, JR.
-----------------------
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr. on
behalf of those indicated pursuant to a
Power of Attorney dated
September 21, 1994, incorporated by
reference to the Registrant's Post-
Effective Amendment No. 41 filed with the
Securities and Exchange Commission via
EDGAR on January 26, 1996.
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
1 (c) Amendment to Declaration of Trust for
Redesignation of Class P Shares as Class I
Shares, dated December 19, 1996.
9 (b) Amendment to Shareholder Servicing Agent
Agreement to add Class P shares, dated
September 3, 1996.
11 Consent of Deloitte & Touche, LLP - MFS
Total Return Fund and Research Fund.
17 Financial Data Schedules for Class A, B
and C of each Series.
<PAGE>
EXHIBIT NO. 99.1(c)
MFS SERIES TRUST V
CERTIFICATION OF AMENDMENT
TO THE DECLARATION OF TRUST
REDESIGNATION
OF CLASS P SHARES AS CLASS I SHARES
The undersigned, being a majority of the Trustees of MFS Series Trust V
(the "Trust"), a business trust organized under the laws of The Commonwealth of
Massachusetts pursuant to an Amended and Restated Declaration of Trust dated
December 21, 1994 as amended (the "Declaration"), acting pursuant to Section
6.10 of the Declaration, do hereby redesignate the shares previously designated
as Class P shares of each series of the Trust as Class I shares.
IN WITNESS WHEREOF, a majority of the Trustees of the Trust have executed
this amendment, in one or more counterparts, all constituting a single
instrument, as an instrument under seal in The Commonwealth of Massachusetts, as
of this 18th day of December, 1996.
A. KEITH BRODKIN CHARLES W. SCHMIDT
- -------------------------- --------------------------
A. Keith Brodkin Charles W. Schmidt
76 Farm Road 63 Claypit Hill Road
Sherborn, MA 01770 Wayland, MA 01778
RICHARD B. BAILEY ARNOLD D. SCOTT
- -------------------------- --------------------------
Richard B. Bailey Arnold D. Scott
63 Atlantic Avenue 20 Rowes Wharf
Boston, MA 02110 Boston, MA 02110
PETER G. HARWOOD
- -------------------------- --------------------------
Peter G. Harwood Jeffrey L. Shames
211 Lindsay Pond Road 36 Lake Avenue
Concord, MA 01742 Newton, MA 02159
J. ATWOOD IVES ELAINE R. SMITH
- -------------------------- --------------------------
J. Atwood Ives Elaine R. Smith
1 Bennington Road 75 Scotch Pine Road
Lexington, MA 02173 Weston, MA 02193
LAWRENCE T. PERERA DAVID B. STONE
- -------------------------- --------------------------
Lawrence T. Perera David B. Stone
18 Marlborough Street 282 Beacon Street
Boston, MA 02116 Boston, MA 02116
WILLIAM J. POORVU
- --------------------------
William J. Poorvu
975 Memorial Drive
Cambridge, MA 02138
<PAGE>
EXHIBIT NO. 99.9(b)
MFS SERIES TRUST V
500 BOYLSTON STREET o BOSTON o MASSACHUSETTS o 02116
(617) o 954-5000
September 3, 1996
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Dear Sir/Madam:
This will confirm our understanding that Exhibit B to the Shareholder
Servicing Agent Agreement between us, dated August 1, 1985, as amended, is
hereby amended, effective immediately, to read in its entirety as set forth on
Attachment 1 hereto.
Please indicate your acceptance of the foregoing by signing below.
Sincerely,
MFS SERIES TRUST V
By: W. THOMAS LONDON
------------------
W. Thomas London
Treasurer
Accepted and Agreed:
MFS SERVICE CENTER, INC.
By: JOSEPH W. DELLO RUSSO
---------------------
Joseph W. Dello Russo
Treasurer
<PAGE>
ATTACHMENT 1
September 3, 1996
EXHIBIT B TO THE SHAREHOLDER
SERVICING AGENT AGREEMENT BETWEEN
MFS SERVICE CENTER, INC. ("MFSC")
AND MFS SERIES TRUST V (THE "FUND")
1. The fees to be paid by the Fund on behalf of its series with respect to
Class A shares of each series of the Fund to MFSC, for MFSC's services as
shareholder servicing agent, shall be:
0.15% of the first $500 million of the assets of the series attributable
to such class; 0.12% of the second $500 million of the assets of the
series attributable to such class; 0.09% over $1 billion of the assets of
the series attributable to such class.
2. The fees to be paid by the Fund on behalf of its series with respect to
Class B shares of each series of the Fund to MFSC, for MFSC's services as
shareholder servicing agent, shall be:
0.22% of the first $500 million of the assets of the series attributable
to such class; 0.18% of the second $500 million of the assets of the
series attributable to such class; 0.13% over $1 billion of the assets of
the series attributable to such class.
3. The fees to be paid by the Fund on behalf of its series with respect to
Class C shares of each series of the Fund to MFSC, for MFSC's services as
shareholder servicing agent, shall be:
0.15% of the first $500 million of the assets of the series attributable
to such class; 0.12% of the second $500 million of the assets of the
series attributable to such class; 0.09% over $1 billion of the assets of
the series attributable to such class.
4. The fees to be paid by the Fund on behalf of its series with respect to
Class P shares of each series of the Fund to MFSC, for MFSC's services as
shareholder servicing agent, shall be:
0.15% of the first $500 million of the assets of the series attributable
to such class; 0.12% of the second $500 million of the assets of the
series attributable to such class; 0.09% over $1 billion of the assets of
the series attributable to such class.
<PAGE>
Exhibit 99.11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 43 to Registration Statement No. 33-2-38613 of MFS Series Trust V
of our reports dated November 1, 1996 appearing in the annual reports to
shareholders for the year ended September 30, 1996 of MFS Total Return Fund and
MFS Research Fund, each a series of MFS Series Trust V and to the references to
us under the headings "Condensed Financial Information" in the Prospectus and
"Independent Auditors and Financial Statements" in the Statement of Additional
Information, both of which are part of such Registration Statement.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000200489
<NAME> MFS SERIES TRUST V
<SERIES>
<NUMBER> 011
<NAME> MFS TOTAL RETURN FUND CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 3387269994
<INVESTMENTS-AT-VALUE> 3915203761
<RECEIVABLES> 90213826
<ASSETS-OTHER> 71968
<OTHER-ITEMS-ASSETS> 3635
<TOTAL-ASSETS> 4005493190
<PAYABLE-FOR-SECURITIES> 49940446
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 19667488
<TOTAL-LIABILITIES> 69607934
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3168174568
<SHARES-COMMON-STOCK> 170867867
<SHARES-COMMON-PRIOR> 167977952
<ACCUMULATED-NII-CURRENT> 4235183
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 235692844
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 527782661
<NET-ASSETS> 3935885256
<DIVIDEND-INCOME> 69999748
<INTEREST-INCOME> 120797212
<OTHER-INCOME> (1027783)
<EXPENSES-NET> (42042521)
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<PAGE>
<ARTICLE> 6
<CIK> 0000200489
<NAME> MFS SERIES TRUST V
<SERIES>
<NUMBER> 012
<NAME> MFS TOTAL RETURN FUND CLASS B
<MULTIPLIER> 1
<S> <C>
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000200489
<NAME> MFS SERIES TRUST V
<SERIES>
<NUMBER> 013
<NAME> MFS TOTAL RETURN FUND CLASS C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000200489
<NAME> MFS SERIES TRUST V
<SERIES>
<NUMBER> 021
<NAME> MFS RESEARCH FUND A
<MULTIPLIER> 1
<S> <C>
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<PAGE>
<ARTICLE> 6
<CIK> 0000200489
<NAME> MFS SERIES TRUST V
<SERIES>
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<NAME> MFS RESEARCH FUND B
<MULTIPLIER> 1
<S> <C>
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<PAGE>
<ARTICLE> 6
<CIK> 0000200489
<NAME> MFS SERIES TRUST V
<SERIES>
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<NAME> MFS RESEARCH FUND C
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