<PAGE>
MFS(R) TOTAL RETURN FUND
SUPPLEMENT TO THE FEBRUARY 1, 1999 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,
1999, 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
SHAREHOLDER TRANSACTION EXPENSES: CLASS I
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...................................................... 0.34%
Rule 12b-1 Fees...................................................... None
Other Expenses(1).................................................... 0.21%
Total Operating Expenses............................................. 0.55%
- ----------
(1) 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 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......................... 18
5 years......................... 31
10 years........................ 70
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.
CONDENSED FINANCIAL INFORMATION
The following information has been audited 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 independent auditors are Deloitte
& Touche LLP.
<TABLE>
FINANCIAL HIGHLIGHTS - CLASS I SHARES
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997*
------------------ -------------------
<S> <C> <C>
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period $ 16.92 $ 14.70
Income from investment operations# -
Net investment income $ 0.63 $ 0.48
Net realized and unrealized gain on
investments and foreign currency
transactions 0.53 2.23
Total from investment operations $ 1.16 $ 2.71
------- -------
Less distributions declared to shareholders -
From net investment income $ (0.64) $ (0.49)
From net realized gain on investments and
foreign currency transactions (1.37) --
In excess of net investment income (0.01) --
------- -------
Total distributions declared to shareholders $ 2.02 $ (0.49)
------- -------
Net asset value - end of period $ 16.06 $ 16.92
------- -------
Total return 7.35% 18.69%++
Ratios (to average net assets)/
Supplemental data:
Expenses## 0.55% 0.60%+
Net investment income 3.79% 4.16%+
Portfolio turnover 126% 143%
Net assets at end of period
(000,000 omitted) $ 17 $ 16
</TABLE>
- --------------------------
* For the period from the inception of Class I, January 2, 1997, through
September 30, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
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") of 1.00% upon redemption 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 of 1.00% upon redemption 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(R) 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, 1999.
<PAGE>
------------------------
MFS(R) TOTAL RETURN FUND
------------------------
FEBRUARY 1, 1999
PROSPECTUS
CLASS A SHARES OF BENEFICIAL INTEREST
CLASS B SHARES OF BENEFICIAL INTEREST
CLASS C SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
The primary investment objective of the MFS(R) 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(R) 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, 1999, 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 44 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 at
http://www.sec.gov 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.
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.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
TABLE OF CONTENTS
Page
1. Expense Summary .................................... 3
2. Condensed Financial Information .................... 5
3. The Fund ........................................... 8
4. Investment Objectives and Policies ................. 9
5. Management of the Fund ............................. 21
6. Year 2000 Issues ................................... 23
7. Information Concerning Shares of the Fund .......... 24
Purchases ...................................... 24
Exchanges ...................................... 31
Redemptions and Repurchases .................... 33
Distribution Plan .............................. 36
Distributions .................................. 38
Tax Status ..................................... 38
Net Asset Value ................................ 39
Description of Shares, Voting Rights and
Liabilities .................................. 40
Performance Information ........................ 40
Provision of Annual and Semiannual Reports ..... 41
8. Shareholder Services ............................... 42
Appendix A ......................................... A-1
Appendix B ......................................... B-1
<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) 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 ......................... 0.34% 0.34% 0.34%
Rule 12b-1 Fees ......................... 0.35%(2) 1.00%(3) 1.00%(3)
Other Expenses(4) ....................... 0.21% 0.21% 0.21%
---- ---- ----
Total Operating Expenses ................ 0.90% 1.55% 1.55%
- ------------
(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."
<PAGE>
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
- ------ ------- ------------ ------------
(1) (1)
1 year ....................... $ 56 $ 56 $ 16 $ 26 $ 16
3 years ...................... 75 79 49 49 49
5 years ...................... 95 104 84 84 84
10 years ...................... 153 167(2) 167(2) 185 185
- ------------
(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.
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.
<PAGE>
2. 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>
FINANCIAL HIGHLIGHTS
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
CLASS A
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ...................... $16.92 $15.03 $14.46 $12.80 $13.70 $12.42
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) .... $ 0.57 $ 0.60 $ 0.64 $ 0.64 $ 0.54 $ 0.45
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions .............. 0.53 2.94 1.21 1.64 (0.69) 1.74
------ ------ ------ ------ ------ ------
Total from investment
operations ............ $ 1.10 $ 3.54 $ 1.85 $ 2.28 $(0.15) $ 2.19
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income .. $(0.58) $(0.59) $(0.62) $(0.61) $(0.54) $(0.59)
From net realized gain on
investments and foreign
currency transactions ..... $(1.37) (1.06) (0.66) (0.01) (0.10) (0.32)
In excess of net investment
income .................... (0.01) -- -- -- -- --
In excess of net realized
gain on investments and
foreign currency
transactions .............. -- -- -- -- (0.11) --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(1.96) $(1.65) $(1.28) $(0.62) $(0.75) $(0.91)
------ ------ ------ ------ ------ ------
Net asset value -- end of
period ...................... $16.06 $16.92 $15.03 $14.46 $12.80 $13.70
====== ====== ====== ====== ====== ======
TOTAL RETURN(+) ............... 6.98% 25.27% 13.50% 18.36% (1.07)% 18.32%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## .................. 0.90% 0.93% 0.91% 0.87% 0.85% 0.84%
Net investment income ....... 3.44% 3.84% 4.35% 4.82% 4.26% 4.51%
PORTFOLIO TURNOVER ............ 126% 143% 140% 102% 91% 95%
NET ASSETS AT END OF PERIOD
(000,000 OMITTED) ........... $3,503 $3,199 $2,568 $2,242 $1,857 $1,702
- ------------
# Per shares data for the periods subsequent to September 30, 1993, are 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.
(+) 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.
(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>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------
1992 1991 1990 1989
---- ---- ---- ----
CLASS A
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period .......... $11.82 $10.25 $11.58 $10.13
------ ------ ------ ------
Income from investment operations --
Net investment income ......................... $ 0.65 $ 0.67 $ 0.64 $ 0.65
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.75 1.57 (1.25) 1.71
------ ------ ------ ------
Total from investment operations .......... $ 1.40 $ 2.24 $(0.61) $ 2.36
------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income(++) ................ $(0.66) $(0.61) $(0.66) $(0.63)
From net realized gain on investments and
foreign currency transactions ............... (0.14) (0.06) (0.06) (0.28)
From paid-in capital .......................... -- -- -- --
------ ------ ------ ------
Total distributions declared to
shareholders ............................ $(0.80) $(0.67) $(0.72) $(0.91)
------ ------ ------ ------
Net asset value -- end of period ................ $12.42 $11.82 $10.25 $11.58
====== ====== ====== ======
TOTAL RETURN(+) ................................. 12.26% 22.25% (5.59)% 23.46%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ...................................... 0.84% 0.87% 0.85% 0.72%
Net investment income ......................... 5.40% 5.89% 5.71% 5.97%
PORTFOLIO TURNOVER .............................. 84% 74% 50% 53%
NET ASSETS AT END OF PERIOD (000,000 OMITTED) ... $1,198 $ 909 $ 707 $ 628
- ------------
(+) 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 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.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993*
---- ---- ---- ---- ---- -----
CLASS B
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD):
Net asset value -- beginning
of period .................. $16.92 $15.02 $14.46 $12.80 $13.70 $13.53
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income ...... $ 0.46 $ 0.50 $ 0.52 $ 0.53 $ 0.39 $ 0.06
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions ............. 0.53 2.95 1.21 1.64 (0.65) 0.16
------ ------ ------ ------ ------ ------
Total from investment
operations ........... $ 0.99 $ 3.45 $ 1.73 $ 2.17 $(0.26) $ 0.22
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income . $(0.48) $(0.49) $(0.51) $(0.50) $(0.43) $(0.05)
From net realized gain on
investments and foreign
currency transactions .... (1.37) (1.06) (0.66) -- -- --
In excess of net investment
income ................... (0.01) -- -- (0.01) (0.10) --
From paid-in capital ....... -- -- -- -- (0.11) --
------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders ......... $(1.86) $(1.55) $(1.17) $(0.51) $(0.64) $(0.05)
------ ------ ------ ------ ------ ------
Net asset value -- end of
period ..................... $16.05 $16.92 $15.02 $14.46 $12.80 $13.70
====== ====== ====== ====== ====== ======
TOTAL RETURN ................. 6.22% 24.51% 12.49% 17.46% (1.93)% 15.24%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ................. 1.55% 1.60% 1.67% 1.71% 1.70% 1.75%+
Net investment income ...... 2.80% 3.17% 3.56% 3.97% 3.45% 3.98%+
PORTFOLIO TURNOVER ........... 126% 143% 140% 102% 91% 95%
NET ASSETS AT END OF PERIOD
(000,000 OMITTED) .......... $ 1,984 $ 1,707 $ 1,284 $1,005 $ 843 $ 532
- ----------
* For the period from the inception of Class B shares, August 23, 1993, through September 30, 1993.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to September 30, 1993, are 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.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------
1998 1997 1996 1995 1994**
---- ---- ---- ---- -----
CLASS C
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD):
Net asset value -- beginning of period $16.96 $15.06 $14.49 $12.80 $12.92
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income .............. $ 0.46 $ 0.50 $ 0.53 $ 0.54 $ 0.08
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions ............ 0.53 2.95 1.22 1.66 (0.13)
------ ------ ------ ------ ------
Total from investment operations $ 0.99 $ 3.45 $ 1.75 $ 2.20 $(0.05)
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income ......... $(0.47) $(0.49) $(0.52) $(0.50) $(0.07)
From net realized gain on
investments and foreign currency
transactions ..................... (1.37) (1.06) (0.66) (0.01) --
In excess of net investment income . (0.01) -- -- -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders ................. $(1.85) $(1.55) $(1.18) $(0.51) $(0.07)
------ ------ ------ ------ ------
Net asset value -- end of period ..... $16.10 $16.96 $15.06 $14.49 $12.80
====== ====== ====== ====== ======
TOTAL RETURN ......................... 6.27% 24.39% 12.67% 17.66% (0.41)%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ......................... 1.55% 1.60% 1.63% 1.67% 1.76%+
Net investment income .............. 2.80% 3.16% 3.67% 4.14% 4.08%+
PORTFOLIO TURNOVER ................... 126% 143% 140% 102% 91%
NET ASSETS AT END OF PERIOD (000,000
OMITTED) ........................... $ 336 $ 190 $ 83 $ 23 $ 1
- ----------
** For the period from the inception of Class C, August 1, 1994, through September 30, 1994.
+ Annualized.
++ Not annualized.
# Per share data are 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.
</TABLE>
3. 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 six 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 of 1.00% upon redemption 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 of
1.00% upon redemption during the first year and an 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.
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 IBCA ("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. See
Appendix B for a description of these ratings.
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, but not including, 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 location of its 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, Croatia, Dominican Republic, Ecuador, Jordan, Mexico,
Morocco, Nigeria, Panama, Peru, the Philippines, Poland, Slovenia, 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. While awaiting delivery of
securities purchased on such bases, the Fund will segregate liquid assets
sufficient to cover its commitments.
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 changes in the value of 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 and could involve the loss
of all or a portion of the principal amount of or interest on the instrument.
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
notional principal amount determined by the parties and the payment
obligations of the parties are typically netted on the payment dates.
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 could be used 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 or no
investment of cash. 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 of the liquidity determinations, 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. However, the writing of options
constitutes only a partial hedge, up to the amount of the premium, less any
transaction costs. In contrast, 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 interest rates, 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.
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 which require the 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 Conduct Rules 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,
1998, 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). Except with respect to the Fund's policy on borrowing and
investing in illiquid securities, 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"). Under
the Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services.
David M. Calabro, a Senior Vice President of the Adviser, Geoffrey L.
Kurinsky, a Senior Vice President of the Adviser, Constantinos G. Mokas, a
Vice President of the Adviser, Lisa B. Nurme, a Senior Vice President of the
Adviser, Maura A. Shaughnessy, a Senior Vice President of the Adviser, and
Kenneth J. Enright, 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 a portfolio manager of the Fund since 1995 and has been employed by the
Adviser as a portfolio manager since 1992. Mr. Kurinsky, the manager of the
Fund's fixed income securities, has been a portfolio manager of the Fund since
1989 and has been employed by the Adviser as a portfolio manager since 1987.
Mr. Mokas, the manager of the Fund's convertible securities, has been a
portfolio manager of the Fund since April 1, 1998, and has been employed by
the Adviser as a portfolio manager since 1990. Ms. Nurme, a manager of the
common stock portion of the Fund's portfolio, has been a portfolio manager of
the Fund since 1995 and 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 a portfolio manager of the Fund
since 1995 and has been employed by the Adviser as a portfolio manager since
1991. Mr. Enright, also a manager of the common stock portion of the Fund's
portfolio, has been a portfolio manager of the Fund since January 15, 1999 and
has been employed by the Adviser as a portfolio manager since 1986.
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:
ANNUAL RATE OF MANAGEMENT FEE BASED ON ANNUAL RATE OF MANAGEMENT FEE BASED
AVERAGE DAILY NET ASSETS ON GROSS INCOME
- -------------------------------------- ------------------------------------
0.250% of the first $200 million 3.57% of the first $14 million
0.212% of average daily net assets in 3.04% of gross income in excess of
excess of $200 million $14 million
For the Fund's fiscal year ended September 30, 1998, MFS received management
fees under the Advisory Agreement of $19,252,268 (of which $11,957,988 was
based on average daily net assets and $7,294,280 on gross income), equivalent,
on an annualized basis, to 0.34% 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 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.), a subsidiary of
Sun Life Assurance Company of Canada ("Sun Life"), 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 $92.8 billion on behalf of approximately 3.6 million investor
accounts as of November 30, 1998. As of such date, the MFS organization
managed approximately $21.8 billion of assets in fixed income securities. MFS
is a subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings,
Inc., which in turn is an indirect subsidiary of Sun Life. The Directors of
MFS are John W. Ballen, Thomas J. Cashman, Joseph Dello Russo, John D. McNeil,
Kevin R. Parke, Arnold D. Scott, William W. Scott, Jr., Jeffrey L. Shames and
Donald A. Stewart. Mr. Shames is the Chairman and Chief Executive Officer of
MFS, Mr. Ballen is the President and the Chief Investment Officer of MFS, Mr.
Cashman is an Executive Vice President of MFS, Mr. Dello Russo is the Chief
Financial Officer and an Executive Vice President of MFS, Mr. Parke is the
Chief Equity Officer, Director of Equity Research and an Executive Vice
President of MFS, Mr. Arnold Scott is the Secretary and a Senior Executive
Vice President of MFS and Mr. William Scott is the President of MFS Fund
Distributors, Inc. (the distributor of MFS Funds). 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.
Mr. Shames, the Chairman, Chief Executive Officer and a Director of MFS, is
also the President and a Trustee of the Trust. W. Thomas London, Stephen E.
Cavan, James O. Yost, Ellen Moynihan, Mark E. Bradley and James R. Bordewick,
Jr., all of whom are officers of MFS, are officers of the Trust.
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. Some simultaneous
transactions are inevitable when several clients receive investment advice
from MFS, 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.
ADMINISTRATOR: MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, the Fund pays MFS an administrative fee up to
0.015% per annum of the Fund's average daily net assets. This fee reimburses
MFS for a portion of the costs it incurs to provide such services.
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. YEAR 2000 ISSUES
The Fund could be adversely affected if the computer systems used by MFS, the
Fund's other service providers or the companies in which the Fund invests do
not properly process date-related information from and after January 1, 2000
(the "Year 2000 Issue"). MFS recognizes the importance of the Year 2000 Issue
and, to address Year 2000 compliance, created a Year 2000 Program Management
Office in 1996, which is separately funded, has a specialized staff and
reports directly to MFS senior management. The Office, with the help of
external consultants, is responsible for ascertaining that all internal
systems, data feeds and third party applications are Year 2000 compliant.
While MFS is confident that all MFS systems will be Year 2000 compliant before
the turn of the century, there are significant systems interdependencies in
the domestic and foreign markets for securities, the business environments in
which companies held by the Fund operate and in MFS' own business environment.
MFS has been actively working with the Fund's other service providers to
identify and respond to potential problems in an effort to ensure Year 2000
compliance or develop contingency plans. Year 2000 compliance is also one of
the factors considered by MFS in its ongoing assessment of companies in which
the Fund invests. There can be no assurance, however, that these steps will be
sufficient to avoid any adverse impact on the Fund.
7. 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. As used in the Prospectus and any appendices thereto
the term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement or other similar 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 to the general public, 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
OFFERING NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE 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 five 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 had 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; (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 (d) the plan has not
redeemed its Class B shares in the MFS Funds in order to purchase
Class A shares under this category.
(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; and
(v) 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, 1997; (b) such plan's records are
maintained on a pooled basis by the Shareholder Servicing Agent; and
(c) the sponsoring organization demonstrates to the satisfaction of
MFD that, at the time of purchase, the employer has at least 200
eligible employees and the plan has aggregate assets of at least
$2,000,000.
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, 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)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the Plan makes
a complete redemption of all of its shares in the MFS Funds, or (b) with
respect to plans which established an account with the Shareholder Servicing
Agent prior to November 1, 1997, in the event that there is a change in law or
regulation 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 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:
CONTINGENT
YEAR OF 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 between July 1,
1996 and December 31, 1998 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.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which
establishes its account with the Shareholder Servicing Agent on or after
January 1, 1999 (provided that the plan establishment paperwork is received by
the Shareholder Servicing Agent in good order on or after November 15, 1998),
MFD pays no up front commissions to dealers, but instead pays an amount to
dealers equal to 1% per annum of the average daily net assets of the Fund
attributable to plan assets, payable at the rate of 0.25% at the end of each
calendar quarter, in arrears. This commission structure is not available with
respect to a plan with a pre-existing account(s) with any MFS Fund which seeks
to switch to the MFS Recordkeeper Plus product.
Certain 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 established an account with the
Shareholder Servicing Agent between July 1, 1996 and December 31, 1998;
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 under ERISA or is liquidated or dissolved; or
(iii) is acquired by, merged into, or consolidated with, any other entity.
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 Recordkeeper Plus product
and which establishes its account with the Shareholder Servicing Agent on or
after January 1, 1999 (provided that the plan establishment paperwork is
received by the Shareholder Servicing Agent in good order on or after November
15, 1998). A plan with a pre-existing account(s) with any MFS Fund which
switches to the MFS Recordkeeper Plus product will not become eligible for
this waiver category.
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 "Information Concerning Shares of the
Fund -- 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 of 1.00% upon
redemption 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 reserves
the right to reject or restrict any specific purchase or exchange request.
Because an exchange request involves both a request to redeem shares of one
fund and to purchase shares of another fund, the Fund considers the underlying
redemption request conditioned upon the acceptance of the underlying purchase
request. Therefore, 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 MFS Family of Funds is not designed for professional market timing
organizations or other entities using programmed or frequent exchanges. The
MFS Family of Funds defines a "market timer" as an individual, or organization
acting on behalf of one or more individuals, if (i) the individual or
organization makes six or more exchange requests among the MFS Family of Funds
or three or more exchange requests out of any of the MFS high yield bond funds
or MFS municipal bond funds per calendar year and (ii) any one of such
exchange requests represents shares equal in value to $1 million or more.
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 (i) delaying for
up to seven days the purchase side of an exchange request by market timers,
(ii) rejecting or otherwise restricting purchase or exchange requests by
market timers; and (iii) permitting exchanges by market timers only into
certain 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
or arrange for the sale of 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 and other employees, payment for travel expenses, including
lodging, incurred by registered representatives and other employees 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 and other employees 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 into
which an exchange is made 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.
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 or exchanges, 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 certain 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
entity-level 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 paid in cash or reinvested 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 (as well as the rate category or
categories under which such gain is taxable), the portion, if any,
representing a return of capital (which is generally free of current taxes but
which results in a basis reduction), and the amount, if any, of federal income
tax withheld.
Fund distributions of net capital gains or net short-term capital gains will
reduce the Fund's net asset value per share. Shareholders who buy shares
shortly before the Fund makes such 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% (or
any lower rate permitted under an applicable treaty) on taxable 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. 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 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. The Fund has
authorized one or more dealers to receive purchase and redemption orders on
behalf of the Fund. Such dealers are authorized to designate other
intermediaries to receive purchase and redemption orders on behalf of the
Fund. The Fund will be deemed to have received a purchase or redemption order
when an authorized dealer or, if applicable, a dealer's authorized designee.
receives the order. Customer orders will be priced at the net asset value of
the Fund next computed after such orders are received by an authorized dealer
or the dealer's authorized designee.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of six 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 Securities Corporation, 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
calculated by (i) annualizing the distributions (excluding short-term capital
gains) of the class for a stated period; (ii) adding any short-term capital
gains paid within the immediately preceding 12-month period; and (iii)
dividing the result by the maximum offering price or net asset value per share
on the last day of the 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 may be 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 therefore be higher. The Fund offers multiple classes of shares which
were initially offered for sale to, and purchased by, the public on different
dates (the class "inception date"). The calculation of total rate of return
for a class of shares which has a later class inception date than another
class of shares of the Fund is based both on (i) the performance of the Fund's
newer class from its inception date and (ii) the performance of the Fund's
oldest class from its inception date up to the class inception date of the
newer class. See the SAI for further information on the calculation of total
rate of return for share classes with different class inception dates.
All performance quotations are based on historical performance and are not
intended to indicate future performance. Yield reflects only annualized net
portfolio income as of a stated period of time and current distribution rate
reflects only the annualized rate of distributions paid by the Fund over a
stated period of time, while total rate of return reflects all components of
investment return. 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, 1998, 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.
PROVISION OF ANNUAL AND SEMIANNUAL REPORTS
To avoid sending duplicate copies of materials to households, only one copy of
the Fund's annual and semiannual report may be mailed to shareholders having the
same residential address on the Fund's records. However, any shareholder may
call the Shareholder Servicing Agent at 1-800-225-2606 to request that copies of
such reports be sent personally to that shareholder.
8. 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:
o Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified.
o Dividends in cash; capital gain distributions reinvested in additional
shares.
o 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, 1999, 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). Some of the following information will not apply to certain MFS Funds,
depending on which classes of shares are offered by such Fund. As used in this
Appendix, the term "dealer" includes any broker, dealer, bank (including bank
trust departments), registered investment adviser, financial planner and any
other financial institutions having a selling agreement or other similar
agreement with MFS Fund Distributors, Inc. ("MFD").
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 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;
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.
o Shares purchased by certain retirement plans or trust accounts if:
(i) the plan is currently a party to a retirement plan recordkeeping
or administrative services agreement with MFD or one of its
affiliates and (ii) the shares purchased or redeemed represent
transfers from or transfers to plan investments other than the MFS
Funds of which retirement plan recordkeeping services are provided
under the terms of such agreement.
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.
7. LOAN REPAYMENTS
o Shares acquired pursuant to repayments by retirement plan
participants of loans from 401(a) or ESP Plans with respect to which
such Plan or its sponsoring organization subscribes to the MFS
FUNDamental 401(k) Program or the MFS Recordkeeper Plus Program (but
not the MFS Recordkeeper Program).
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. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund "supermarket" account
or a similar program under which such clients pay a fee to such
dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
o Shares acquired by retirement plans or trust accounts 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.
4. PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases Subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund,
MFS Municipal Limited Maturity Fund, MFS Money Market Fund, MFS
Government Money Market Fund and MFS Cash Reserve Fund.
5. BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFS and are acquiring such
shares for the benefit of their trust account clients.
6. INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions
of Class A shares, are waived with respect to Class A shares acquired
of any of the MFS Funds through the immediate reinvestment of the
proceeds of a redemption of Class I shares of any of the MFS Funds.
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 (or 15% per year, in the case of accounts registered as IRAs
where the redemption is made pursuant to Section 72(t) of the
Internal Revenue Code of 1986, as amended) 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
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 & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this
obligation are being continued.
D: An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's 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 or the taking of a
similar action if payments on an obligation 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
rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly unlikely
to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility, Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50% -- 90% of such outstandings,
and D the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable economic/
industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt-obligations. Issuer failed to meet scheduled principal and/
or interest payments.
DP: Preferred stock with dividend arrearages.
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>
Investment Adviser
Massachusetts Financial
Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Principal Underwriter
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian
State Street Bank and Trust Company
225 Franklin 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, MA 02110
MTR-1-2/99/864M 15/215/315/815
<PAGE>
[LOGO] M F S(R)
INVESTMENT MANAGEMENT
MFS(R) TOTAL STATEMENT OF
RETURN FUND ADDITIONAL INFORMATION
(A Member of the MFS Family of Funds(R)) February 1, 1999
- -------------------------------------------------------------------------------
Page
1. Definitions ....................................................... 2
2. Investment Objectives, Policies and Restrictions .................. 2
3. Management of the Fund ............................................ 12
Trustees ........................................................ 13
Officers ........................................................ 13
Trustee Compensation Table ...................................... 13
Investment Adviser .............................................. 14
Administrator ................................................... 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(R) 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, 1999. 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, 1999, 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 liquid assets 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 or a
fee from the borrower. The Fund would also receive compensation based on
investment of the collateral, less a fee paid to the borrower if the
collateral is in the form of cash. 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.
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 amount 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 collateral.
"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 liquid assets 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. Certain indexed securities may expose the
Fund to the risk of loss of all or a portion of the principal amount of its
investment and/or the interest that might otherwise have been earned on the
amount invested.
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 but not including 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 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 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 IBCA ("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 segregated by the Fund) 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 liquid assets representing the difference is
segregated by the Fund. A put option written by the Fund is covered if the
Fund segregates liquid assets, 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 liquid assets
representing the difference is segregated by the Fund. 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 segregated by the Fund) 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 liquid assets representing the
difference is segregated by the Fund. The Fund may cover put options on stock
indices by segregating liquid assets, 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 liquid assets representing the difference is segregated by the
Fund. 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 segregates liquid assets 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 interest rates or 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 liquid assets, 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 liquid assets 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 liquid assets 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 liquid assets representing the difference is
segregated by the Fund. 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, Options on Futures
Contracts and Options on Foreign Currencies traded on a CFTC-regulated
exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums required to establish on such non-bona
fide hedging positions does not exceed 5% of the liquidation value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on any such contracts the Fund has entered into, and excluding, in
computing such 5%, the in-the-money amount with respect to an option that is
in-the-money at the time of purchase.
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 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 segregate liquid assets, 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.
Furthermore, the cost of using these techniques may make it economically
infeasible for the Fund to engage in such transactions.
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.
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. The Fund also may not invest 25%
or more of the market value of its total assets in any one industry.
Except for Investment Restriction (1) and the Fund's non-fundamental
investment policy regarding illiquid investments set forth above, 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
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 services company), Chairman, Trustee and
Chief Executive Officer
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; International Technology Corp., Director; Mohawk Paper
Company, Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES* President (born 6/2/55)
Massachusetts Financial Services Company, Chairman and Chief Executive Officer
ELAINE R. SMITH (born 4/25/46)
Independent Consultant
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Trustee
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, Senior Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September,
1996); Deloitte & Touche LLP, Senior Manager (until September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March, 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994)
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. Messrs. Shames, Scott and Cavan are the
Chairman, a Director and the Secretary, repectively of MFD, and hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun
Life Assurance Company of Canada (U.S.), a subsidiary of Sun Life Assurance
Company of Canada ("Sun Life").
The Fund pays the compensation of non-interested Trustees and Mr. Bailey who
currently receive a fee of $7,500 per year plus $350 per meeting and $325 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. 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 ESTIMATED TOTAL TRUSTEE
TRUSTEE ACCRUED AS CREDITED FEES FROM
FEES FROM PART OF FUND YEARS OF FUND AND FUND
TRUSTEE FUND(1) EXPENSE(1) SERVICE(2) COMPLEX(3)
- ------------------------------------------------------------------------------
Richard B. Bailey $12,250 $2,431 8 $259,430
Peter G. Harwood 14,575 1,790 5 150,511
J. Atwood Ives 13,250 2,527 17 149,491
Lawrence T. Perera 12,525 4,139 26 129,371
William J. Poorvu 13,525 4,432 25 139,006
Charles W. Schmidt 12,475 4,326 20 129,301
Arnold D. Scott --0-- --0-- N/A --0--
Jeffrey L. Shames --0-- --0-- N/A --0--
Elaine R. Smith 14,550 2,596 27 150,511
David B. Stone 15,425 4,549 14 165,826
(1) For fiscal year ended September 30, 1998.
(2) Based on normal retirement age of 73. See the table below for the
estimated annual benefits payable upon retirement by the Fund to a Trustee
based on his or her estimated years of service.
(3) For calendar year 1998. All Trustees receiving compensation served as
Trustees of 24 funds within the MFS fund complex (having aggregate net
assets at December 31, 1998, of approximately $43.3 billion) except Mr.
Bailey, who served as Trustee of 60 funds within the MFS fund complex
(having aggregate net assets at December 31, 1998, of approximately $68.2
billion).
ESTIMATED ANNUAL BENEFITS
PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
-------------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- --------------------------------------------------------------------------------
$11,025 $1,654 $2,756 $3,859 $5,513
12,214 1,832 3,053 4,275 6,107
13,402 2,010 3,351 4,691 6,701
14,591 2,189 3,648 5,107 7,295
15,779 2,367 3,945 5,523 7,890
16,968 2,545 4,242 5,939 8,484
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of October 30, 1998, all Trustees and officers as a group owned less than
1% of the Fund's shares outstanding. As of October 30, 1998, Merrill Lynch,
Pierce, Fenner & Smith Inc., 4800 Deer Lake Drive East, Jacksonville, FL
32246-6484 was the record owner of approximately 6.49% of the outstanding
Class C shares of the Fund. As of October 30, 1998, MFS Defined Contribution
Plan, c/o Mark Leary, Massachusetts Financial Services, 500 Boylston Street,
Boston, MA 02116-3740, and MFS 401(k) Plan, c/o Mark Leary, 500 Boylston
Street, Boston, MA 02116-3740 owned 83.62% and 16.38%, respectively, of the
outstanding Class I 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.) Financial
Services Holdings, Inc., which in turn is an indirect subsidiary of Sun Life.
The Adviser manages the Fund pursuant to an Investment Advisory Agreement,
dated January 18, 1985 (the "Advisory Agreement"). Under the Advisory
Agreement, the Adviser provides the Fund with overall investment advisory
services. 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
- ------------------------------------ --------------------------------
.250% 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, 1998, MFS received management
fees under the Advisory Agreement of $19,252,268 (of which $11,957,988 was
based on average daily net assets and $7,294,280 on gross income), equivalent
on an annualized basis, to 0.34% of the Fund's average daily net assets. For
the Fund's fiscal year ended September 30, 1997, MFS received management fees
under the Advisory Agreement of $16,190,722 (of which $9,620,517 was based on
average daily net assets and $6,570,205 on gross income), equivalent, on an
annualized basis, to 0.36% of the Fund's average daily net assets. 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.
The Fund pays all of the Fund's expenses (other than those assumed by MFS or
MFD), including: advisory and administrative services; 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 State Street Bank and 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, 1998,
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.
The Advisory Agreement will remain in effect until August 1, 1999, 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.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997, as amended. Under this
Agreement, the Fund pays MFS an administrative fee up to 0.015% per annum of
the Fund's average daily net assets. This fee reimburses MFS for a portion of
the costs it incurs to provide such services. For the March 1, 1997 through
the period ended September 30, 1997, MFS received $220,890 and for the year
ended September 30, 1998, MFS received $350,854 under the Agreement.
CUSTODIAN
State Street Bank and 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. The Custodian also acts as the dividend disbursing agent of the
Fund.
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, as amended (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 0.1125%. 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
disbursing agent 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, 1998, MFD and dealers and
certain other financial institutions received net commissions of $1,401,379
and $6,753,729, respectively (as their concession on gross commissions of
$8,155,108), for selling Class A shares of the Fund. The Fund received
$238,532,577 representing the aggregate net asset value of such shares. During
the Fund's fiscal year ended September 30, 1997, MFD and dealers and certain
other financial institutions received net commissions of $1,022,760 and
$5,856,862, respectively (as their concession on gross commissions of
$6,879,622), for selling Class A shares of the Fund. The Fund received
$454,614,566 representing the aggregate net asset value of such 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.
For the Fund's fiscal years ended September 30, 1998, 1997 and 1996, the
Contingent Deferred Sales Charge ("CDSC") imposed on redemption of Class A
shares was $39,263, $58,236 and $13,595, respectively. For the Fund's fiscal
years ended September 30, 1998, 1997 and 1996, the CDSC imposed on redemption
of Class B shares was $2,278,545, $1,791,715 and $1,500,543, respectively.
During the Fund's fiscal years ended September 30, 1998, 1997 and 1996, the
CDSC imposed on redemption of Class C shares was $71,068, $35,597 and $3,178,
respectively.
The Distribution Agreement will remain in effect until August 1, 1999, 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 Conduct Rules 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 $53,050 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, 1996, 1997 and 1998, total
brokerage commissions of $3,740,816, $4,286,823 and $6,577,848 on total
transactions of $2,942,323,293, $3,605,738,508 and $4,940,708,306,
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, 1998, the Fund owned
securities issued by A. G. Edwards, Inc. which securities had a value of
$7,272,000 at the end of such fiscal year, by Merrill Lynch & Co., Inc. which
securities had a value of $4,857,000 at the end of such fiscal year, by J. P.
Morgan & Co. which securities had a value of $821,000 at the end of such
fiscal year, by Morgan Stanley Dean Witter & Co. which securities had a value
of $14,953,000 at the end of such fiscal year, by Ford Motor Credit which
securities had a value of $21,730,000 at the end of such fiscal year, by
General Electric Capital Corp. which securities had a value of $10,347,000 at
the end of such fiscal year and by Goldman Sachs Group L.P. which securities
has a value of $5,453,000 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, the following:
Traditional 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);
Roth Individual Retirement Accounts (Roth IRAs) (for individuals who desire
to make limited contributions to a tax-favored retirement program);
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 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 the 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 distributions are 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 for federal income tax purposes
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 by the
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 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 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 ninety 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 bonds, 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, Forward Contracts, and
swaps and related transactions 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 which could 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. The
Fund may elect to mark to market any investments in "passive foreign
investment companies" on the last day of each year. This election may cause
the Fund to recognize income prior to the receipt of cash payments with
respect to those investments; 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. 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% (or any lower rate
permitted under an applicable treaty) on taxable dividends and other payments
to Non-U.S. Persons that are subject to such withholding. 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 its distributions consist
of such interest. Residents of certain states may be subject to an intangibles
tax or personal property tax on all or a portion of the value of their shares.
Shareholders are urged to consult their tax advisers regarding the possible
exclusion of a 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, Martin Luther
King, Jr. 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.
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) 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, and purchased by, the public on different dates (the class "inception
date"). The calculation of total rate of return for a class of shares which
has a later class inception date than another class of shares of the Fund is
based both on (i) the performance of the Fund's newer class from its inception
date and (ii) the performance of the Fund's oldest class from its inception
date up to the class inception date of the newer class.
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.
PERFORMANCE RESULTS: 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.
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 (i) annualizing the distributions
(excluding any short-term capital gains) of the class for the stated period;
(ii) adding any short-term capital gains paid within the immediately preceding
12-month period; and (iii) dividing the result by the maximum offering price
at net asset value per share on the last day of the period. 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 may be calculated over a different period of
time. 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 Securities Corporation, 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.
The Fund may also use charts, graphs or other presentation formats to
illustrate the historical correlation of its performance to fund categories
established by Morningstar (or other nationally recognized statistical ratings
organizations) and to other MFS Funds.
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.
From time to time, the Fund may also advertise annual returns showing the
cumulative value of an initial investment in the Fund in various amounts over
specified periods with capital gain and dividend distributions invested in
additional shares or taken in cash, and with no adjustment for any income
taxes (if applicable) payable by shareholders.
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) Global 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) Global Total Return Fund is the first global balanced
fund.
-- 1993 -- MFS(R) Global 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 Equity Fund,
the first fund 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 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
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, 1998, 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 $11,988,833 $ 4,567,790 $7,421,043
Class B Shares $18,619,719 $14,185,546 $4,434,173
Class C Shares $ 2,578,174 $ 67,115 $2,511,059
GENERAL: The Distribution Plan will remain in effect until August 1, 1999, 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 five 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 the Fund and each of the Trust's five
other series, Class A shares, Class B shares and Class C shares as well as
Class I shares for the Fund and each of the five other series. 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, 1998, the Statement of Assets
and Liabilities at September 30, 1998, the Statement of Operations for the
year ended September 30, 1998, the Statement of Changes in Net Assets for each
of the two years in the period ended September 30, 1998, 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 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.
All performance quotations are as of September 30, 1998.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS ACTUAL
---------------------------- 30-DAY 30-DAY
YIELD YIELD
(INCLUDING (WITHOUT CURRENT
ANY ANY DISTRIBUTION
1 YEAR 5 YEAR 10 YEAR WAIVERS) WAIVERS) RATE(4)
------ ------ ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares with sales charge .......... 1.90% 11.14% 12.42% N/A 2.53% 5.62%
Class A Shares without sales charge ....... 6.98 12.23 12.97 N/A N/A N/A
Class B Shares with CDSC .................. 2.43 11.11(1) 12.52(1) N/A N/A N/A
Class B Shares without CDSC ............... 6.22 11.37(1) 12.52(1) N/A 2.02 5.28
Class C Shares with CDSC .................. 5.32 11.61(2) 12.65(2) N/A N/A N/A
Class C Shares without CDSC ............... 6.27 11.61(2) 12.65(2) N/A 2.02 5.26
Class I Shares ............................ 7.35(3) 12.38(3) 13.04(3) N/A 3.00 6.23
(1) Class B share performance includes the performance of the Fund's Class A shares for periods prior to the inception 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 inception 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.
(3) Class I share performance includes the performance of the Fund's Class A shares for periods prior to the inception of Class
I shares on January 2, 1997. Sales charges, expenses and expense ratios, and therefore performance for Class I and A shares
differ. Class I share performance has been adjusted to reflect that Class I shares are not subject to an initial sales
charge, whereas Class A shares generally are subject to an initial sales charge. Class I 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 I
shares.
(4) Annualized based on last distribution.
</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
State Street Bank and Trust Company
225 Franklin 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, MA 02110
MFS(R) TOTAL
RETURN FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO] M F S(R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
Printed on recycled paper.
MTR-13-2/99/475 15/215/315
<PAGE>
MFS(R) RESEARCH FUND
SUPPLEMENT TO THE FEBRUARY 1, 1999 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,
1999, 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
SHAREHOLDER TRANSACTION EXPENSES: CLASS I
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...................................................... 0.43%
Rule 12b-1 Fees...................................................... None
Other Expenses(1).................................................... 0.23%
Total Operating Expenses............................................. 0.66%
- ----------
(1) 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 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.......................... $ 7
3 years......................... 21
5 years......................... 37
10 years........................ 82
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.
CONDENSED FINANCIAL INFORMATION
The following information has been audited 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 independent auditors are Deloitte
& Touche LLP.
<TABLE>
FINANCIAL HIGHLIGHTS - CLASS I SHARES
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997*
------------------ -------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 22.75 $ 18.34
Income from investment operations# -
Net investment income $ 0.13 $ 0.07
Net realized and unrealized gain on investments
and foreign currency transactions (0.31) 4.34
------- -------
Total from investment operations $ (0.18) $ 4.41
------- -------
Less distributions declared to shareholders
from net realized gain on investments and
foreign currency transactions $ (1.05) $ --
------- -------
Net asset value - end of period $ 21.52 $ 22.75
------- -------
Total return (0.55)% 24.05%++
Ratios (to average net assets)/
Supplemental data:
Expenses## 0.56% 0.63%+
Net investment income 0.57% 0.51%+
Portfolio turnover 81% 79%
Net assets at end of period
(000 omitted) $17,551 $19,400
</TABLE>
- ----------
* For the period from the inception of Class I, January 2, 1997, through
September 30, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following 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, endowment or foundation 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, endowments or
foundations or in smaller amounts if it believes, in its sole discretion,
that such entity's aggregate assets will equal or exceed $100 million, or
that such entity will make additional investments which will cause its
total investment to equal or exceed $10 million, within a reasonable
period of time;
(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; and
(v) certain retirement plans offered, administered or sponsored by insurance
companies, provided that these plans and insurance companies meet certain
criteria established by MFD from time to 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") of 1.00% upon redemption 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 of 1.00% upon redemption 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(R) 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, 1999.
<PAGE>
--------------------
MFS(R) RESEARCH FUND
--------------------
FEBRUARY 1, 1999
PROSPECTUS
CLASS A SHARES OF BENEFICIAL INTEREST
CLASS B SHARES OF BENEFICIAL INTEREST
CLASS C SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
The investment objective of MFS(R) 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(R) 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, 1999, 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 36 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 at
http://www.sec.gov 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.
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.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
TABLE OF CONTENTS
Page
1. Expense Summary .................................... 3
2. Condensed Financial Information .................... 5
3. The Fund ........................................... 8
4. Investment Objective and Policies .................. 9
5. Certain Securities, Investment Techniques and Risk
Factors .......................................... 10
6. Additional Risk Factors ............................ 12
7. Management of the Fund ............................. 14
8. Year 2000 Issues ................................... 16
9. Information Concerning Shares of the Fund .......... 16
Purchases ...................................... 16
Exchanges ...................................... 24
Redemptions and Repurchases .................... 25
Distribution Plan .............................. 28
Distributions .................................. 30
Tax Status ..................................... 31
Net Asset Value ................................ 32
Description of Shares, Voting Rights and
Liabilities .................................. 32
Performance Information ........................ 33
Provision of Annual and Semiannual Reports ..... 33
10. Shareholder Services ............................... 34
Appendix A ......................................... A-1
<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 ..................... 0.43% 0.43% 0.43%
Rule 12b-1 Fees ..................... 0.35%(2) 1.00%(3) 1.00%(3)
Other Expenses(4) ................... 0.23% 0.23% 0.23%
--- --- ---
Total Operating Expenses ............ 1.01% 1.66% 1.66%
- ----------
(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."
<PAGE>
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
- ------ ------- -------------- -------------
(1) (1)
1 year ...................... $ 67 $ 57 $ 17 $ 27 $ 17
3 years ..................... 88 82 52 52 52
5 years ..................... 110 110 90 90 90
10 years ..................... 174 179(2) 179(2) 197 197
- ------------
(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.
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.
<PAGE>
2. 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>
FINANCIAL HIGHLIGHTS
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
----- ----- ----- ----- ----- ----- -----
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD):
Net asset value -- beginning
of period $22.69 $18.53 $15.61 $12.59 $14.47 $12.18 $11.84
------ ------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ........ $ 0.05 $ 0.04 $ 0.06 $ 0.08 $ 0.02 $ 0.11 $ 0.07
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions (0.30) 5.07 3.88 2.99 1.01 3.15 1.27
------ ------ ------ ------ ------ ------ ------
Total from investment
operations ... $(0.25) $ 5.11 $ 3.94 $ 3.07 $ 1.03 $ 3.26 $ 1.34
------ ------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ...... $ -- $(0.01) $(0.05) $(0.02) $(0.03) $(0.07) $ --
From net realized gain on
investments and foreign
currency transactions ......... (0.99) (0.92) (0.97) (0.03) (2.87) (0.90) (1.00)
In excess of net investment income -- (0.02) -- -- (0.01) -- --
------ ------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders .............. $(0.99) $(0.95) $(1.02) $(0.05) $(2.91) $(0.97) $(1.00)
------ ------ ------ ------ ------ ------ ------
Net asset value -- end of period .. $21.45 $22.69 $18.53 $15.61 $12.59 $14.47 $12.18
====== ====== ====== ====== ====== ====== ======
Total return(+) ................... (0.89)% 28.72% 26.54% 24.49% 7.72% 28.87% 11.79%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ...................... 0.91% 0.96% 0.91% 0.95% 0.91% 0.90% 0.84%
Net investment income ........... 0.23% 0.18% 0.36% 0.58% 0.14% 0.36% 0.59%
PORTFOLIO TURNOVER ................ 81% 79% 81% 94% 79% 93% 74%
NET ASSETS AT END OF PERIOD
(000 OMITTED) $2,611,866 $2,201,849 $972,353 $507,784 $318,170 $294,019 $240,366
- ------------
(+) Total return for Class A shares do not include the applicable sales charge. If the charge had been included, the results would
have been lower.
# Per share data for the periods subsequent to September 30, 1993, are 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.
(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>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1991 1990 1989
---- ---- ----
CLASS A
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period .................... $ 9.62 $11.49 $10.20
------ ------ ------
Income from investment operations --
Net investment income ................................... $ 0.27 $ 0.36 $ 0.39
Net realized and unrealized gain (loss) on investments
and foreign currency transactions ..................... 2.21 (1.52) 2.30
------ ------ ------
Total from investment operations .................... $ 2.48 $(1.16) $ 2.69
------ ------ ------
Less distributions declared to shareholders --
From net investment income .............................. $(0.26) $(0.36) $(0.39)
From net realized gain on investments and foreign
currency transactions -- (0.35) (1.01)
From paid-in capital .................................... -- -- * --
------ ------ ------
Total distributions declared to shareholders ........ $(0.26) $(0.71)* $(1.40)
------ ------ ------
Net asset value -- end of period .......................... $11.84 $ 9.62 $11.49
====== ====== ======
Total return(+) ........................................... 25.87% (12.73)% 26.91%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ................................................ 0.95% 0.83% 0.88%
Net investment income ................................... 2.48% 3.21% 3.48%
PORTFOLIO TURNOVER ........................................ 177% 79% 99%
NET ASSETS AT END OF PERIOD (000 OMITTED) ................. $231,316 $202,377 $251,857
- ----------
* For the year ended September 30, 1990, the per share distribution was less than $0.01.
(+) Total return 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>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993**
---- ---- ---- ---- ---- -----
CLASS B
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning
of period .................. $22.16 $18.19 $15.40 $12.50 $14.47 $13.95
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment loss ........ $(0.10) $(0.10) $(0.06) $(0.03) $(0.08) $(0.04)
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions ............. (0.28) 4.97 3.82 2.96 1.00 0.56
------ ------ ------ ------ ------ ------
Total from investment
operations ........... $(0.38) $ 4.87 $ 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 and foreign
currency transactions .... (0.88) (0.90) (0.97) (0.03) (2.87) --
------ ------ ------ ------ ------ ------
Total distributions $
declared to
shareholders ......... $(0.88) $(0.90) $(0.97) $(0.03) $(2.89) --
------ ------ ------ ------ ------ ------
Net asset value -- end of
period ..................... $20.90 $22.16 $18.19 $15.40 $12.50 $14.47
====== ====== ====== ====== ====== ======
Total return ................. (1.54)% 27.88% 25.59% 23.55% 6.91% 3.73%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses## ................. 1.56% 1.63% 1.66% 1.78% 1.82% 2.33%+
Net investment loss ........ (0.42)% (0.49)% (0.37)% (0.21)% (0.65)% (0.89)%+
PORTFOLIO TURNOVER ........... 81% 79% 81% 94% 79% 93%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .............. $2,237,570 $1,860,130 $680,456 $178,117 $25,672 $ 447
- ----------
** For the period from the inception of Class B, September 7, 1993, through September 30, 1993.
+ Annualized.
++ Not annualized.
+++ For the year ended September 30, 1995, the per share distribution from net investment income was less than $0.01.
# Per share data for the periods subsequent to September 30, 1993, are 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.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994***
---- ---- ---- ---- ------
CLASS C
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period .. $22.17 $18.22 $15.42 $12.51 $13.18
------ ------ ------ ------ ------
Income from investment operations# --
Net investment loss ................... $(0.10) $(0.09) $(0.06) $(0.02) $(0.04)
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions ........................ (0.27) 4.96 3.83 2.96 0.62
------ ------ ------ ------ ------
Total from investment operations .. $(0.37) $ 4.87 $ 3.77 $ 2.94 $ 0.58
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income ............ $ -- $ -- +++ $ -- $ -- $ --
In excess of net investment income .... -- -- +++ -- +++ -- --
From net realized gain on investments
and foreign currency transactions ... (0.88) (0.92) (0.97) (0.03) (1.25)
------ ------ ------ ------ ------
Total distributions declared to
shareholders .................... $(0.88) $(0.92) $(0.97) $(0.03) $(1.25)
------ ------ ------ ------ ------
Net asset value -- end of period ........ $20.92 $22.17 $18.22 $15.42 $12.51
====== ====== ====== ====== ======
Total return ............................ (1.51)% 27.87% 25.67% 23.58% 4.43%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses## ............................ 1.56% 1.62% 1.67% 1.71% 1.74%+
Net investment loss ................... (0.42)% (0.47)% (0.38)% (0.15)% (0.54)%+
PORTFOLIO TURNOVER ...................... 81% 79% 81% 94% 79%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ......................... $563,505 $459,809 $136,032 $ 25,737 $ 4,821
- ----------
*** For the period from the inception of Class C, January 3, 1994, through September 30, 1994.
+ Annualized.
++ Not annualized.
+++ For the year ended September 30, 1997, the per share distribution from net investment income was less than $0.01, and for
the years ended September 30, 1997 and 1996, the per share distributions in excess of net investment income were less
than $0.01.
# Per share data for the periods subsequent to September 30, 1993, are 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.
</TABLE>
3. 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 six
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 of 1.00% upon redemption 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 of 1:00% upon
redemption 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.
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 IBCA ("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. CERTAIN SECURITIES, 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 location of its 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 of the liquidity determinations, 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 Conduct Rules 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, but not
including, 20% (and generally expects to invest between 5% and 15%) 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). Except with respect to the Fund's
policy on borrowing and investing in illiquid securities, 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 November 1, 1998 (the "Advisory Agreement"). Under
the Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. The Fund is currently managed by a committee comprised of
various equity research analysts employed by the Adviser. For these services
and facilities, effective November 1, 1998, the Adviser receives 0.43% per
annum of the Fund's average daily net assets. Prior to November 1, 1998, the
Adviser received 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.
For the fiscal year ended September 30, 1998, MFS received management fees of
$18,088,633 (of which $15,823,906 was based on average daily net assets and
$2,264,727 on gross income), equivalent, on an annualized basis, to 0.33% 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 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.), a
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"), 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 $92.8 billion on behalf of over 3.6 million investor accounts as
of November 30, 1998. MFS is a subsidiary of Sun Life of Canada (U.S.)
Financial Services Holdings, Inc., which in turn is an indirect subsidiary of
Sun Life. The Directors of MFS are John W. Ballen, Thomas J. Cashman, Joseph
Dello Russo, John D. McNeil, Kevin R. Parke, Arnold D. Scott, William W.
Scott, Jr., Jeffrey L. Shames and Donald A. Stewart. Mr. Shames is the
Chairman and Chief Executive Officer of MFS, Mr. Ballen is the President and
the Chief Investment Officer of MFS, Mr. Cashman is an Executive Vice
President of MFS, Mr. Dello Russo is the Chief Financial Officer and an
Executive Vice President of MFS, Mr. Parke is the Chief Equity Officer,
Director of Equity Research and an Executive Vice President of MFS, Mr. Arnold
Scott is the Secretary and a Senior Executive Vice President of MFS and Mr.
William Scott is the President of MFS Fund Distributors, Inc. (the distributor
of MFS Funds). 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.
Mr. Shames, the Chairman, Chief Executive Officer and a Director of MFS, is
also the President and a Trustee of the Trust. W. Thomas London, Stephen E.
Cavan, James O. Yost, Ellen Moynihan, Mark E. Bradley, and James R. Bordewick,
Jr., all of whom are officers of MFS, are also officers of the Trust.
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. Some simultaneous
transactions are inevitable when several clients receive investment advice
from MFS, 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.
ADMINISTRATOR: MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, the Fund pays MFS an administrative fee up to
0.015% per annum of the Fund's average daily net assets. This fee reimburses
MFS for a portion of the costs it incurs to provide such services.
SHAREHOLDER SERVICING AGENT: MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
8. YEAR 2000 ISSUES
The Fund could be adversely affected if the computer systems used by MFS, the
Fund's other service providers or the companies in which the Fund invests do
not properly process date-related information from and after January 1, 2000
(the "Year 2000 Issue"). MFS recognizes the importance of the Year 2000 Issue
and, to address Year 2000 compliance, created a Year 2000 Program Management
Office in 1996, which is separately funded, has a specialized staff and
reports directly to MFS senior management. The Office, with the help of
external consultants, is responsible for ascertaining that all internal
systems, data feeds and third party applications are Year 2000 compliant.
While MFS is confident that all MFS systems will be Year 2000 compliant before
the turn of the century, there are significant systems interdependencies in
the domestic and foreign markets for securities, the business environments in
which companies held by the Fund operate and in MFS' own business environment.
MFS has been actively working with the Fund's other service providers to
identify and respond to potential problems in an effort to ensure Year 2000
compliance or develop contingency plans. Year 2000 compliance is also one of
the factors considered by MFS in its ongoing assessment of companies in which
the Fund invests. There can be no assurance, however, that these steps will be
sufficient to avoid any adverse impact on the Fund.
9. 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. As used in the Prospectus and any appendices
thereto, the term "dealer" includes any broker, dealer, bank (including bank
trust departments), registered investment adviser, financial planner and any
other financial institutions having a selling agreement or other similar
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
OFFERING NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE PRICE INVESTED OF OFFERING PRICE
- ------------------ ------------ -------- -----------------
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.
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 five 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;
(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 had 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; (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 (d) the plan
has not redeemed its Class B shares in the MFS Funds in order to
purchase Class A shares under this category.
(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; AND
(v) 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, 1997; (b) such
plan's records are maintained on a pooled basis by the Shareholder
Servicing Agent; and (c) the sponsoring organization demonstrates
to the satisfaction of MFD that, at the time of purchase, the
employer has at least 200 eligible employees and the plan has
aggregate assets of at least $2,000,000.
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, 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)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the Plan makes
a complete redemption of all of its shares in the MFS Funds, or (b) with
respect to plans which established an account with the Shareholder Servicing
Agent prior to November 1, 1997, in the event that there is a change in law or
regulation 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 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:
CONTINGENT
YEAR OF 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 between July 1,
1996 and December 31, 1998, 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.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which
establishes its account with the Shareholder Servicing Agent on or after
January 1, 1999 (provided that the plan establishment paperwork is received by
the Shareholder Servicing Agent in good order on or after November 15, 1998),
MFD pays no up front commissions to dealers, but instead pays an amount to
dealers equal to 1% per annum of the average daily net assets of the Fund
attributable to plan assets, payable at the rate of 0.25% at the end of each
calendar quarter, in arrears. This commission structure is not available with
respect to a plan with a pre-existing account(s) with any MFS Fund which seeks
to switch to the MFS Recordkeeper Plus product.
Certain 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 established an account with the
Shareholder Servicing Agent between July 1, 1996 and December 31, 1998;
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 under ERISA or is liquidated or dissolved; or
(iii) is acquired by, merged into, or consolidated with, any other entity.
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 Recordkeeper Plus product
and which establishes its account with the Shareholder Servicing Agent on or
after January 1, 1999 (provided that the plan establishment paperwork is
received by the Shareholder Servicing Agent in good order on or after November
15, 1998). A plan with a pre-existing account(s) with any MFS Fund which
switches to the MFS Recordkeeper Plus product will not become eligible for
this waiver category.
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 "Information Concerning Shares of the Fund -- 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 or restrict any specific purchase or exchange request.
Because an exchange request involves both a request to redeem shares of one
fund and to purchase shares of another fund, the Fund considers the underlying
redemption request conditioned upon the acceptance of the underlying purchase
request. Therefore, 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 MFS Family of Funds is not designed for professional market timing
organizations or other entities using programmed or frequent exchanges. The
MFS Family of Funds defines a "market timer" as an individual, or organization
acting on behalf of one or more individuals, if (i) the individual or
organization makes six or more exchange requests among the MFS Family of Funds
or three or more exchange requests out of any of the MFS high yield bond funds
or MFS municipal bond funds per calendar year and (ii) any one of such
exchange requests represents shares equal in value to $1 million or more.
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 (i) delaying for
up to seven days the purchase side of an exchange request by market timers,
(ii) rejecting or otherwise restricting purchase or exchange requests by
market timers; and (iii) permitting exchanges by market timers only into
certain 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
or arrange for the sale of 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 and other employees, payment for travel expenses, including
lodging, incurred by registered representatives and other employees 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 and other employees 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
into which an exchange is made 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.
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 or exchanges, 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 certain 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. 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
entity-level 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 paid in cash or reinvested 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 (as well as the rate category or
categories under which such gain is taxable), the portion, if any,
representing a return of capital (which is generally free of current taxes but
which 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% (or
any lower rate permitted under an applicable treaty) on taxable 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. 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 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 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. The Fund has
authorized one or more dealers to receive purchase and redemption orders on
behalf of the Fund. Such dealers are authorized to designate other
intermediaries to receive purchase and redemption orders on behalf of the
Fund. The Fund will be deemed to have received a purchase or redemption order
when an authorized dealer or, if applicable, a dealer's authorized designee.
receives the order. Customer orders will be priced at the net asset value of
the Fund next computed after such orders are received by an authorized dealer
or the dealer's authorized designee.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of six 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 Securities
Corporation 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 therefore be
higher. The Fund offers multiple classes of shares which were initially
offered for sale to, and purchased by, the public on different dates (the
class "inception date"). The calculation of total rate of return for a class
of shares which has a later class inception date than another class of shares
of the Fund is based both on (i) the performance of the Fund's newer class
from its inception date and (ii) the performance of the Fund's oldest class
from its inception date up to the Class inception date of the newer class. See
the SAI for further information on the calculation of total rate of return for
share classes with different class inception 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, 1998, 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.
PROVISION OF ANNUAL AND SEMIANNUAL REPORTS
To avoid sending duplicate copies of materials to households, only one copy of
the Fund's annual and semiannual report may be mailed to shareholders having the
same resi- dential address on the Fund's records. However, any shareholder may
call the Share- holder Servicing Agent at 1-800-225-2606 to request that copies
of such reports be sent personally to that shareholder.
10. 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:
o Dividends and capital gain distributions reinvested in additional shares;
this option will be assigned if no other option is specified;
o Dividends in cash; capital gain distributions reinvested in additional
shares;
o 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, 1999, 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). Some of the following information will not apply to certain MFS Funds,
depending on which classes of shares are offered by such Fund. As used in this
Appendix, the term "dealer" includes any broker, dealer, bank (including bank
trust departments), registered investment adviser, financial planner and any
other financial institutions having a selling agreement or other similar
agreement with MFS Fund Distributors, Inc. ("MFD").
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;
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.
o Shares purchased by certain retirement plans or trust accounts if: (i)
the plan is currently a party to a retirement plan recordkeeping or
administrative services agreement with MFD or one of its affiliates
and (ii) the shares purchased or redeemed represent transfers from or
transfers to plan investments other than the MFS Funds of which
retirement plan recordkeeping services are provided under the terms of
such agreement.
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.
7. LOAN REPAYMENTS
o Shares acquired pursuant to repayments by retirement plan participants
of loans from 401(a) or ESP Plans with respect to which such Plan or
its sponsoring organization subscribes to the MFS FUNDamental 401(k)
Program or the MFS Recordkeeper Plus Program (but not the MFS
Recordkeeper Program).
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. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund "supermarket" account
or a similar program under which such clients pay a fee to such
dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
o Shares acquired by retirement plans or trust accounts 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.
4. PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases Subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund,
MFS Municipal Limited Maturity Fund, MFS Money Market Fund, MFS
Government Money Market Fund and MFS Cash Reserve Fund.
5. BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFS and are acquiring such
shares for the benefit of their trust account clients.
6. INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions of
Class A shares, are waived with respect to Class A shares acquired of
any of the MFS Funds through the immediate reinvestment of the
proceeds of a redemption of Class I shares of any of the MFS Funds.
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 (or 15% per year, in the case of accounts registered as IRAs
where the redemption is made pursuant to Section 72(t) of the Internal
Revenue Code of 1986, as amended) 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
State Street Bank and Trust Company
225 Franklin 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, MA 02110
MFR-1 2/99 1.1MM 14/214/314/814
<PAGE>
[LOGO]M F S(R)
INVESTMENT MANAGEMENT
MFS(R) RESEARCH STATEMENT OF
FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) February 1, 1999
- ------------------------------------------------------------------------------
Page
1. Definitions ..................................................... 2
2. The Fund ........................................................ 2
3. Investment Objective, Policies and Restrictions ................. 2
4. Management of the Fund .......................................... 4
Trustees ..................................................... 4
Officers ..................................................... 4
Trustee Compensation Table ................................... 5
Investment Adviser ........................................... 6
Administrator ................................................ 6
Custodian .................................................... 6
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(R) 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, 1999. 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, 1999, 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 or a fee
from the borrower. The Fund would also receive compensation based on
investment of the collateral, less a fee paid to the borrower if the
collateral is in the form of cash. 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.
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 amount 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 collateral.
FOREIGN SECURITIES: The Fund may invest up to but not including 20% (and
generally expects to invest between 5% and 15%) 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 IBCA ("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.
The Fund may not invest 25% or more of the market value of its total assets in
securities of issuers in any one industry.
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) Invest more than 5% of its assets in companies which, including
predecessors, have a record of less than three years' continuous operation;
(11) 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;
(12) 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;
(13) 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: Except with respect to Investment Restriction
(1) and the Fund's policy on investing in illiquid securities, 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
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 services company), Chairman, Trustee and
Chief Executive Officer
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; International Technology Corp., Director; Mohawk Paper
Company, Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES*, President (born 6/2/55)
Massachusetts Financial Services Company, Chairman and Chief Executive Officer
ELAINE R. SMITH (born 4/25/46)
Independent Consultant
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Trustee
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, Senior Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September,
1996); Deloitte & Touche LLP, Senior Manager (until September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March, 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994)
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. Messrs. Shames, Scott and Cavan, are
the Chairman, a Director and the Secretary, respectively of MFD and hold
similar positions with certain other MFS affiliates. Mr. Bailey is a Director
of Sun Life Assurance Company of Canada (U.S.), a subsidiary of Sun Life
Assurance Company of Canada ("Sun Life").
The Fund pays the compensation of non-interested Trustees and Mr. Bailey who
currently receive a fee of $4,500 per year plus $200 per meeting and $175 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. 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>
TRUSTEE COMPENSATION TABLE
<CAPTION>
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 $10,700 $ 993 8 $259,430
Peter G. Harwood 12,775 730 5 150,511
J. Atwood Ives 11,700 1,033 17 149,491
Lawrence T. Perera 10,875 1,684 26 129,371
William J. Poorvu 11,800 1,802 25 139,006
Charles W. Schmidt 10,825 1,767 20 129,301
Arnold D. Scott -- -- N/A --
Jeffrey L. Shames -- -- N/A --
Elaine R. Smith 12,750 1,060 27 150,511
David B. Stone 13,475 1,853 14 165,826
(1) For fiscal year ended September 30, 1998.
(2) Based on normal retirement age of 73. See the table below for the estimated annual benefits payable upon retirement by
the Fund to a Trustee based on his or her estimated credited years of service.
(3) For calendar year 1998. All Trustees receiving compensation served as Trustees of 24 funds within the MFS fund complex
(having aggregate net assets at December 31, 1998, of approximately $43.3 billion) except Mr. Bailey, who served as
Trustee of 60 funds within the MFS fund complex (having aggregate net assets at December 31, 1998, of approximately $68.2
billion).
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
----------------------------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- -----------------------------------------------------------------------------------------------------------------------------
$ 9,630 $1,445 $2,408 $3,371 $4,815
10,669 1,600 2,667 3,734 5,334
11,707 1,756 2,927 4,097 5,854
12,746 1,912 3,186 4,461 6,373
13,784 2,068 3,446 4,824 6,892
14,823 2,223 3,706 5,188 7,411
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
As of October 30, 1998, all Trustees and officers as a group owned less than
1% of the Fund's shares outstanding.
As of October 30, 1998, Merrill Lynch Pierce Fenner & Smith Inc., Attn: Fund
Administration, 4800 Deer Lake Drive East, Jacksonville, FL 32232-6484 was the
record owner of 9.43% of the outstanding Class A shares of the Fund, 13.84% of
the outstanding Class B shares of the Fund and 27.69% of the outstanding Class
C shares of the Fund. As of October 30, 1998, MFS Defined Contribution Plan,
c/o Mark Leary, Massachusetts Financial Services, 500 Boylston Street, Boston,
MA 02116-3740 and New England Trust Company, c/o First of America Bank, P.O.
Box 4042, Kalamazoo, MI 49003-4042, owned 84.16% and 7.93%, respectively, of
the outstanding Class I 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.) Financial
Services Holdings, Inc., which in turn is an indirect wholly owned subsidiary
of Sun Life.
The Adviser manages the Fund pursuant to an Investment Advisory Agreement,
dated November 1, 1998 (the "Advisory Agreement"). Under the Advisory
Agreement, the Adviser provides the Fund with overall investment advisory
services. Subject to such policies as the Trustees may determine, the Adviser
makes investment decisions for the Fund. For these services and facilities,
effective November 1, 1998, the Adviser receives 0.43% per annum of the Fund's
average daily net assets. Prior to November 1, 1998, the Adviser received 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).
For the fiscal year ended September 30, 1998, MFS received management fees
under the Fund's Investment Advisory Agreement of $18,088,633 (of which
$15,823,906 was based on average daily net assets and $2,264,727 on gross
income), equivalent on an annualized basis to 0.33% of the Fund's average
daily net assets. For the fiscal year ended September 30, 1997, MFS received
management fees of $10,295,600 (of which $9,009,037 was based on average daily
net assets and $1,286,563 on gross income), equivalent on an annualized basis
to 0.34% of the Fund's average daily net assets. 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.
The Fund pays its expenses (other than those assumed by MFS or MFD),
including: advisory and administrative services; 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, 1998, 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.
The Advisory Agreement will remain in effect until August 1, 2000, 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.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997, as amended. Under this
Agreement, the Fund pays MFS an administrative fee up to 0.015% per annum of
the Fund's average daily net assets. This fee reimburses MFS for a portion of
the costs it incurs to provide such services. For the period commencing March
1, 1997 through the period ended September 30, 1997, and the year ended
September 30, 1998, MFS received $252,317 and $350,786, respectively, under
the Agreement.
CUSTODIAN
State Street Bank and 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. The Custodian also acts as the dividend disbursing agent of the
Fund.
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, as amended (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
0.1125%. 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 disbursing agent
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, 1998, MFD received net
commissions of $1,982,171 and dealers received net commissions of $11,310,221
(as their concession on gross commissions of $13,292,392) for selling Class A
shares of the Fund; the Fund received $349,585,006 representing the aggregate
net asset value of such shares. During the Fund's fiscal year ended September
30, 1997, MFD received net commissions of $2,307,594 and dealers received net
commissions of $14,693,030 (as their concession on gross commissions of
$17,000,624) for selling Class A shares of the Fund; the Fund received
$942,545,591 representing the aggregate net asset value of such 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, 1998, the CDSC imposed on
redemption of Class A, Class B and Class C shares was $32,486, $2,772,815 and
$136,727, respectively. During the Fund's fiscal year ended September 30,
1997, the CDSC imposed on redemption of Class A, Class B and Class C shares
was $27,929, $1,598,460 and $107,032, respectively. 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.
The Distribution Agreement will remain in effect until August 1, 1999, 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 Conduct Rules 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 $53,050 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, 1997 and 1998, total
brokerage commissions of $3,831,659, $7,737,147 and $11,227,552, respectively,
were paid on total transactions of $2,556,113,000, $5,170,226,072 and
$8,341,643,655. During the Fund's fiscal year ended September 30, 1998, the
Fund owned securities issued by Morgan Stanley Dean Witter & Co. which
securities had a value of $24,571,000 at the end of such fiscal year.
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 the
following:
Traditional 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);
Roth Individual Retirement Accounts (Roth IRAs) (for individuals who desire
to make limited contributions to a tax-favored retirement program);
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 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 the 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 distributions are 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 for federal income tax purposes
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 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 ninety 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 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. Investment by the Fund in certain
"passive foreign investment companies" may be limited in order to avoid a tax
on the Fund. The Fund may elect to mark to market any investments in "passive
foreign investment companies" on the last day of each year. This election may
cause the Fund to recognize income prior to the receipt of cash payments with
respect to those investments; 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. 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 payments at the rate of 30% (or any lower
rate permitted under an applicable treaty) on taxable dividends and other
payments to Non-U.S. persons that are subject to such withholding. 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; Martin
Luther King, Jr. 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) 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, and purchased by, the public on different dates (the class "inception
date"). The calculation of total rate of return for a class of shares which
has a later class inception date than another class of shares of the Fund is
based both on (i) the performance of the Fund's newer class from its inception
date and (ii) the performance of the Fund's oldest class from its inception
date up to the class inception date of the newer class.
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.
PERFORMANCE RESULTS: 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 Securities Corporation, 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.
The Fund may also use charts, graphs or other presentation formats to
illustrate the historical correlation of its performance to fund categories
established by Morningstar (or other nationally recognized statistical ratings
organizations) and to other MFS Funds.
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.
From time to time, the Fund may also advertise annual returns showing the
cumulative value of an initial investment in the Fund in various amounts over
specified periods with capital gain and dividend distributions invested in
additional shares or taken in cash, and with no adjustment for any income
taxes (if applicable) payable by shareholders.
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) Global 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) Global Total Return Fund is the first global balanced
fund.
-- 1993 -- MFS(R) Global 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 Equity Fund,
the first fund 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, 1998, 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 $ 9,198,981 $ 2,986,989 $6,211,992
Class B Shares $22,103,603 $16,632,598 $5,471,005
Class C Shares $ 5,519,535 $ 5,073 $5,514,462
GENERAL: The Distribution Plan will remain in effect until August 1, 1999, 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 five 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 and five other
series). 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, 1998, the Statement of Assets
and Liabilities at September 30, 1998, the Statement of Operations for the
year ended September 30, 1998, the Statement of Changes in Net Assets for the
years ended September 30, 1998 and 1997, 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
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 & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this
obligation are being continued.
D: An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's 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 or the taking of a
similar action if payments on an obligation 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
rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly unlikely
to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility, Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50% -- 90% of such outstandings,
and D the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable economic/
industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt-obligations. Issuer failed to meet scheduled principal and/
or interest payments.
DP: Preferred stock with dividend arrearages.
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>
APPENDIX B
PERFORMANCE INFORMATION
The performance 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.
All performance quotations are as of September 30, 1998.
AVERAGE ANNUAL TOTAL RETURNS
-----------------------------------------
1 YEAR 5 YEAR 10 YEAR
------ ------ -------
Class A shares with sales charge .... (6.59)% 15.33% 15.41%
Class A shares without sales charge . (0.89)% 16.71% 16.09%
Class B shares with CDSC ............ (5.31)% 15.65%(1) 15.68%(1)
Class B shares without CDSC ......... (1.54)% 15.87%(1) 15.68%(1)
Class C shares with CDSC ............ (2.46)% 15.94%(2) 15.71%(2)
Class C shares without CDSC ......... (1.51)% 15.94%(2) 15.71%(2)
Class I shares without CDSC ......... (0.55)%(3) 16.85%(3) 16.16%(3)
----- ----- -----
(1) Class B share performance includes the performance of the Fund's Class A
shares for periods prior to the inception 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 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 inception 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.
(3) Class I share performance includes the performance of the Fund's Class A
shares for the periods prior to the inception of Class I shares on
January 2, 1997. Sales charges, expenses and expense ratios, and therefore
performance for Class I and A shares differ. Class I share performance has
been adjusted to reflect that Class I shares are not subject to an initial
sales charge, whereas Class A shares generally are subject to an initial
sales charge. Class I 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 I 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
State Street Bank and Trust Company
225 Franklin 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, MA 02110
MFS(R)
RESEARCH
FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO]M F S(R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
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MFR-13-2/99/475 14/214/314
