<PAGE>
MFS(R) INTERNATIONAL OPPORTUNITIES FUND
MFS(R) INTERNATIONAL STRATEGIC GROWTH FUND
MFS(R) INTERNATIONAL VALUE FUND
MFS(R)ASIA PACIFIC FUND
Supplement to the February 1, 1999 Prospectus and
Statement of Additional Information
The following information should be read in conjunction with the Funds'
Prospectus and Statement of Additional Information ("SAI"), dated February 1,
1999, as supplemented, and contains a description of Class I shares.
Class I shares are available for purchase only by certain investors as
described under the caption "Eligible Purchasers" below.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Class I
---------------------------------------------------
International
International Strategic International Asia
Opportunities Growth Value Pacific
Fund Fund Fund Fund
Shareholder Transaction Expenses:
Maximum Initial Sales Charge Imposed
on Purchases of Fund Shares (as a
percentage of offering price)........ None None None None
Maximum Contingent Deferred Sales
Charge (as a percentage of original
purchase price or redemption proceeds,
as applicable)....................... None None None None
International
International Strategic International Asia
Opportunities Growth Value Pacific
Fund Fund Fund Fund
Annual Operating Expenses (as a percentage of average net assets):
Management Fees (after fee
reduction)(1)........................ 0.00% 0.00% 0.00% 0.00%
Rule 12b-1 Fees......................... None None None None
Other Expenses (after expense
limitation)(2)....................... 1.75%(3) 1.75%(3) 1.75%(3) 1.36%
-------- -------- -------- -----
Total Operating Expenses (after
fee reductions) (4).................. 1.75% 1.75% 1.75% 1.36%
</TABLE>
- ------------------------------
(1) The Adviser intends during the Funds' current fiscal year to waive its
right to receive management fees from each Fund. Absent this waiver,
"Management Fees" would be as follows:
INTERNATIONAL INTERNATIONAL INTERNATIONAL ASIA
OPPORTUNITIES STRATEGIC GROWTH VALUE PACIFIC
FUND FUND FUND FUND
0.975% 0.975% 0.975% 1.00%
(2) Each 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>
(3) The Adviser has agreed to bear the expenses of the Fund, subject to
reimbursement by each such Fund, such that "Other Expenses" do not exceed
1.75% per annum of each such Fund's average daily net assets during the
current fiscal year. See "Information Concerning Shares of the Funds -
Expenses" in the Prospectus. Otherwise, "Other Expenses" would be 2.10% for
the International Opportunities Fund, 2.45% for the International Strategic
Growth Fund, and 2.45% for the International Value Fund.
(4) Absent any fee waivers, "Total Operating Expenses" for each Fund would be as
follows:
INTERNATIONAL INTERNATIONAL INTERNATIONAL ASIA
OPPORTUNITIES STRATEGIC GROWTH VALUE PACIFIC
FUND FUND FUND FUND
3.07% 3.42% 3.42% 2.36%
Example of Expenses
An investor would pay the following dollar amounts of expenses on a
$1,000 investment in Class I shares of each Fund, assuming (a) a 5% annual
return and (b) redemption at the end of each of the time periods indicated:
INTERNATIONAL INTERNATIONAL INTERNATIONAL ASIA
OPPORTUNITIES STRATEGIC GROWTH VALUE PACIFIC
Period FUND FUND FUND FUND
1 year......... $ 18 $ 18 $ 18 $ 14
3 years........ 55 55 55 42
5 years........ 95 95 95 73
10 years....... 206 206 206 164
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Funds
will bear directly or indirectly. A more complete description of each Fund's
management fee is set forth under the caption "Management of the Funds" in the
Prospectus.
The "Example" set forth above should not be considered a representation
of past or future expenses of the Funds; actual expenses may be greater or less
than those shown.
2. CONDENSED FINANCIAL INFORMATION
The following information has been audited and should be read in conjunction
with the financial statements included in the Funds' Annual Report to
shareholders which are incorporated by reference into the SAI in reliance upon
the report of the Funds' independent Auditors, given upon their authority as
experts in accounting and auditing. The Funds' independent auditors are Ernst &
Young LLP.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
International
International Strategic International
Opportunities Growth Value
Financial Highlights Fund Fund Fund
Period Ended September 30, 1998* Class I Class I Class I
Per share data (for a share outstanding throughout the period).
Net asset value - beginning of period $ 10.00 $ 10.00 $ 10.00
-------- -------- --------
Income from investment operations# --
Net investment incomess. $ 0.07 $ 0.05 $ 0.11
Net realized and unrealized gain on
investments and foreign currency (0.65) (0.35) 0.36
-------- -------- --------
Total from investment operations $ (0.58) $ (0.30) $ 0.47
-------- -------- --------
Net asset value - end of period $ 9.42 $ 9.70 $ 10.47
-------- -------- --------
Total return (5.80)%++ (3.00)%++ 4.70%++
Ratios (to average net assets)/Supplemental datass.:
Expenses 1.75%+### 1.75%+ 1.75%+###
<PAGE>
Net investment income 0.65%+ 0.48%+ 1.00%+
Portfolio turnover 165% 103% 71%
Net assets at end of period (000 omitted) $692 $876 $112
</TABLE>
- ------------------
+ Annualized.
++ Not annualized.
* For the period from the commencement of the Fund's investment operations,
October 9, 1997 through September 30, 1998.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
### The Fund's expenses without reduction for fees paid indirectly for both
Class A and Class I for the period ended September 30, 1998 would have
been:
<TABLE>
<CAPTION>
<S> <C>
1.79% 1.77%
</TABLE>
ss. Subject to reimbursement by the Fund, the investment adviser agreed to
maintain the expenses of the Fund, exclusive of management, distribution,
and service fees, at not more than 1.75% of the Fund's average daily net
assets. The investment adviser and the distributor voluntarily waived
their fees for the period indicated. If these fees had not been waived
and/or, if actual expenses had been over this limitation, the net
investment loss per share and the ratios would have been:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net investment income $ 0.07 $ (0.13) $ (0.07)
Ratios (to average net assets):
Expenses## 3.07%+ 3.38%+ 3.42%+
Net investment income (0.71)% + (1.15)% + (0.67)%+
</TABLE>
Financial Highlights Asia Pacific Fund
Period Ended September 30, 1998* Class I
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period $ 10.00
Income from investment operations# --
Net investment incomess. $ 0.08
Net realized and unrealized loss on
investments and foreign currency (3.53)
Total from investment operations $ (3.45)
--------
Less distributions declared to shareholders from net
investment income $ (0.02)
Net asset value - end of period $ 6.53
-------
Total return (34.72)%++
Ratios (to average net assets)/Supplemental datass.:
Expenses## 1.33%+
Net investment income 0.83%+
Portfolio turnover 84%
Net assets at end of period (000 omitted) $342
- ------------------
* For the period from the commencement of the Fund's investment operations,
October 9, 1997, through September 30, 1998.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
ss. The investment adviser and the distributor voluntarily waived their fees
for the period indicated. If these fees had been incurred by the Fund,
the net investment loss per share and the ratios would have been:
Net investment loss $(0.02) Ratios (to average net assets):
Expenses## 2.37%+
Net investment loss (0.22)%+
<PAGE>
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 each Fund's policies, disqualify the purchaser as an eligible
investor of Class I shares.
SHARE CLASSES OFFERED BY THE FUNDS
While each Fund has four classes of shares (Class A, Class B, Class C
and Class I shares), Class A and Class I shares are the only classes presently
available for sale. Class I shares are available for purchase only by Eligible
Purchasers, as defined above, and are described in this Supplement. Class A,
Class B and Class C shares are described in the Funds' Prospectus. Class A
shares are available for purchase by certain retirement plans established for
the benefit of employees of MFS and by such employees and certain of their
family members who are residents of The Commonwealth of Massachusetts, and
members of the governing boards of the various funds sponsored by MFS.
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 0.50% 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 Funds.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through
MFD. Eligible Purchasers may exchange Class I shares of a 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 a Fund for shares of the MFS Money Market Fund (if available for
sale), and may redeem Class I shares of a Fund at net asset value. Distributions
paid by a Fund with respect to Class I shares generally will be greater than
those paid with respect to Class A, Class B and Class C shares because expenses
attributable to Class A, Class B and Class C shares generally will be higher.
The date of this Supplement is February 1, 1999.
[GRAPHIC OMITTED]
PROSPECTUS
FEBRUARY 1, 1999
MFS(R) International Opportunities Fund
MFS(R) International Strategic Growth Fund
MFS(R) International Value Fund
MFS(R) Asia Pacific Fund
Class A Shares of Beneficial Interest
(Members of the MFS Family of Funds(R)) Class B Shares of Beneficial Interest
Each a series of MFS Series Trust V Class C Shares of Beneficial Interest
- --------------------------------------------------------------------------------
MFS International Opportunities Fund (the "International Opportunities Fund") --
The investment objective of the International Opportunities Fund is capital
appreciation. The Fund will, under normal conditions, invest at least 80% of its
total assets in equity securities of companies whose principal activities are
outside the U.S. The Fund may invest in foreign companies of any size, including
smaller, lesser known companies in the developing stages of their life cycle
that offer the potential for accelerated earnings or revenue growth (foreign
emerging growth companies). Such companies generally would be expected to offer
superior prospects for growth and would have the products, management and market
opportunities which are usually necessary to become more widely recognized as
growth companies.
MFS International Strategic Growth Fund (the "International Strategic Growth
Fund") -- The investment objective of the International Strategic Growth Fund is
capital appreciation. The Fund will, under normal conditions, invest at least
80% of its total assets in equity securities of companies whose principal
activities are outside the U.S. The Fund may invest in foreign companies of any
size but generally invests in established foreign companies which the Adviser
believes offer prospects for growth of earnings. The Fund may also invest in
equity securities of foreign companies in the developing stages of their life
cycle (foreign emerging growth companies).
MFS International Value Fund (the "International Value Fund") -- The investment
objective of the International Value Fund is capital appreciation. The Fund
seeks to achieve its objective by investing, under normal conditions, at least
80% of its total assets in equity securities of companies whose principal
activities are outside the U.S. The Fund invests in securities that the Adviser
believes are undervalued compared to industry norms within their countries,
based on an assessment of assets, earnings, cash flow and growth potential. The
Fund generally will invest in established foreign companies, many of which pay
current dividends.
MFS Asia Pacific Fund (the "Asia Pacific Fund") -- The investment objective of
the Asia Pacific Fund is capital appreciation. The Fund seeks to achieve its
objective by investing, under normal conditions, at least 80% of its total
assets in equity securities of companies whose principal activities are in Asia
or the Pacific Basin. The Fund may invest in securities of issuers located in
any country in Asia or the Pacific Basin.
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.
While three classes of shares of each Fund are described in this Prospectus, the
Funds do not currently offer Class B and Class C shares. Class A shares are
available for purchase at net asset value only by employees of MFS and its
affiliates and certain of their family members who are residents of The
Commonwealth of Massachusetts, and members of the governing boards of the
various funds sponsored by Massachusetts Financial Services Company (the
"Adviser" or "MFS").
Each Fund's investment adviser and distributor are MFS and MFS Fund
Distributors, Inc. ("MFD"), respectively, both of which are located at 500
Boylston Street, Boston, Massachusetts 02116. Each Fund is a series of MFS
Series Trust V (the "Trust"). This Prospectus sets forth concisely the
information concerning each Fund and the Trust that a prospective investor ought
to know before investing. The Trust, on behalf of each Fund, has filed with the
Securities and Exchange Commission (the "SEC") a Statement of Additional
Information ("SAI"), dated February 1, 1999, as amended or supplemented from
time to time, which contains more detailed information about the Trust and each
Fund. The SAI is incorporated into this Prospectus by reference. See page 30 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).
<PAGE>
TABLE OF CONTENTS
Page
1. Expense Summary......................................... 1
2. Condensed Financial Information......................... 4
3. The Funds............................................... 5
4. Investment Objectives and Policies...................... 6
International Opportunities Fund...................... 6
International Strategic Growth Fund................... 6
International Value Fund.............................. 6
Asia Pacific Fund..................................... 7
5. Certain Securities and Investment Techniques............ 7
6. Additional Risk Factors................................. 12
7. Management of the Funds................................. 15
8. Year 2000 Issues........................................ 17
9. Information Concerning Shares of the Funds.............. 17
Purchases............................................. 17
Exchanges............................................. 22
Redemptions and Repurchases........................... 22
Distribution Plan..................................... 24
Distributions......................................... 26
Tax Status............................................ 26
Net Asset Value....................................... 26
Expenses ............................................. 27
Description of Shares, Voting Rights and Liabilities.. 27
Performance Information............................... 28
Provision of Annual and Semiannual Reports............ 28
10. Shareholder Services.................................... 28
Appendix A - Waivers of Sales Charges................................... A-1
Appendix B - Description of Bond Ratings................................ B-1
<PAGE>
1. EXPENSE SUMMARY
Shareholder Transaction Expenses: Class A Class B Class C
Maximum Initial Sales Charge Imposed on
Purchases of Fund Shares (as a
percentage of offering price) 4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase
price or redemption proceeds, as
applicable) See Below(1) 4.00% 1.00%
Annual Operating Expenses (as a percentage of average daily net assets):
CLASS A SHARES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
International International International Asia
Opportunities Strategic Growth Value Pacific
Fund Fund Fund Fund
Management Fees (after fee
reduction)(2)...................... 0.00% 0.00% 0.00% 0.00%
Rule 12b-1 Fees (after fee
reduction)(3)...................... 0.00% 0.00% 0.00% 0.00%
Other Expenses (after expense
limitation)(5) (7)................. 1.75% 1.75% 1.75% 1.36%
----- ----- ----- -----
Total Operating Expenses
(after fee reductions)(6).......... 1.75% 1.75% 1.75% 1.36%
</TABLE>
CLASS B SHARES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
International International International Asia
Opportunities Strategic Growth Value Pacific
Fund Fund Fund Fund
Management Fees (after fee
reduction)(2)...................... 0.00% 0.00% 0.00% 0.00%
Rule 12b-1 Fees(4).................... 1.00% 1.00% 1.00% 1.00%
Other Expenses (after expense
limitation)(5) (7)................. 1.75% 1.75% 1.75% 1.36%
----- ----- ----- -----
Total Operating Expenses
(after fee reductions)(6).......... 2.75% 2.75% 2.75% 2.36%
</TABLE>
CLASS C SHARES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
International International International Asia
Opportunities Strategic Growth Value Pacific
Fund Fund Fund Fund
Management Fees (after fee
reduction)(2)...................... 0.00% 0.00% 0.00% 0.00%
Rule 12b-1 Fees(4).................... 1.00% 1.00% 1.00% 1.00%
Other Expenses (after expense
limitation)(5) (7)................. 1.75% 1.75% 1.75% 1.36%
----- ----- ----- -----
Total Operating Expenses
(after fee reductions)(6).......... 2.75% 2.75% 2.75% 2.36%
</TABLE>
- -----------------------
(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 "Purchases").
-1-
<PAGE>
(2) The Adviser intends during the Funds' current fiscal year to waive its
right to receive management fees from each Fund. Absent these waivers,
"Management Fees" would be as follows:
International International International Asia
Opportunities Strategic Growth Value Pacific
Fund Fund Fund Fund
0.975% 0.975% 0.975% 1.00%
(3) Each 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)
0.50% per annum of the average daily net assets attributable to Class A
shares. Distribution and service fees under the Distribution Plan are
currently being waived on a voluntary basis and, while they may be imposed
at the discretion of MFD at any time, MFD currently intends to waive these
fees during the Funds' current fiscal year. Distribution expenses paid
under the Distribution 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 "Distribution Plan" below.
(4) Each 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 and 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 "Distribution Plan" below.
(5) The Adviser has agreed to bear the expenses of the Fund, subject to
reimbursement by each such Fund, such that "Other Expenses" do not exceed
1.75% per annum of each such Fund's average daily net assets during the
current fiscal year. See "Information Concerning Shares of the Funds -
Expenses" below. Otherwise, "Other Expenses" would be 2.10% for each class
of the International Opportunities Fund, 2.45% for each class of the
International Strategic Growth Fund and 2.45% for each class of the
International Value Fund.
(6) Absent any expense reductions, "Total Operating Expenses," expressed as a
percentage of average daily net assets, would be as follows:
International International International Asia
Opportunities Strategic Growth Value Pacific
Fund Fund Fund Fund
Class A 3.57% 3.92% 3.92% 2.86%
Class B 4.07% 4.42% 4.42% 3.36%
Class C 4.07% 4.42% 4.42% 3.36%
(7) Each 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 each Fund, assuming (a) a 5% annual return
-2-
<PAGE>
and, unless otherwise noted, (b) redemption at the end of each of the time
periods indicated:
CLASS A SHARES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
International International International Asia
Opportunities Strategic Growth Value Pacific
Period Fund Fund Fund Fund
------ -------------- --------------- ------------ ------
1 year $ 64 $ 64 $ 64 $ 61
3 years 100 100 100 89
5 years 138 138 138 118
10 years 244 244 244 203
</TABLE>
CLASS B SHARES
(ASSUMES REDEMPTION)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
International International International Asia
Opportunities Strategic Growth Value Pacific
Period Fund Fund Fund Fund
------ -------------- --------------- ------------ ------
1 year $ 63 $ 68 $ 68 $ 64
3 years 100 115 115 104
5 years 140 165 165 146
10 years(2) 246 284 284 244
</TABLE>
CLASS B SHARES
(ASSUMES NO REDEMPTION)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
International International International Asia
Opportunities Strategic Growth Value Pacific
Period Fund Fund Fund Fund
------ -------------- --------------- ------------ ------
1 year $ 23 $28 $28 $ 24
3 years 70 85 85 74
5 years 120 145 145 126
10 years(2) 246 284 284 244
</TABLE>
CLASS C SHARES
(ASSUMES REDEMPTION)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
International International International Asia
Opportunities Strategic Growth Value Pacific
Period Fund Fund Fund Fund
------ -------------- --------------- ------------ ------
1 year $33 $38 $38 $ 34
3 years 70 85 85 74
5 years 120 145 145 126
10 years 258 308 308 270
</TABLE>
- -------------------
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore years nine and ten reflect Class A expenses.
-3-
<PAGE>
CLASS C SHARES
(ASSUMES NO REDEMPTION)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
International International International Asia
Opportunities Strategic Growth Value Pacific
Period Fund Fund Fund Fund
------ -------------- --------------- ------------ ------
1 year $23 $28 $28 $ 24
3 years 70 85 85 74
5 years 120 145 145 126
10 years 258 308 308 270
</TABLE>
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of each Fund will bear
directly or indirectly. More complete descriptions of the following Fund
expenses are set forth in the following sections: (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 a Fund; actual expenses may be greater or less than those
shown.
2. CONDENSED FINANCIAL INFORMATION
The following information has been audited and should be read in conjunction
with the financial statements included in the Funds' Annual Report to
shareholders which are incorporated by reference into the SAI in reliance upon
the report of each Fund's independent auditors given upon their authority as
experts in accounting and auditing. Each Fund's current independent auditors are
Ernst & Young LLP.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
International
International Strategic International
Opportunities Growth Value
Financial Highlights Fund Fund Fund
- -------------------- -------------- ------------ -------
Period Ended September 30, 1998* Class A Class A Class A
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period $ 10.00 $ 10.00 $ 10.00
------- ------- -------
Income from investment operations# --
Net investment incomess. $ 0.06 $ 0.04 $ 0.10
Net realized and unrealized gain on
investments and foreign currency (0.64) (0.36) 0.36
Total from investment operations $ (0.58) $ (0.32) $ 0.46
-------- -------- -------
Net asset value - end of period $ 9.42 $ 9.68 $ 10.46
-------- ------- -------
Total return (5.80)%++ (3.20)%++ 4.70%++
Ratios (to average net assets)/Supplemental datass.:
Expenses 1.75%###+ 1.75%+ 1.75%+###
Net investment income 0.54%+ 0.34%+ 0.98%+
Portfolio turnover 165% 103% 71%
Net assets at end of period (000 omitted) $573 $90 $1,002
</TABLE>
- ------------------
* For the period from the commencement of investment operations, October 9,
1997, through September 30, 1998.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
### The Fund's expenses without reduction for fees paid indirectly for the
period ended September 30, 1998 would have been:
<TABLE>
<CAPTION>
<S> <C>
1.79% 1.77%
</TABLE>
ss. Subject to reimbursement by the Funds, the investment adviser agreed to
maintain the expenses of the Funds, exclusive of management, distribution
and service fees, at not more than 1.75% of the Fund's average daily net
assets. The investment
-4-
<PAGE>
adviser and the distributor voluntarily waived their fees for the
period indicated. If these fees had not been incurred by the Funds and
other expenses had not been limited, the net investment loss per share
and the ratios would have been:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net investment income $ 0.13 $ (0.13) $ (0.13)
Ratios (to average net assets):
Expenses## 3.57%+ 3.92%+ 3.92%+
Net investment income (1.32)%+ (1.19)% + (1.19)% +
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Financial Highlights Asia Pacific Fund
Period Ended September 30, 1998* Class A
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period $ 10.00
Income from investment operations# --
Net investment incomess. $ 0.07
Net realized and unrealized loss on
investments and foreign currency (3.53)
Total from investment operations $ 3.46
-------
Less distributions declared to shareholders from net investment income $ (0.02)
Net asset value - end of period $ 6.52
-------
Total return (34.82)%++
Ratios (to average net assets)/Supplemental datass.:
Expenses## 1.36%+
Net investment income 0.86%+
Portfolio turnover 84%
Net assets at end of period (000 omitted) $1,348
</TABLE>
- ------------------
* For the period from the commencement of the Fund's investment operations,
October 9, 1997, through September 30, 1998.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
ss. The investment adviser and the distributor voluntarily waived their fees
for the period indicated. If these fees had been incurred by the Fund,
the net investment loss per share and the ratios would have been:
<TABLE>
<CAPTION>
<S> <C>
Net investment loss $(0.06) Ratios (to average net assets):
Expenses## 2.90%+
Net investment loss (0.69)%+
</TABLE>
3. THE FUNDS
Each Fund is a 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. Each Fund is a diversified fund. The Trust presently
consists of six series, all of which are offered for sale pursuant to separate
prospectuses, and each of which represents a portfolio with separate investment
objectives and policies. Shares of each Fund are sold continuously to the public
and each Fund then uses the proceeds to buy securities for its portfolio. While
each Fund has three classes of shares designed for sale generally to the public,
Class A shares are the only class presently available for sale. 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 certain 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 0.50% 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 up to a maximum of 1.00% per
annum. Class C shares do not convert to any other class of shares of a Fund. In
addition, the Funds offer 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
-5-
<PAGE>
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
each Fund. MFS is each Fund's investment adviser and is responsible for the
management of each Fund's assets. The officers of the Trust are responsible for
its operations. The Adviser manages each Fund's portfolio from day to day in
accordance with each Fund's investment objective and policies. A majority of the
Trustees are not affiliated with the Adviser. The selection of investments and
the way they are managed depend on the conditions and trends in the economies of
the various countries of the world, their financial markets and the relationship
of their currencies to the U.S. dollar. The Trust also offers to buy back
(redeem) shares of each Fund from shareholders at any time at net asset value,
less any applicable CDSC.
4. INVESTMENT OBJECTIVES AND POLICIES
Each Fund has an investment objective which it pursues through separate
investment policies, as described below. The differences in objectives and
policies among the Funds can be expected to affect the market and financial risk
to which each Fund is subject and the performance of each Fund. The investment
objective and polices of each Fund, unless otherwise specifically stated, may be
changed by the Trustees of the Trust without a vote of the shareholders. A
change in a Fund's objective may result in the Fund having an investment
objective different from the objective which shareholders considered appropriate
at the time of investment in the Fund. Any investment involves risk and there is
no assurance that the investment objective of any Fund will be achieved.
INTERNATIONAL OPPORTUNITIES FUND - The International Opportunities Fund's
investment objective is capital appreciation.
The Fund will, under normal conditions, invest at least 80% of its total assets
in equity securities of companies whose principal activities are outside the
U.S. The Fund may invest in foreign companies of any size, including smaller,
lesser known companies in the developing stages of their life cycle that offer
the potential for accelerated earnings or revenue growth (foreign emerging
growth companies). Such companies generally would be expected to offer superior
prospects for growth and would have the products, management and market
opportunities which are usually necessary to become more widely recognized as
growth companies.
The Fund may invest up to 35% of its net assets in securities of issuers whose
principal activities are located in emerging market countries. The Fund may also
invest up to 10% of its net assets in fixed income securities (including Brady
Bonds). The Fund may engage in short sales of securities which the Adviser
expects to decline in price.
The Fund may engage in certain investment techniques, as described under the
caption "Certain Securities and Investment Techniques" below and in the SAI. The
Fund's investments are subject to certain risks, as described in the
above-referenced sections of this Prospectus and the SAI and as described under
the caption "Additional Risk Factors" below.
INTERNATIONAL STRATEGIC GROWTH FUND - The International Strategic Growth Fund's
investment objective is capital appreciation.
The Fund will, under normal conditions, invest at least 80% of its total assets
in equity securities of companies whose principal activities are outside the
U.S. The Fund may invest in foreign companies of any size but generally invests
in established foreign companies which the Adviser believes offer prospects for
growth of earnings. The Fund may also invest in equity securities of foreign
companies in the developing stages of their life cycle (foreign emerging growth
companies).
The Fund may invest up to 25% of its net assets in securities of issuers whose
principal activities are located in emerging market countries. The Fund may also
invest up to 10% of its net assets in fixed income securities (including Brady
Bonds).
The Fund may engage in certain investment techniques, as described under the
caption "Certain Securities and Investment Techniques" below and in the SAI. The
Fund's investments are subject to certain risks, as described in the
above-referenced sections of this Prospectus and the SAI and as described under
the caption "Additional Risk Factors" below.
INTERNATIONAL VALUE FUND - The International Value Fund's investment objective
is capital appreciation.
The Fund seeks to achieve its objective by investing, under normal conditions,
at least 80% of its total assets in equity securities of companies whose
principal activities are outside the U.S. The Fund invests in securities that
the Adviser believes are undervalued compared to industry norms within their
countries, based on an assessment of assets, earnings, cash flow and growth
potential. The Fund generally will invest in established foreign companies, many
of which pay current dividends.
The Fund may invest up to 10% of its net assets in securities of issuers whose
principal activities are located in emerging market countries. The Fund may also
invest up to 25% of its net assets in fixed income securities (including Brady
Bonds), including up to 10% of its net assets in fixed income securities rated
BB or lower by Standard & Poor's Ratings Services ("S&P"), Fitch IBCA ("Fitch")
or Duff
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<PAGE>
& Phelps Credit Rating Co. ("Duff & Phelps") or Ba or lower by Moody's Investors
Service, Inc. ("Moody's"), or if unrated, determined to be of equivalent quality
by the Adviser. See Appendix B for a description of these ratings.
The Fund may engage in certain investment techniques, as described under the
caption "Certain Securities and Investment Techniques" below and in the SAI. The
Fund's investments are subject to certain risks, as described in the
above-referenced sections of this Prospectus and the SAI and as described under
the caption "Additional Risk Factors" below.
ASIA PACIFIC FUND - The Asia Pacific Fund's investment objective is capital
appreciation.
The Fund seeks to achieve its objective by investing, under normal conditions,
at least 80% of its total assets in equity securities of companies whose
principal activities are in Asia or the Pacific Basin. The Fund may invest in
securities of issuers located in any country in Asia or the Pacific Basin. Such
countries may include Australia, Hong Kong, India, Indonesia, Japan, Malaysia,
New Zealand, Pakistan, the Peoples Republic of China, the Philippines,
Singapore, South Korea, Taiwan and Thailand. Many of these countries have less
developed economies and securities markets (emerging market countries). Although
the amount of the Fund's assets invested in emerging market countries will vary
over time, the Fund may invest all of its assets in emerging markets securities.
The Fund may invest in companies of any size whose earnings are believed to be
in a relatively strong growth trend, or in companies in which significant
further growth is not anticipated but whose securities are thought to be
undervalued. The Fund may invest in lesser known companies in the developing
stages of their life cycle that offer the potential for accelerated earnings or
revenue growth (foreign emerging growth companies).
The Fund may invest up to 10% of its net assets in fixed income securities
(including Brady Bonds), all of which may be rated BB or lower by S&P, Fitch or
Duff & Phelps or Ba or lower by Moody's, or if unrated, determined to be of
equivalent quality by the Adviser. The Fund may engage in short sales of
securities which the Adviser expects to decline in price.
The Fund may engage in certain investment techniques, as described under the
caption "Certain Securities and Investment Techniques" below and in the SAI. The
Fund's investments are subject to certain risks, as described in the
above-referenced sections of this Prospectus and the SAI and as described under
the caption "Additional Risk Factors" below.
--------------------------------
In determining where an issuer's principal activities are located, the Adviser
considers 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 are deemed to be located in a
particular country or region if the issuer (a) is organized under the laws of,
and maintains a principal office in, that country or region, (b) has its
principal securities trading market in that country or region, (c) derives 50%
or more of its total revenues from goods sold or services performed in that
country or region, or (d) has 50% or more of its assets in that country or
region.
5. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
The securities and investment techniques described below are applicable to all
or certain of the Funds, as specified. Additional information about certain of
these securities and investment techniques can be found under the caption
"Investment Objectives, Policies and Restrictions - Investment Techniques" in
the SAI and "Additional Risk Factors" below.
Equity Securities: Each Fund may invest in all types of equity
securities, including the following: common stocks, preferred stocks and
preference stocks; securities such as bonds, warrants or rights that are
convertible into stocks; and depository receipts for those securities. These
securities may be listed on securities exchanges, traded in various
over-the-counter markets or have no organized market.
Foreign Emerging Growth Securities: Each Fund may invest in securities
of foreign emerging growth companies, including established foreign companies,
whose rates of earnings growth are expected to accelerate because of special
factors, such as rejuvenated management, new products, changes in consumer
demand, or basic changes in the economic environment or which otherwise
represent opportunities for long-term growth. It is anticipated that these
companies will primarily be in nations with more developed securities markets,
such as Japan, Australia, Canada, New Zealand, Hong Kong and most Western
European countries, including Great Britain.
Emerging Markets Securities: Each Fund may invest in securities of
issuers whose principal activities are located in emerging market countries
(which may include foreign governments and their subdivisions, agencies or
instrumentalities). Emerging markets 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
-7-
<PAGE>
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, 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.
Fixed Income Securities: Fixed income securities in which each Fund may
invest include bonds, debentures, mortgage securities, notes, bills, commercial
paper, U.S. Government Securities and certificates of deposit, as well as debt
obligations which may have a call on common stock by means of attached warrants.
Depository Receipts: Each Fund may invest in American Depositary
Receipts ("ADRs"), Global Depository Receipts ("GDRs") and other types of
depository receipts. ADRs 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. GDRs and other types of
depository receipts are typically issued by foreign banks or trust companies and
evidence ownership of underlying securities issued by either a foreign or a U.S.
company. Generally, ADRs are in registered form and are designed for use in U.S.
securities markets and GDRs are in bearer form and are designed for use in
foreign securities markets. For the purposes of a Fund's policy to invest a
certain percentage of its assets in foreign securities, the investments of a
Fund in ADRs, GDRs and other types of depository receipts are deemed to be
investments in the underlying securities.
Privatizations: The governments in some countries, including emerging
market countries, have been engaged in programs of selling part or all of their
stakes in government owned or controlled enterprises ("privatizations"). Each
Fund may invest in privatizations. In certain countries, the ability of foreign
entities to participate in privatizations may be limited by local law and the
terms on which the foreign entities may be permitted to participate may be less
advantageous than those afforded local investors.
Brady Bonds: Each 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.
Investment in Other Investment Companies: Each Fund may invest in other
investment companies to the extent permitted by the 1940 Act and applicable
state securities laws (i) as a means by which the Fund may invest in securities
of certain countries which do not otherwise permit investment, (ii) as a means
to purchase thinly traded securities of emerging market companies, or (iii) when
the Adviser believes such investments may be more advantageous to the Fund than
a direct market purchase of securities. If a Fund invests in such investment
companies, the Fund's shareholders will bear not only their proportionate share
of the expenses of the Fund (including operating expenses and the fees of the
Adviser) but also will indirectly bear similar expenses of the underlying
investment companies.
U.S. Government Securities: Each Fund for temporary defensive purposes,
as discussed below, may invest in U.S. Government securities, including: (1) the
following 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, authorities 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 (collectively, "U.S.
Government Securities"). The term "U.S. Government Securities" also includes
interests in trusts or other entities
-8-
<PAGE>
issuing interests in obligations that are backed by the full faith and credit of
the U.S. Government or are issued or guaranteed by the U.S. Government, its
agencies, authorities or instrumentalities.
Investments for Temporary Defensive Purposes: During periods of unusual
conditions when the Adviser believes that investing for temporary defensive
purposes is appropriate, or in order to meet anticipated redemption requests, a
large portion or all of the assets of a Fund may be invested in cash (including
foreign currency) or cash equivalents, including, but not limited to,
obligations of banks (including certificates of deposit, bankers' acceptances,
time deposits and repurchase agreements), commercial paper, short-term notes,
U.S. Government Securities and related repurchase agreements.
Repurchase Agreements: Each Fund may enter into repurchase agreements
in order to earn income on available cash or as a temporary defensive measure.
Under a repurchase agreement, a 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). Each
Fund has adopted certain procedures intended to minimize the risks of such
transactions.
Restricted Securities: Each Fund may purchase securities that are not
registered under the Securities Act of 1933 (the "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 a 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 the Adviser 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 a Fund
to the extent that qualified institutional buyers become for a time uninterested
in purchasing Rule 144A securities held in the Fund's portfolio. Subject to each
Fund's 15% limitation on investments in illiquid investments, a Fund may also
invest in restricted securities that may not be sold under Rule 144A, which
presents certain risks. As a result, a 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.
Lending of Portfolio Securities: Each Fund may seek to increase its
income by lending portfolio securities. Such loans will usually be made to
member firms (and subsidiaries thereof) of the New York Stock Exchange (the
"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 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: Each Fund may purchase securities on a
"when-issued" or on a "forward delivery" basis, which means that the securities
will be delivered to a 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. In general, a Fund does not pay
for such 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, a Fund will normally invest in liquid
assets. Although a Fund does not intend to make such purchases for speculative
purposes, purchases of securities on such bases may involve more risk than other
types of purchases.
Indexed Securities: Each 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)
and/or interest rates rise or fall according to changes in 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 the investment.
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds: Each Fund may
invest in zero coupon bonds, deferred interest bonds and payment-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
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<PAGE>
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. A 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.
Swaps and Related Transactions: As one way of managing its exposure to
different types of investments, each 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 a Fund with another party of
cash payments based upon different interest rate indices, currencies, and other
prices or rates, such as the value of mortgage prepayment rates. For example, in
the typical interest rate swap, a 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.
Each 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 a Fund's investment exposure
from one type of investment to another. For example, if a Fund agreed to
exchange payments in dollars for payments in foreign currency, in each case
based on a fixed rate, the swap agreement would tend to decrease 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 a Fund's investments and its share price and
yield.
Swap agreements are sophisticated hedging instruments that typically
involve a small investment of cash relative to the magnitude of risks assumed,
or no investment of cash. As a result, swaps can be highly volatile and may have
a considerable impact on a Fund 's performance. Swap agreements are subject to
risks related to the counterparty's ability to perform, and may decline in value
if the counterparty's creditworthiness deteriorates. A Fund may also suffer
losses if it is unable to terminate outstanding swap agreements or reduce its
exposure through offsetting transactions.
Options on Securities: Each Fund may write (sell) covered put and call
options and purchase put and call options on securities. Each Fund will write
options on securities for the purpose of increasing its return and/or to protect
the value of its portfolio. In particular, where a Fund writes an option that
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 the portfolio security underlying the option, 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, however, if the price of the underlying
security moves adversely to the Fund's position, the option may be exercised and
the Fund will be required to purchase or sell the underlying security at a
disadvantageous price, which may only be partially offset by the amount of the
premium. Each 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.
By writing a call option on a security, a Fund limits its opportunity
to profit from any increase in the market value of the underlying security,
since the holder will usually exercise the call option when the market value of
the underlying security exceeds the exercise price of the call. However, the
Fund retains the risk of depreciation in value of securities on which it has
written call options.
Each Fund may also purchase put or call options in anticipation of
market fluctuations which may adversely affect the value of its portfolio or the
prices of securities that a Fund wants to purchase at a later date. In the event
that the expected market fluctuations occur, a Fund may be able to offset the
resulting adverse effect on its portfolio, in whole or in part, through the
options purchased. The premium paid for a put or call option plus any
transaction costs will reduce the benefit, if any, realized by the Fund upon
exercise or liquidation of the option, and, unless the price of the underlying
security changes sufficiently, the option may expire without value to the Fund.
In certain instances, a Fund may enter into options on Treasury
securities that are "reset" options or "adjustable strike" options. These
options provide for periodic adjustment of the strike price and may also provide
for the periodic adjustment of the premium during the term of the option.
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Options on Stock Indices: Each Fund may write (sell) covered call and
put options and purchase call and put options on stock indices. Each 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 a 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. A Fund will
thereby retain the amount of the premium, less related transaction costs, 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 a Fund for the writing of the option, less related
transaction costs. In addition, if the value of an underlying index moves
adversely to a 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.
Each 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. A
Fund's possible loss in either case will be limited to the premium paid for the
option, plus related transaction costs.
"Yield Curve" Options: Each Fund may 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 a 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
"Additional 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 Foreign Currencies: Each 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 a 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 a Fund's position, it may forfeit the entire amount of the premium paid for
the option plus related transaction costs. A Fund may also choose to, or be
required to, receive delivery of the foreign currencies underlying Options on
Foreign Currencies into which it has entered. 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, a Fund may hold such
currencies for an indefinite period of time.
Futures Contracts and Options on Futures Contracts: Each Fund may
purchase and sell futures contracts ("Futures Contracts") on interest rates or
stock indices, and may purchase and sell Futures Contracts on foreign currencies
or indices of foreign currencies and on fixed income securities, or indices of
such securities. Each Fund may also purchase and write options on such Futures
Contracts. All above-referenced options on Futures Contracts are referred to as
"Options on Futures Contracts."
Such transactions will be entered into for hedging purposes or for
non-hedging purposes to the extent permitted by applicable law. Each 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
Funds, if its investment judgment about the general direction of exchange rates
or the stock market is incorrect, a Fund's overall performance may be poorer
than if it had not entered into any such contract and the Fund may realize a
loss.
Purchases of Options on Futures Contracts may present less risk in
hedging a 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, a Fund may suffer a loss on the transaction.
Futures Contracts and Options on Futures Contracts that are entered
into by a Fund will be traded on U.S. and foreign exchanges.
Forward Contracts: Each 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 at a price set at the time of the contract ("Forward
Contracts"). Each Fund may enter into
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<PAGE>
Forward Contracts for hedging purposes and for non-hedging purposes of
increasing the Fund's current income. By entering into transactions in Forward
Contracts for hedging purposes, a 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, a 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. A 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, a Fund may hold such currencies for an indefinite period of time. A
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. Each Fund has established procedures consistent with
statements of the SEC and its staff regarding the use of Forward Contracts by
registered investment companies, which requires use of segregated assets or
"cover" in connection with the purchase and sale of such contracts.
Short Sales: If the International Opportunities Fund or the Asia
Pacific Fund anticipates that the price of a security will decline, it may sell
the security short and borrow the same type of security from a broker or other
institution to complete the sale. Such Fund may make a profit or loss depending
upon whether the market price of the security decreases or increases between the
date of the short sale and the date on which the Fund must replace the borrowed
security. Possible losses from short sales differ from losses that could be
incurred from a purchase of a security, because losses from short sales may be
unlimited, whereas losses from purchases of a security can equal only the total
amount invested. The Fund's short sales must be fully collateralized. The Fund
will not sell short securities whose underlying value, minus any amounts pledged
by the Fund as collateral (which does not include proceeds from the short sale),
exceeds 35% of its net assets.
6. ADDITIONAL RISK FACTORS
The following discussion of additional risk factors supplements the risk factors
described above. Additional information concerning risk factors can be found
under the caption "Investment Objectives, Policies and Restrictions Certain
Securities and Investment Techniques" in the SAI.
Foreign Securities: Each Fund may invest in dollar denominated and
non-dollar denominated foreign securities. 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, securities settlement practices, 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. Each 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. Each Fund may also hold foreign currency
in anticipation of purchasing foreign securities.
Foreign Emerging Growth Companies: Investing in emerging growth
companies involves greater risk than is customarily associated with investing in
more established companies. Emerging growth companies often have limited product
lines, markets or financial resources, and they may be dependent on one-person
management. The securities of emerging growth companies may be subject to more
abrupt or erratic market movements than securities of larger, more established
companies or the market averages in general. Similarly, many of the securities
offering the capital appreciation sought by the Funds will involve a higher
degree of risk than would established growth stocks.
Emerging Market Securities: Each Fund may invest in emerging markets.
In addition to the general risks of investing in foreign securities, investments
in emerging markets involve special risks. Securities of many issuers in
emerging markets may be less liquid and more volatile than securities of
comparable domestic issuers. These securities may be considered speculative and,
while generally offering higher income and the potential for capital
appreciation, may present significantly greater risk. Emerging markets may 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 a Fund is uninvested and no return is earned thereon. The inability of
a Fund to make intended securities purchases due to settlement problems could
cause a Fund to miss attractive investment opportunities. Inability to dispose
of portfolio securities due to settlement problems could result in losses to a
Fund due to subsequent declines in value of the
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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,
possible liability to the purchaser. Certain markets may require payment for
securities before delivery, and in such markets a 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 movements in
price.
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. A 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 a Fund.
Allocation Among Emerging Markets: Each Fund may allocate all or a
portion of its investments in emerging market securities among the emerging
markets of Latin America, Asia, Africa, the Middle East and the developing
countries of Europe, primarily in Eastern Europe. Each Fund will allocate its
investments among these emerging markets in accordance with the Adviser's
determination as to the allocation most appropriate with respect to the Fund's
investment objective and policies. The Asia Pacific Fund expects to invest
substantially all of its assets in developed and emerging market countries in a
single region, the Asia and Pacific Basin region. Each other Fund may invest its
assets allocated to investment in emerging markets without limitation in any
particular region, and, in accordance with the Adviser's investment discretion,
at times may invest all of its assets allocated to investment in emerging
markets in securities of emerging market issuers located in a single region
(e.g., Latin America). To the extent that the Asia Pacific Fund's or any other
Fund's investments are concentrated in one or a few emerging market regions, the
Fund's investment performance correspondingly will be more dependent upon the
economic, political and social conditions and changes in those regions. The
ability of a Fund, other than the Asia Pacific Fund, to allocate its investments
among emerging market regions without restriction may have the effect of
increasing the volatility of the Fund, as compared to a fund which limits such
allocations.
Investments in One or a Limited Number of Countries: Each Fund will
seek to reduce risk by investing its assets in a number of markets and issuers.
However, each Fund may invest a substantial amount of its net assets in issuers
located in a single country. To the extent that a Fund invests a significant
portion of its assets in a single or limited number of countries, the Fund's
investment performance correspondingly will be more dependent upon the economic,
political and social conditions and changes in that country or countries, and
the risks associated with investments in such country or countries will be
particularly significant. The ability of a Fund to focus its investments in one
or a limited number of countries may have the effect of increasing the
volatility of that Fund. The Asia Pacific Fund may be particularly dependent
upon the economic, political and social conditions in Japan as a result of its
investments of substantially all of its assets in Japanese issuers and issuers
in other Asia and Pacific Basin countries, many of which are directly affected
by Japanese capital investments in the region and by Japanese consumer demands.
Foreign Currencies: Because each Fund may invest up to 100% of its
assets in securities denominated in currencies other than the U.S. dollar, and
because each Fund may hold foreign currencies, the value of a Fund's
investments, and the value of dividends and interest earned by a Fund, may be
significantly affected by changes in currency exchange rates. Some foreign
currency values may be volatile, and there is the possibility of governmental
controls on currency exchange or governmental intervention in currency markets,
which could adversely affect the Funds. Although the Adviser may attempt to
manage currency exchange rate risks, there is no assurance that the Adviser will
do so at an appropriate time or that the Adviser will be able to predict
exchange rates accurately. For example, if the Adviser hedges a Fund's exposure
to a foreign currency, and that currency's value rises, the Fund will lose the
opportunity to participate in the currency's appreciation. Each Fund may hold
foreign currency received in connection with investments in foreign securities,
and enter into Forward Contracts, Futures Contracts and Options on Foreign
Currencies 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 rates. While the holding of foreign currencies
will permit a Fund to take advantage of favorable movements in the applicable
exchange rate, it also exposes the Fund to risk of loss if such rates move in a
direction adverse to the Fund's position. Such losses could also adversely
affect the Fund's hedging strategies.
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<PAGE>
Options, Futures Contracts and Forward Contracts: Although each Fund
may enter into transactions in options, Futures Contracts, Options on Futures
Contracts, Forward 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 a Fund's hedging strategy unsuccessful and could result in losses.
The Funds 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 a 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 a
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 and indices
underlying options, Futures Contracts and Options on Futures Contracts traded by
the Fund will include both domestic and foreign securities.
Lower Rated Bonds: Each Fund may invest in fixed income securities, and
may invest in convertible securities, rated Baa by Moody's or BBB by S&P, Fitch
or 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 securities.
The International Value Fund and the Asia Pacific Fund each may also
invest in 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 above. No minimum rating standard is required
by the International Value Fund or the Asia Pacific 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 a
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, a 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 a Fund but will be reflected
in the net asset value of shares of the Fund.
Portfolio Trading: Each Fund intends to manage its portfolio by buying
and selling securities, as well as holding securities to maturity, to help
attain its investment objective and policies.
Each Fund will engage in portfolio trading if it believes a
transaction, net of costs (including custodian charges), will help in attaining
its investment objective. In trading portfolio securities, a Fund seeks to take
advantage of market developments, yield disparities and variations in the
creditworthiness of issuers. For a description of the strategies which may be
used by the Funds in trading portfolio securities, see "Portfolio Transactions
and Brokerage Commissions" in the SAI. Because each Fund is expected to have a
portfolio turnover rate of up to 200% during its current fiscal year,
transaction costs incurred by each Fund and the realized capital gains and
losses of each Fund may be greater than that of a fund with a lower portfolio
turnover rate.
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 of the Trust may determine, the Adviser may
consider sales of shares of other investment company clients of MFD, the
distributor of shares of the Trust and of the MFS Family of Funds (the "MFS
Funds"), as a factor in the selection of broker-dealers to
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<PAGE>
execute each 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 a Fund's operating expenses (e.g., fees charged
by the custodian of the Fund's assets).
- -------------------------------------------------------------------------------
The SAI includes a discussion of other investment policies and a
listing of specific investment restrictions which govern the investment policies
of each Fund. The specific investment restrictions listed in the SAI may be
changed without shareholder approval unless indicated otherwise (see the SAI).
Except with respect to a Fund's policies on borrowing and investing in illiquid
securities, a 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.
7. MANAGEMENT OF THE FUNDS
Investment Adviser -- The Adviser manages each Fund pursuant to separate
Investment Advisory Agreements, dated October 8, 1997 (the "Advisory
Agreements"). Under the Advisory Agreements, the Adviser provides each Fund with
overall investment advisory and administrative services. Subject to such
policies as the Trustees may determine, the Adviser makes investment decisions
for each Fund. For its services, the Adviser is entitled to receive a management
fee, computed and paid monthly, in an amount listed below per annum of the
average daily net assets of such Fund:
% OF AVERAGE DAILY
NET ASSETS OF
FUND EACH FUND
International Opportunities Fund 0.975% of the first $500 million and
0.925% thereafter
International Strategic Growth Fund 0.975% of the first $500 million and
0.925% thereafter
International Value Fund 0.975% of the first $500 million and
0.925% thereafter
Asia Pacific Fund ` 1.00%
The Adviser is currently waiving its right to receive management fees from each
Fund.
The identity and background of the portfolio manager(s) for each Fund is set
forth below.
FUND PORTFOLIO MANAGER(S)
International Opportunities Fund David A. Antonelli, a Vice President of the
Adviser, has been the portfolio
manager of the Fund since its
inception and has been employed as
a portfolio manager by the Adviser
since 1991.
International Strategic Growth Fund David R. Mannheim, a Senior Vice President
of the Adviser, has been the
portfolio manager of the Fund since
its inception and has been employed
as a portfolio manager by the
Adviser since 1988.
International Value Fund Frederick J. Simmons, a Senior Vice
President of the Adviser, has been the
portfolio manager of the Fund since its
inception and has been employed as
a portfolio manager by the Adviser
since 1971.
<PAGE>
FUND PORTFOLIO MANAGER(S)
Asia Pacific Fund Christopher J. Burn and Barry P. Dargan,
Investment Officers of the Adviser, have
been portfolio managers of the Fund since
its inception and have been employed as
portfolio managers by the Adviser since
1995 and 1996, respectively. Prior to
joining MFS, Mr. Burn completed his
MBA at the Wharton School of Business at
the University of Pennsylvania in 1995,
and worked as an Analyst at the United
States Department of State until 1993.
Prior to joining MFS, Mr. Dargan was an
Executive Director and Investment Analyst
at SBC Warburg in Tokyo, Japan.
MFS also serves as investment adviser to each of the other MFS Funds and 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.) ("Sun Life of Canada (U.S.)") in connection with the sale of
various fixed/variable annuity contracts. MFS and its wholly owned subsidiary,
MFS Institutional Advisors, Inc., 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 U.S., 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 $20
billion of assets invested in fixed income funds and fixed income portfolios,
approximately $4.9 billion of assets invested in foreign securities, and
approximately $60.6 billion of assets invested in equity securities. 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 Assurance Company of
Canada ("Sun Life"). The Directors of MFS are John W. Ballen, Thomas J. Cashman,
Joseph W. 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. Stewart and McNeil are the President and the Chairman of Sun Life,
respectively. 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, Mark E. Bradley, Ellen Moynihan 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 a 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 a Fund is concerned, in other
cases, however, it may produce increased investment opportunities for the Funds.
Administrator - MFS provides each 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, each Fund pays MFS an administrative fee up to
0.015% per annum of such Fund's average daily net assets. This fee reimburses
MFS for a portion of the costs it incurs to provide such services.
Distributor -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of each Fund and also serves as distributor of each of the other MFS
Funds.
Shareholder Servicing Agent -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and certain other services for each Fund.
<PAGE>
8. YEAR 2000 ISSUES
Each Fund could be adversely affected if the computer systems used by MFS, a
Fund's other service providers or the companies in which a 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 fees 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 each Fund
operate and in MFS' own business environment. MFS has been actively working with
each 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 each Fund invests. There can be no
assurance, however, that these steps will be sufficient to avoid any adverse
impact on a Fund.
9. INFORMATION CONCERNING SHARES OF THE FUNDS
PURCHASES
Class A, Class B and Class C shares of each 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 each Fund.
This Prospectus offers Class A, Class B and Class C shares which bear sales
charges and distribution fees in different forms and amounts, as described below
(currently, only Class A shares are available for sale):
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 of
Amount of Purchase Price Invested 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**
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* 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 each 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 an initial sales charge). In the
following five circumstances, Class A shares of each Fund are also 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
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<PAGE>
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 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 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 are 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
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(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 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.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC as follows:
CONTINGENT
YEAR OF REDEMPTION AFTER DEFERRED SALES
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 each 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 each 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
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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 each Fund that remain
outstanding for approximately eight years will convert to Class A shares of the
same 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 each Fund's Distribution
Plan. See "Distribution Plan" below. However, for purposes of conversion to
Class A shares, all shares in a shareholder's account that were purchased
through the reinvestment of dividends and distributions paid in respect of Class
B shares (and which have not converted to Class A shares as provided in the
following sentence) will be held in a separate sub-account. Each time any Class
B shares in the shareholder's account (other than those in the sub-account)
convert to Class A shares, a portion of the Class B shares then in the
sub-account will also convert to Class A shares. The portion will be determined
by the ratio that the shareholder's Class B shares not acquired through
reinvestment of dividends and distributions that are converting to Class A
shares bear to the shareholder's total Class B shares not acquired through
reinvestment. The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversion will not constitute a taxable event for
federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B shares
would continue to be subject to higher expenses than Class A shares for an
indefinite period.
CLASS C SHARES: 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. Class C shares do not convert to any other class of shares. The maximum
investment in Class C shares 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 each 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 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 each
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
Individual Retirement Accounts ("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. Each Fund reserves the right to cease offering its shares at
any time.
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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. Each 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 Funds consider the underlying redemption
request conditioned upon the acceptance of the underlying purchase request.
Therefore, in the event that a Fund or MFD rejects an exchange request, neither
the redemption nor the purchase side of the exchange will be processed.
The MFS Funds are not designed for professional market timing organizations or
other entities using programmed or frequent exchanges. The MFS Funds define 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 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, each 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 a 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 a 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.
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EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with a 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 exchanges from MFS money market funds): No
initial sales charge or CDSC will be imposed in connection with an exchange from
shares of an MFS Fund to shares of any other MFS Fund, except with respect to
exchanges from an MFS money market fund to another MFS Fund which is not an MFS
money market fund (discussed below). With respect to an exchange involving
shares subject to a CDSC, the CDSC will be unaffected by the exchange and the
holding period for purposes of calculating the CDSC will carry over to the
acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth above in this
paragraph.
GENERAL: A shareholder should read the prospectus of the other MFS Funds and
consider the differences in objectives, policies and restrictions before making
any exchange. Exchanges will be made only after instructions in writing or by
telephone (an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as the shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record) and each
exchange must involve either shares having an aggregate value of at least $1,000
($50 in the case of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent) or all
the shares in the account. If an Exchange Request is received by the Shareholder
Servicing Agent on any business day prior to the close of regular trading on the
Exchange (generally, 4:00 p.m., Eastern time), 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 a Fund is open for business by redeeming shares at their net asset
value (a redemption) or by selling such shares to a 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.
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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, each 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. See "Tax Status" below.
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 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.
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 B and Class C 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 each 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.
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GENERAL: The following information applies to redemptions and repurchases of all
classes of each Fund's shares.
Signature Guarantee. In order to protect shareholders against fraud,
each 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 a 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 each 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. Each 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, each 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 each Fund and its shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are features of the Distribution
Plan that are common to each Class of shares, as described below.
Service Fees. The Distribution Plan provides that a 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 a 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 a Fund may pay
MFD a distribution fee in addition to the service fee described above 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 Funds - Distributor" in the SAI. The amount of the
distribution fee paid by a 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
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<PAGE>
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 expenses 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 each Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the Designated
Class. The provisions of the Distribution Plan are severable with respect to
each class of shares offered by the Fund.
FEATURES UNIQUE TO CLASS OF SHARES: These 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 0.25% of a 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 CDSC of
1.00% for one year after purchase). Distribution fee payments under the
Distribution Plan may be used by MFD to pay securities dealers a distribution
fee in an amount equal to 0.25% per annum of each Fund's average daily net
assets attributable to Class A shares (other than Class A shares that have
converted from Class B shares) owned by investors from whom that securities
dealer is the holder or dealer of record. See "Purchases - Class A Shares"
above. In addition, to the extent that the aggregate service and distribution
fees paid under the Class A Distribution Plan do not exceed 0.50% per annum of
the average daily net assets of a 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
therefor, MFD may retain the service fee paid by a 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, a 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 of 1.00% upon redemption during
the first year. 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 a
Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: Each Fund's Class A, Class B and
Class C distribution and service fees for its current fiscal year are 0.00%,
1.00% and 1.00%, per annum, respectively. Distribution and service fees with
respect to Class A shares under the Distribution Plan are currently being waived
on a voluntary basis and may be imposed at the discretion of MFD.
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<PAGE>
DISTRIBUTIONS
Each Fund intends to pay substantially all of its net investment income to its
shareholders as dividends at least annually. In determining the net investment
income available for distributions, each Fund may rely on projections of its
anticipated net investment income over a longer term, rather than its actual net
investment income for the period. If a Fund earns less than projected, or
otherwise distributes more than its earnings for the year, a portion of the
distributions may constitute a return of capital. Each 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 a 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
Each Fund is treated as an entity separate from the other Funds and the other
series of the Trust for federal income tax purposes. In order to minimize the
taxes each Fund would otherwise be required to pay, each Fund intends to qualify
each year as a "regulated investment company" under Subchapter M of the Code.
Because each 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 Funds will be
required to pay entity level federal income or excise taxes, although
foreign-source income received by a Fund may be subject to foreign withholding
taxes.
Shareholders of a 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.
Each Fund expects that none of its distributions will be eligible for the
dividends received deduction for corporations.
Shortly after the end of each calendar year, each shareholder of a Fund will be
sent a statement that sets forth the federal income tax status of all of the
Fund's dividends and distributions for that calendar year, including the portion
taxable as ordinary income, the portion taxable as long-term capital gain (as
well as any 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. In certain circumstances, a Fund may also elect to
"pass through" to shareholders foreign income taxes paid by the Fund. Under
those circumstances, the Fund will notify shareholders of their pro rata portion
of the foreign income taxes paid by the Fund; shareholders may be eligible for
foreign tax credits or deductions with respect to those taxes, but will be
required to treat the amount of the taxes as an amount distributed to them and
thus includable in their gross income for federal income tax purposes.
Fund distributions will reduce a Fund's net asset value per share. Shareholders
who buy shares just before a 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.
Each 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 any
other payments that are subject to such withholding and that are made to persons
who are neither citizens nor residents of the U.S. Each 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 Funds' 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 a Fund.
NET ASSET VALUE
The net asset value per share of each class of each 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 a Fund's portfolio are valued on the basis of
their market values or otherwise at their fair values, as described in the SAI.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. The net asset value per share of each class of shares
is effective for orders received in "good order" by the dealer prior to its
calculation and received by the dealer prior to the close of that business day.
Each Fund has authorized one or more dealers to receive purchase and redemption
orders on behalf of a Fund. Such dealers are authorized to designate other
intermediaries to receive purchase and redemption orders on behalf of a Fund.
Each 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 a Fund next
computed after such orders are received by an authorized
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<PAGE>
dealer or the dealer's authorized designee.
EXPENSES
The Trust pays the compensation of the Trustees who are not officers of MFS and
all expenses of each Fund (other than those assumed by MFS) including but not
limited to: advisory and administrative services; governmental fees; interest
charges; taxes; membership dues in the Investment Company Institute allocable to
the Funds; fees and expenses of independent auditors, of legal counsel, and of
any transfer agent, registrar or dividend disbursing agent of the Funds;
expenses of repurchasing and redeeming shares and servicing shareholder
accounts; expenses of preparing, printing and mailing prospectuses, periodic
reports, notices and proxy statements to shareholders and 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 Funds' custodian, for all services to the Funds, including safekeeping of
funds and securities and maintaining required books and accounts; expenses of
calculating the net asset value of shares of the Funds; and expenses of
shareholder meetings. Expenses relating to the issuance, registration and
qualification of shares of the Funds and the preparation, printing and mailing
of prospectuses are borne by the Funds except that the Distribution Agreement
with MFD 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 between the series in a manner believed by management of the Trust
to be fair and equitable.
Subject to termination or revision at the sole discretion of MFS, MFS has agreed
to bear each Fund's expenses (after taking into effect any compensating balance
and offset arrangements) such that the "Other Expenses" of each Fund, which are
defined to include all Fund expenses except for management fees, Rule 12b-1
fees, taxes, extraordinary expenses, brokerage and transaction costs and class
specific expenses, do not exceed 1.75% per annum of each such Fund's average
daily net assets (the "Maximum Percentage"). The payments made by MFS on behalf
of each such Fund under this arrangement are subject to reimbursement by each
such Fund to MFS, which will be accomplished by the payment of an expense
reimbursement fee by each such Fund to MFS computed and paid monthly at a
percentage of its average daily net assets for each such Fund's current fiscal
year, with a limitation that immediately after such payment each such Fund's
"Other Expenses" will not exceed the Maximum Percentage. The obligation of MFS
to bear a Fund's "Other Expenses" pursuant to this arrangement, and a Fund's
obligation to pay the reimbursement fee to MFS, terminates on the earlier of the
date on which payments made by the Fund equal the prior payment of such
reimbursable expenses by MFS or September 30, 2007.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Each Fund 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). Each Fund also has a class of shares which it offers exclusively to
certain institutional investors, entitled Class I shares. As of the date of this
Prospectus, the Trust has six series. The Trust has reserved the right to create
and issue additional classes of shares and series, 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 that
class of shares, but will otherwise vote together with all other classes of
shares of the series on all other matters. The Trust does not intend to hold
annual shareholder meetings. The Trust's 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 each Fund represents an equal proportionate interest in
that Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as set
forth in "Purchases -- Conversion of Class B shares"). Shares are fully paid and
non-assessable. Should a 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 would be limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
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<PAGE>
The following owned of record more than 25% of the outstanding shares of the
following Funds as of October 30, 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Name and Address Fund Class Percentage of the Fund
Trustees of the
MFS Defined Contribution Plan1 International Opportunities Fund I 57.20%
c/o Mark Leary International Strategic Growth Fund I 90.72%
Mass Financial Services
500 Boylston St.
Boston, MA
MFS Fund Distributors, Inc. International Opportunities Fund A 29.82%
(a Delaware corporation) International Value Fund A 86.82%
c/o Mass Financial Services Asia Pacific Fund A 65.40%
Attn: Thomas B. Hastings
500 Boylston St.
Boston, MA
</TABLE>
- ---------------------
1 The MFS Defined Contribution Plan (the "Plan") is a qualified retirement
plan under section 401(a) of the Internal Revenue Code of 1986, as amended.
The Plan benefits employees of MFS and its subsidiaries.
PERFORMANCE INFORMATION
From time to time, each Fund may provide total rate of return quotations for
each class of shares and may also quote fund rankings in the relevant fund
category from various sources, such as the Lipper Analytical Services, Inc., and
Wiesenberger Investment Companies Service. Total rate of return quotations will
reflect the average annual percentage change over stated periods in the value of
an investment in each class of shares of a 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. Each 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 such
Fund's newer class from its inception date and (ii) the performance of such
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
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. Total rate of return reflects all components of investment
return over a stated period of time. A 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 a Fund will calculate its
total rate of return, see the SAI. A copy of the Funds' 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, each 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
each Fund's Annual and Semiannual Report may be mailed to shareholders having
the same residential address on a 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.
10. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of a Fund, should contact the Shareholder Servicing
Agent (see back cover for address and phone number). 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 a Fund (such as Right of Accumulation, Letter
of Intent and certain recordkeeping services) that a Fund ordinarily provides.
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").
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Distribution Options -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts described below) and may be changed
as often as desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional
shares. This option will be assigned if no other option is specified;
-- Dividends in cash; capital gain distributions reinvested in additional
shares; or
-- 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. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of each 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, each
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with a 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 a 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 a Fund alone or in combination with shares of Class B or Class C shares of a
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 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, Class B and Class C
shares of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level.
Distribution Investment Program: Shares of a particular class of a 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 a 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 to him (or any one 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 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 participate in 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 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
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<PAGE>
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 transferred 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 an investment program concurrently with a withdrawal program
would 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 share redemption (if applicable) in the case of Class A shares.
Tax-Deferred Retirement Plans -- Except as noted under "Purchases -- Class C
Shares," shares of each Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, Simplified Employee Pension 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 Funds' SAI contains more detailed information about each Fund, including,
but not limited to, information related to: (i) each Fund's investment policies
and restrictions; (ii) the Trustees, officers and Adviser; (iii) portfolio
trading; (iv) the shares, including rights and liabilities of shareholders; (v)
tax status of dividends and distributions; (vi) the Distribution Plan; and (vii)
various services and privileges provided by each Fund for the benefit of its
shareholders, including additional information with respect to the exchange
privilege.
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<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 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. 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 institution having a selling agreement or other similar
agreement with 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, are 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 fund in the 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 MFS, 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
which have a sales agreement with MFD;
o Certain family members of any such individual and their
spouses identified above and certain trusts, pension,
profit-sharing or other retirement plans for the sole
benefit of such persons, provided the shares are not
resold except to the MFS Fund which issued the shares;
and
o Institutional Clients of MFS or MFS Institutional
Advisors, Inc.
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 ("IRAs")
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;
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);
A-1
<PAGE>
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 MFS Service Center, Inc. ( 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 401(a) or ESP 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.
A-2
<PAGE>
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:
IRAs
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
401(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 MFD 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.
A-3
<PAGE>
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:
IRAs, 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 Code rules.
Salary Reduction Simplified 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; and
o Death or disability of a SAR-SEP Plan participant.
A-4
<PAGE>
DESCRIPTION OF BOND RATINGS
MOODY'S
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Some 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.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa to B. The modifier 1 indicates that the company
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
S&P
AAA: 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 higher rated issues only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is VERY STRONG.
B - 1
<PAGE>
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 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 S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition or the taking of similar actions of 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 major
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 risks--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH
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.
B - 2
<PAGE>
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.
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 and 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
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and expertise.
The projected viability of the obligor at the trough of the cycle is a critical
determination.
Each rating also takes into account the legal form of the security (e.g.,
first mortgage bonds, subordinated debt, preferred stock, etc.). The extent of
rating dispersion among the various classes of securities is determined by
several classes in the capital structure, the overall credit strength of the
issuer, and the nature of covenant protection. From time to time, Duff & Phelps
places issuers or security classes on Rating Watch. The Rating Watch status
results from a need to notify investors and the issuer that there are conditions
present leading us to re-evaluate the current rating(s).
A listing on Rating Watch, however, does not mean a rating change is
inevitable. The Rating Watch status can either be resolved quickly or over a
longer period of time depending on the reasons surrounding the placement on
Rating Watch. The "up" designation means a rating may be upgraded; the "down"
designation means a rating may be downgraded, and the "uncertain" designation
means a rating may be raised or lowered.
The Credit Rating Committee formally reviews all ratings once per quarter
(more frequently, if necessary). Ratings of BBB- and higher fall within the
definition of investment grade securities, as defined by bank and insurance
supervisory authorities. Structured finance issues, including real estate,
asset-backed and mortgage-backed financings, used this same rating scale. Duff &
Phelps claims paying ability ratings of insurance companies use the same scale
with minor modification in the definitions. Thus, an investor can compare the
credit quality of investment alternatives across industries and structural
types. A "Cash Flow Rating" (as noted for specific ratings) addresses the
likelihood that aggregate principal and interest will equal or exceed the rated
amount under appropriate stress conditions.
B - 3
<PAGE>
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. Issuers failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
B - 4
<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 and 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
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
[GRAPHIC OMITTED]
MFS(R) International Opportunities Fund
MFS(R) International Strategic Growth Fund
MFS(R) International Value Fund
MFS(R) Asia Pacific Fund
500 Boylston Street, Boston, MA 02116
<PAGE>
[GRAPHIC OMITTED]
MFS(R) International Opportunities Fund
MFS(R) International Strategic Growth Fund STATEMENT OF ADDITIONAL
MFS(R) International Value Fund INFORMATION
MFS(R) Asia Pacific Fund February 1, 1999
(Members of the MFS Family of Funds(R))
Each a series of MFS Series Trust V
500 Boylston Street, Boston, MA 02116
(617) 954-5000
PAGE
1. Definitions.................................................... 1
2. Investment Objectives, Policies and Restrictions............... 1
3. Management of the Funds........................................ 16
Trustees.............................................. 16
Officers.............................................. 17
Investment Adviser.................................... 19
Administrator......................................... 19
Custodian............................................. 20
Shareholder Servicing Agent........................... 20
Distributor........................................... 20
4. Portfolio Transactions and Brokerage Commissions............... 21
5. Shareholder Services........................................... 22
Investment and Withdrawal Programs.................... 22
Exchange Privilege.................................... 24
Tax-Deferred Retirement Plans......................... 25
6. Tax Status..................................................... 25
7. Distribution Plan.............................................. 27
8. Determination of Net Asset Value and Performance............... 28
9. Description of Shares, Voting Rights and Liabilities........... 30
10. Independent Auditors and Financial Statements.................. 31
Appendix A..................................................... 31
This Statement of Additional Information ("SAI"), as amended or supplemented
from time to time, sets forth information which may be of interest to investors
but which is not necessarily included in the Funds' 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 back cover 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>
I. DEFINITIONS
International MFS(R) International Opportunities
Opportunities Fund Fund, a diversified series of the
Trust.
International MFS(R) International Strategic Growth
Strategic Growth Fund, a diversified series of the
Fund Trust.
International MFS(R) International Value Fund, a
Value Fund diversified series of the Trust.
Asia Pacific Fund MFS(R) Asia Pacific Fund, a diversified series
of the Trust.
Fund(s) International Opportunities Fund,
International Strategic Growth
Fund, International Value Fund and
Asia Pacific Fund.
Trust MFS Series Trust V, a Massachusetts business Trust,
organized in 1984.
MFS or Massachusetts Financial Services
the Adviser Company, a Delaware corporation.
MFD MFS Fund Distributors, Inc., a
Delaware corporation.
Prospectus The Prospectus of the Funds, dated February 1, 1999, as
amended or supplemented from time to time.
2. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
Investment Objectives and Policies. The investment objective and policies of
each Fund are described in the Prospectus and below. The following discussion of
each Fund's investment techniques and restrictions supplements, and should be
read in conjunction with, the information set forth in the "Investment
Objectives and Policies - Certain Securities and Investment Techniques" and
"-Additional Risk Factors" sections of the Prospectus.
CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
Foreign Securities: Each Fund may invest up to 100% of its assets in foreign
securities as discussed in the Prospectus. Investments in foreign issues involve
considerations and possible risks not typically associated with investments in
securities issued by domestic companies or with debt securities issued by
foreign governments. There may be less publicly available information about a
foreign company than about a domestic company, and many foreign companies are
not subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which U.S. companies are subject. Foreign
securities markets, while growing in volume, have substantially less volume than
U.S. markets, and securities of many foreign companies are less liquid and their
prices more volatile than securities of
comparable domestic companies. Fixed brokerage commissions and other transaction
costs on foreign securities exchanges are generally higher than in the U.S.
There is also less government supervision and regulation of exchanges, brokers
and issuers in foreign countries than there is in the U.S.
Emerging Markets: Each of the Funds may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Such investments entail significant risks as described in the
Prospectus under the caption "Risk Factors" and as more fully described below.
Company Debt - Governments of many emerging market countries have exercised
and continue to exercise substantial influence over many aspects of the private
sector through the ownership or control of many companies, including some of the
largest in any given country. As a result, government actions in the future
could have a significant effect on economic conditions in emerging markets,
which in turn, may adversely affect companies in the private sector, general
market conditions and prices and yields of certain of the securities in a Fund's
portfolio. Expropriation, confiscatory taxation, nationalization, political,
economic or social instability or other similar developments have occurred
frequently over the history of certain emerging markets and could adversely
affect a Fund's assets should these conditions recur.
Sovereign Debt - Investment in sovereign debt can involve a high degree of
risk. The governmental entity that controls the repayment of sovereign debt may
not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental entity's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the governmental entity's policy towards the International Monetary Fund and the
political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce principal
and interest on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a
governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt
1
<PAGE>
(including a Fund) may be requested to participate in the rescheduling of such
debt and to extend further loans to governmental entities. There is no
bankruptcy proceeding by which sovereign debt on which governmental entities
have defaulted may be collected in whole or in part.
Emerging market governmental issuers are among the largest debtors to commercial
banks, foreign governments, international financial organizations and other
financial institutions. Certain emerging market governmental issuers have not
been able to make payments of interest on or principal of debt obligations as
those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
The ability of emerging market governmental issuers to make timely payments on
their obligations is likely to be influenced strongly by the issuer's balance of
payments, including export performance, and its access to international credits
and investments. An emerging market whose exports are concentrated in a few
commodities could be vulnerable to a decline in the international prices of one
or more of those commodities. Increased protectionism on the part of an emerging
market's trading partners could also adversely affect the country's exports and
tarnish its trade account surplus, if any. To the extent that emerging markets
receive payment for their exports in currencies other than dollars or
non-emerging market currencies, its ability to make debt payments denominated in
dollars or non-emerging market currencies could be affected.
To the extent that an emerging market country cannot generate a trade surplus,
it must depend on continuing loans from foreign governments, multilateral
organizations or private commercial banks, aid payments from foreign governments
and on inflows of foreign investment. The access of emerging markets to these
forms of external funding may not be certain, and a withdrawal of external
funding could adversely affect the capacity of emerging market country
governmental issuers to make payments on their obligations. In addition, the
cost of servicing emerging market debt obligations can be affected by a change
in international interest rates since the majority of these obligations carry
interest rates that are adjusted periodically based upon international rates.
Another factor bearing on the ability of emerging market countries to repay debt
obligations is the level of international reserves of the country. Fluctuations
in the level of these reserves affect the amount of foreign exchange readily
available for external debt payments and thus could have a bearing on the
capacity of emerging market countries to make payments on these debt
obligations.
Liquidity; Trading Volume; Regulatory Oversight - The securities markets of
emerging market countries are substantially smaller, less developed, less liquid
and more volatile than the major securities markets in the U.S. Disclosure and
regulatory standards are in many respects less stringent than U.S. standards.
Furthermore, there is a lower level of monitoring and regulation of the markets
and the activities of investors in such markets.
The limited size of many emerging market securities markets and limited trading
volume in the securities of emerging market issuers compared to volume of
trading in the securities of U.S. issuers could cause prices to be erratic for
reasons apart from factors that affect the soundness and competitiveness of the
securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or more
emerging markets, as a result of which trading of securities may cease or may be
substantially curtailed and prices for a Fund's securities in such markets may
not be readily available. The Trust may suspend redemption of its shares for any
period during which an emergency exists, as determined by the Securities and
Exchange Commission (the "SEC"). Accordingly, if a Fund believes that
appropriate circumstances exist, it will promptly apply to the SEC for a
determination that an emergency is present. During the period commencing from
the Fund's identification of such condition until the date of the SEC action,
the Fund's securities in the affected markets will be valued at fair value
determined in good faith by or under the direction of the Board of Trustees.
Default; Legal Recourse - A Fund may have limited legal recourse in the
event of a default with respect to certain debt obligations it may hold. If the
issuer of a fixed-income security owned by a Fund defaults, the Fund may incur
additional expenses to seek recovery. Debt obligations issued by emerging market
governments differ from debt obligations of private entities; remedies from
defaults on debt obligations issued by emerging market governments, unlike those
on private debt, must be pursued in the courts of the defaulting party itself. A
Fund's ability to enforce its rights against private issuers may be limited. The
ability to attach assets to enforce a judgment may be limited. Legal recourse is
therefore somewhat diminished. Bankruptcy, moratorium and other similar laws
applicable to private issuers of debt obligations may be substantially different
from those of other countries. The political context, expressed as an emerging
market governmental issuer's willingness to meet the terms of the debt
obligation, for example, is of considerable importance. In addition, no
assurance can be given that the holders of commercial bank debt may not contest
payments to the holders of debt obligations in the event of default under
commercial bank loan agreements.
Inflation - Many emerging markets have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these
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countries, some, in recent years, have begun to control inflation through
prudent economic policies.
Withholding - Income from securities held by a Fund could be reduced by a
withholding tax on the source or other taxes imposed by the emerging market
countries in which the Fund makes its investments. A Fund's net asset value may
also be affected by changes in the rates or methods of taxation applicable to
the Fund or to entities in which the Fund has invested. The Adviser will
consider the cost of any taxes in determining whether to acquire any particular
investments, but can provide no assurance that the taxes will not be subject to
change.
Foreign Currencies - Each Fund may invest up to 100% of its assets in
securities denominated in foreign currencies. Accordingly, changes in the value
of these currencies against the U.S. dollar may result in corresponding changes
in the U.S. dollar value of a Fund's assets denominated in those currencies.
Each Fund may attempt to minimize the impact of these changes to the U.S. dollar
value of the Fund's portfolio by engaging in certain hedging practices, such as
entering into Futures Contracts and Options on Foreign Securities as described
below.
Some emerging market countries also may have managed currencies, which are not
free floating against the U.S. dollar. In addition, there is risk that certain
emerging market countries may restrict the free conversion of their currencies
into other currencies. Further, certain emerging market currencies may not be
internationally traded. Certain of these currencies have experienced a steep
devaluation relative to the U.S. dollar. Any devaluations in the currencies in
which a Fund's portfolio securities are denominated may have a detrimental
impact on the Fund's net asset value.
Investment in Other Investment Companies: A Fund's investment in other
investment companies, as described in the Prospectus, is limited in amount by
the Investment Company Act of 1940, as amended (the "1940 Act") and the SEC.
Such investment may involve the payment of substantial premiums above the value
of such investment companies' portfolio securities, and the total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
Depository Receipts: Each 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. Each 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 depository receipts in the United
States can reduce costs and delays at well as potential currency exchange and
other difficulties. Each 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. Each 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, 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 a foreign currency. Each Fund may also
invest in Global Depository Receipts ("GDRs") and other types of depository
receipts. GDRs and other types of depository receipts are typically issued by
foreign banks or trust companies and evidence ownership of underlying securities
issued by either a foreign or U.S. company.
Repurchase Agreements: Each Fund may enter into repurchase agreements with
sellers who are member firms (or a subsidiary thereof) of the New York Stock
Exchange (the "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 a 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 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, a 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. Each Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, a Fund
only enters into repurchase agreements after the Adviser has
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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.
Borrowing: While each Fund may borrow up to 33 1/3% of its total assets, each
Fund currently does not intend to borrow more than 5% of its total assets for
investment purposes.
Lending of Portfolio Securities: Each Fund may seek to increase its income by
lending portfolio securities. Such loans will usually be made only to member
firms of the Exchange (and subsidiaries thereof) and member banks of the Federal
Reserve System, and would be required to be secured continuously by collateral
in cash, an irrevocable letter of credit or U.S. Treasury securities maintained
on a current basis at an amount at least equal to the market value of the
securities loaned. A Fund would have the right to call a loan and obtain the
securities loaned at any time on customary industry settlement notice (which
will not usually exceed five business days). For the duration of a loan, the
Fund would continue to receive the equivalent of the interest or dividends paid
by the issuer on the securities loaned. A Fund would also receive a fee from the
borrower or compensation based on investment of the cash collateral, less a fee
paid to the borrower, if the collateral is in the form of cash. A Fund would
not, however, have the right to vote any securities having voting rights during
the existence of the loan, but the Fund 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 can be earned currently from securities loans of this type
justifies the attendant risk. If the Adviser determines to make securities
loans, it is intended that the value of the securities loaned would not exceed
30% of the value of a Fund's net assets.
"When-Issued" Securities: Each Fund may purchase securities on a "when-issued"
or on a "forward delivery" basis. When a Fund commits to purchase these
securities on a "when-issued" or "forward delivery" basis, it will set up
procedures consistent with the General Statement of Policy of the SEC concerning
such purchases. Since that policy currently recommends that an amount of each
Fund's assets equal to the amount of the purchase be held aside or segregated to
be used to pay for the commitment, a Fund will always have liquid assets
sufficient to cover any commitments or to limit any potential risk. Although no
Fund intends to make such purchases for speculative purposes and intends to
adhere to the provisions of the SEC policy, purchases of securities on such
bases may involve more risk than other types of purchases. For example, a Fund
may have to sell assets which have been set aside in order to meet redemptions.
Also, if a Fund determines it is 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: Each 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 principal value or interest rates 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.
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds: Each Fund may invest
in 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 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 may, at its option, pay interest on
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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 than debt obligations which make regular payments of
interest. Each Fund will accrue income on such investments for tax and
accounting purposes, 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 each Fund's distribution obligations.
Swaps and Related Transactions: Each 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 a 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. A 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.
Each Fund will maintain cash or appropriate liquid assets to cover its current
obligations under swap transactions. If a Fund enters into a swap agreement on a
net basis (i.e., the two payment streams are netted out, with the Fund receiving
or paying, as the case may be, only the net amount of the two payments), the
Fund will maintain cash or liquid assets with 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
a 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 the
Adviser is incorrect in its forecasts of such factors, the investment
performance of a 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 a 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, a Fund's risk of loss consists of the net amount
of payments that the Fund is contractually entitled to receive. Each 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.
Options on Securities: Each Fund may write (sell) covered put and call options,
and purchase put and call options, on securities. Call and put options written
by a Fund may be covered in the manner set forth below.
A call option written by a Fund is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
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 a Fund is "covered" if the Fund segregates
liquid assets with a value equal to the exercise price, 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 is equal to or greater than the exercise price of
the put written or where the exercise price of the put held 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 a Fund may also be
covered in such other manner as may be in accordance with the requirements of
the exchange on which, or the counter party with which, the option is traded,
and applicable laws and regulations. If the writer's obligation is not so
covered, it is subject to the risk of the full change in value of the underlying
security from the time the option is written until exercise.
Effecting a closing transaction in the case of a written call option will permit
a 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 in liquid assets. Such
transactions permit a 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 cash or proceeds from the concurrent sale of any securities
subject to the option to be used for other investments of a Fund, provided that
another option on such security is not written. If a 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.
A 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 a Fund is more than the
premium paid for the original purchase. Conversely, a Fund will suffer a loss if
the
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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 repurchase of a call option previously written by a 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, a 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. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will decline moderately during the
option period. Buy-and-write transactions using out-of-the-money call options
may be used when it is expected that the premiums received from writing the call
option plus the appreciation in the market price of the underlying security up
to the exercise price will be greater than the appreciation in the price of the
underlying security alone. If the call options are exercised in such
transactions, a 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. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and a Fund's gain will be limited to the premium
received, less related transaction costs. If the market price of the underlying
security declines or otherwise is below the exercise price, a Fund may elect to
close the position or retain the option until it is exercised, at which time the
Fund will be required to take delivery of the security at the exercise price; a
Fund's return will be the premium received from the put option minus the amount
by which the market price of the security is below the exercise price, which
could result in a loss. Out-of-the-money, at-the-money and in-the-money put
options may be used by a Fund in the same market environments that call options
are used in equivalent buy-and-write transactions.
Each Fund may also write combinations of put and call options on the same
security, known as "straddles," with the same exercise price and expiration
date. By writing a straddle, a 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 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 the security remains stable and neither the
call nor the put is exercised. In those instances 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, a 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, a 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 not
be undertaken by a Fund solely for hedging purposes, 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 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.
Each Fund may also purchase options for hedging purposes or to increase its
return. Put options may be purchased to hedge against a decline in the value of
portfolio securities. If such decline occurs, the put options will permit a Fund
to sell the securities at the exercise price, or to close out the options at a
profit. By using put options in this way, a 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 by transaction costs.
Each Fund may also purchase call options to hedge against an increase in the
price of securities that the Fund anticipates purchasing in the future. If such
increase occurs, the call option will permit the Fund to purchase the securities
at the exercise price, or to close out the options at a profit. The premium paid
for the call option plus any transaction costs will reduce the benefit, if any,
realized by a Fund upon exercise of the option, and, unless the price of the
underlying security rises sufficiently, the option may expire worthless to the
Fund.
Reset Options: In certain instances, each Fund may enter into options on U.S.
Treasury securities which provide for periodic adjustment of the strike price
and may also provide for the periodic adjustment of the premium during the term
of each such option. Like other types of options, these transactions, which may
be referred to as "reset" options or "adjustable strike" options grant the
purchaser the right to purchase (in the case of a call) or sell (in the case of
a put), a specified type of U.S. Treasury security at any time up to a stated
expiration date (or, in certain instances, on such date). In contrast to other
types of options, however, the price at which the underlying security may be
purchased or sold under a "reset" option is determined at various
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intervals during the term of the option, and such price fluctuates from interval
to interval based on changes in the market value of the underlying security. As
a result, the strike price of a "reset" option, at the time of exercise, may be
less advantageous than if the strike price had been fixed at the initiation of
the option. In addition, the premium paid for the purchase of the option may be
determined at the termination, rather than the initiation, of the option. If the
premium is paid at termination, the Fund assumes the risk that (i) the premium
may be less than the premium which would otherwise have been received at the
initiation of the option because of such factors as the volatility in yield of
the underlying Treasury security over the term of the option and adjustments
made to the strike price of the option, and (ii) the option purchaser may
default on its obligation to pay the premium at the termination of the option.
Options on Stock Indices: Each Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. In contrast to an
option on a security, an option on a stock index provides the holder with the
right but not the obligation to make or receive a cash settlement upon exercise
of the option, rather than the right to purchase or sell a security. The amount
of this settlement is equal to (i) the amount, if any, by which the fixed
exercise price of the option exceeds (in the case of a call) or is below (in the
case of a put) the closing value of the underlying index on the date of
exercise, multiplied by (ii) a fixed "index multiplier."
Each 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 underlying 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. Where a 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. Each 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.
Each Fund may cover put options on stock indices by segregating liquid assets
with a value equal to the exercise price, or by holding a put on the same stock
index and in the same principal amount as the put written where the exercise
price of the put held is equal to or greater than the exercise price of the put
written or where the exercise price of the put held 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 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. Each 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 a 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, a 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 a
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.
Each Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a stock
index, a 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.
The purchase of call options on stock indices may be used by a 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, a Fund will also bear the risk of losing all or a portion of the
premium paid if the value of the index does not rise. The purchase of call
options on stock indices when a 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 index underlying a stock index option may be a "broad-based" index, such as
the Standard & Poor's 500 Index or the New York Stock Exchange Composite Index,
the changes in value of which ordinarily will reflect movements in the stock
market in general. In contrast, certain options may be based on narrower market
indices, such as the Standard & Poor's 100 Index, or on indices of securities of
particular industry groups, such as those of oil and gas or technology
companies. A stock index assigns relative values to the stocks included in the
index and the index fluctuates with changes in the market values of the stocks
so included. The composition of the index is changed periodically.
"Yield Curve" Options: Each 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
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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, a Fund may purchase or write such options for hedging
purposes. For example, a 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. A 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 a 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, a 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.
Options on Securities, Reset Options, Options on Stock Indices, Yield Curve
Options: 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 each 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 a 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-the-money. Each Fund will
treat all or a part of the formula price as illiquid for purposes of the SEC
illiquidity ceiling. Each 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.
Futures Contracts: Each Fund may purchase and sell futures contracts on interest
rates or stock indices, and may purchase and sell Futures Contracts on foreign
currencies or indices of foreign currencies ("Futures Contracts"). Each Fund may
also purchase and sell Futures Contracts on foreign or domestic fixed income
securities or indices of such securities. Such investment strategies will be
used for hedging purposes and for non-hedging purposes, subject to applicable
law.
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 interest rate
and foreign currency futures contracts, the fixed income securities or currency
are delivered by the seller and paid for by the purchaser, or on which, in the
case of stock index futures contracts and certain interest rate and foreign
currency futures contracts, the difference between the price at which the
contract was entered into and the contract's closing value is settled between
the purchaser and seller in cash. Futures Contracts differ from options in that
they are bilateral agreements, with both the purchaser and the seller equally
obligated to complete the transaction. Futures Contracts call for settlement
only on the expiration date and cannot be "exercised" at any other time during
their term.
The purchase or sale of a Futures Contract differs from the purchase or sale of
a security or the purchase of an option in that no purchase price is paid or
received. Instead, an amount of cash or cash equivalents, which varies but may
be as low as 5% or less of the value of the contract, must be deposited with the
broker as "initial margin." Subsequent payments to and from the broker, referred
to as "variation margin," are made on a daily basis as the value of the index or
instrument underlying the Futures Contract fluctuates, making positions in the
Futures Contract more or less valuable - a process known as "mark-to-market."
Purchases or sales of stock index futures contracts are used to attempt to
protect a Fund's current or intended stock investments
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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.
Interest rate futures contracts may be purchased or sold to attempt to protect
against the effects of interest rate changes on a Fund's current or intended
investments in fixed income securities. For example, if a Fund owned long-term
bonds and interest rates were expected to increase, that Fund might enter into
interest rate futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling some of the long-term bonds in that
Fund's portfolio. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of that Fund's interest
rate futures contracts would increase at approximately the same rate, thereby
keeping the net asset value of that Fund from declining as much as it otherwise
would have.
Similarly, if interest rates were expected to decline, interest rate futures
contracts may be purchased to hedge in anticipation of subsequent purchases of
long-term bonds at higher prices. Since the fluctuations in the value of the
interest rate futures contracts should be similar to that of long-term bonds, a
Fund could protect itself against the effects of the anticipated rise in the
value of long-term bonds without actually buying them until the necessary cash
became available or the market had stabilized. At that time, the interest rate
futures contracts could be liquidated and that Fund's cash reserves could then
be used to buy long-term bonds on the cash market. A Fund could accomplish
similar results by selling bonds with long maturities and investing in bonds
with short maturities when interest rates are expected to increase. However,
since the futures market is more liquid than the cash market, the use of
interest rate futures contracts as a hedging technique allows a Fund to hedge
its interest rate risk without having to sell its portfolio securities.
As noted in the Prospectus, a 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.
Forward Contracts: Each Fund may enter into contracts for the purchase or sale
of a specific currency at a future date at a price set at the time the contract
is entered into (a "Forward Contract"), for hedging purposes as well as for
non-hedging purposes. Each Fund may also enter into Forward Contracts for
"cross-hedging" purposes as noted in the Prospectus. The Fund will enter into
Forward Contracts for the purpose of protecting its current or intended
investments from fluctuations in currency exchange rates.
A Forward Contract to sell a currency may be entered into where a Fund seeks to
protect against an anticipated increase in the exchange rate for a specific
currency which could reduce the dollar value of portfolio securities denominated
in such currency.
Conversely, the Fund may enter into a Forward Contract to purchase a given
currency to protect against a projected increase in the dollar value of
securities denominated in such currency which the Fund intends to acquire.
If a hedging transaction in Forward Contracts is successful, the decline in the
value of portfolio securities or the increase in the cost of securities to be
acquired may be offset, at least in part, by profits on the Forward Contract.
Nevertheless, by entering into such Forward Contracts, the Fund may be required
to forego all or a portion of the benefits which otherwise could have been
obtained from favorable movements in exchange rates. Each Fund does not
presently intend to hold Forward Contracts entered into until the value date, at
which time it would be required to deliver or accept delivery of the underlying
currency, but will seek in most instances to close out positions in such
Contracts by entering into offsetting transactions, which will serve to fix the
Fund's profit or loss based upon the value of the Contracts at the time the
offsetting transaction is executed.
Each 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
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satisfies this requirement through segregation of assets, it will maintain, in a
segregated account, 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.
Options on Futures Contracts: Each Fund also may purchase and write options to
buy or sell those Futures Contracts in which it may invest ("Options on Futures
Contracts") as described above under "Futures Contracts." Such investment
strategies will be used for hedging purposes and for non-hedging purposes,
subject to applicable law.
An Option on a Futures Contract provides the holder with the right to enter into
a "long" position in the underlying Futures Contract in the case of a call
option, or a "short" position in the underlying Futures Contract in the case of
a put option, at a fixed exercise price up to a stated expiration date or, in
the case of certain options, on such date. Upon exercise of the option by the
holder, the contract market clearinghouse establishes a corresponding short
position for the writer of the option, in the case of a call option, or a
corresponding long position in the case of a put option. In the event that an
option is exercised, the parties will be subject to all the risks associated
with the trading of Futures Contracts, such as payment of initial and variation
margin deposits. In addition, the writer of an Option on a Futures Contract,
unlike the holder, is subject to initial and variation margin requirements on
the option position.
A position in an Option on a Futures Contract may be terminated by the purchaser
or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same Fund (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the Fund's profit
or loss on the transaction.
Options on Futures Contracts that are written or purchased by a Fund on U.S.
exchanges are traded on the same contract market as the underlying Futures
Contract, and, like Futures Contracts, are subject to regulation by the
Commodities Futures Trading Commission (the "CFTC") and the performance
guarantee of the exchange clearinghouse. In addition, Options on Futures
Contracts may be traded on foreign exchanges. A 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 liquid assets representing the difference
is segregated by the Fund A 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 is equal to or greater than the
exercise price of the put written or where the exercise price of the put held 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 may also be covered in such other manner as may be in accordance with
the rules of the exchange on which the option is traded and applicable laws and
regulations. Upon the exercise of a call Option on a Futures Contract written by
a 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 a 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 writing of a call option on a Futures Contract for hedging purposes
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, a
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, a Fund will retain the full amount of the option premium 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 a 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 the changes in the value of its
futures positions, a 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.
Each Fund may purchase Options on Futures Contracts for hedging purposes instead
of 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, a 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 in part, by a
profit on the option. Conversely, where it is projected that the value of
securities to be acquired by a Fund will increase prior to acquisition, due to a
market advance or changes in interest or exchange rates, a Fund could purchase
call Options on Futures Contracts, rather than purchasing the underlying Futures
Contracts.
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Options on Foreign Currencies: Each Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or Forward Contracts, will be utilized.
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,
a Fund may purchase put options on the foreign currency. If the value of the
currency does decline, the Fund will have the right to sell such currency for a
fixed amount in dollars and will 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, each 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 foreign currency options will 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 foreign currency
options which would require it to forego a portion or all of the benefits of
advantageous changes in such rates. Each 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 could, instead of purchasing a put
option, write a call option on the relevant currency. If the expected decline
occurs, the option will most likely not be exercised, and the diminution in
value of portfolio securities will 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.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, each Fund could write
a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. Foreign currency options written by a Fund
will generally be covered in a manner similar to the covering of other types of
options. As in the case of other types of options, however, the writing of a
foreign currency option will constitute only a partial hedge up to the amount of
the premium, and only if rates move in the expected direction. If this does not
occur, the option may be exercised and a Fund would be required to purchase or
sell the underlying currency at a loss which may not be offset by the amount of
the premium. Through the writing of options on foreign currencies, a Fund also
may be required to forego all or a portion of the benefits which might otherwise
have been obtained from favorable movements in exchange rates.
ADDITIONAL RISK FACTORS
Short Sales: The International Opportunities Fund and the Asia Pacific Fund each
may seek to hedge investments or realize additional gains through short sales.
Short sales are transactions in which a Fund sells a security it does not own,
in anticipation of a decline in the market value of that security. To complete
such a transaction, the Fund must borrow the security to make delivery to the
buyer. The Fund then is obligated to replace the security borrowed by purchasing
it at the market price at the time of replacement. The price at such time may be
more or less than the price at which the security was sold by the Fund. Until
the security is replaced, the Fund is required to repay the lender any dividends
or interest which accrue during the period of the loan. To borrow the security,
the Fund also may be required to pay a premium, which would increase the cost of
the security sold. The net proceeds of the short sale will be retained by the
broker, to the extent necessary to meet margin requirements, until the short
position is closed out. The Fund also will incur transaction costs in effecting
short sales.
A Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. The Fund will realize a gain if the price
of the security declines in price between those dates. The amount of any gain
will be decreased, and the amount of any loss increased, by the amount of the
premium, dividends or interest the Fund may be required to pay in connection
with a short sale.
The International Opportunities Fund and the Asia Pacific Fund may each make
short sales "against the box," i.e., when a security identical to or convertible
or exchangeable into one owned by the Fund is borrowed and sold short. Each such
Fund may also enter into so called "naked" short sales, i.e., when a security
identical to or exchangeable into the security borrowed and sold short is not
owned by the Fund.
A Fund will not sell short securities whose underlying value, minus any amounts
pledged by a Fund as collateral (which does not include the proceeds from the
short sale), exceeds 35% of its net assets.
Whenever a Fund engages in short sales, it segregates liquid securities in an
amount that, when combined with the amount of collateral deposited with the
broker in connection with the short sale, equals the current market value of the
security sold short. The segregated assets are marked to market daily.
Options, Futures and Forward Transactions
Risk of imperfect correlation of hedging instruments with a Fund's portfolio. A
Fund's ability effectively to hedge all or a portion of its portfolio through
transactions in options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and options on foreign currencies depends 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
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portfolio. In the case of futures and options based on an index, the portfolio
will not duplicate the components of the index, and in the case of futures and
options on fixed income securities, the portfolio securities which are being
hedged may not be the same type of obligation underlying such contract. The use
of Forward Contracts for "cross hedging" purposes may involve greater
correlation risks. As a result, the correlation probably will not be exact.
Consequently, the Fund bears the risk that the price of the portfolio securities
being hedged will not move in the same amount or direction as the underlying
index or obligation.
For example, if a Fund purchases a put option on an index and the index
decreases less than the value of the hedged securities, the Fund would
experience a loss which is not completely offset by the put option. It is also
possible that there may be a negative correlation between the index or
obligation underlying an option or Futures Contract in which the Fund has a
position and the portfolio securities the Fund is attempting to hedge, which
could result in a loss on both the portfolio and the hedging instrument. In
addition, a Fund may enter into transactions in Forward Contracts or options on
foreign currencies in order to hedge against exposure arising from the
currencies underlying such instruments. In such instances, the Fund will be
subject to the additional risk of imperfect correlation between changes in the
value of the currencies underlying such forwards or options and changes in the
value of the currencies being hedged. It should be noted that stock index
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 based on a broad market index. This is due to the fact that 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. Nevertheless, where a Fund
enters into transactions in options, or futures on narrowly-based indices for
hedging purposes, movements in the value of the index should, if the hedge is
successful, correlate closely with the portion of the Fund's portfolio or the
intended acquisitions being hedged.
The trading of Futures Contracts, options and Forward Contracts for hedging
purposes 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 the options, futures and forward markets. In this regard, trading by
speculators in options, futures and Forward 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.
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. The risk of imperfect correlation, however, generally
tends to diminish as the maturity date of the Futures Contract or expiration
date of the option approaches. Further, with respect to options on securities,
options on stock indices, options on currencies and Options on Futures
Contracts, a Fund is subject to the risk of market movements between the time
that the option is exercised and the time of performance thereunder. This could
increase the extent of any loss suffered by a Fund in connection with such
transactions.
In writing a covered call option on a security, index or futures contract, a
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. For example, where a Fund covers a
call option written on a stock index through segregation of securities, such
securities may not match the composition of the index, and the Fund may not be
fully covered. As a result, the Fund could be subject to risk of loss in the
event of adverse market movements.
The writing of options on securities, options on stock indices or Options on
Futures Contracts constitutes only a partial hedge against fluctuations in the
value of a Fund's portfolio. When a Fund writes an option, it will receive
premium income in return for the holder's purchase of the right to acquire or
dispose of the underlying obligation. In the event that the price of such
obligation does not rise sufficiently above the exercise price of the option, in
the case of a call, or fall below the exercise price, in the case of a put, the
option will not be exercised and the Fund will retain the amount of the premium,
less related transaction costs, which will constitute a partial hedge against
any decline that may have occurred in the Fund's portfolio holdings or any
increase in the cost of the instruments to be acquired.
Where the price of the underlying obligation moves sufficiently in favor of the
holder to warrant exercise of the option, however, and the option is exercised,
the Fund will incur a loss which may only be partially offset by the amount of
the premium it received.
Moreover, by writing an option, a Fund may be required to forego the benefits
which might otherwise have been obtained from an increase in the value of
portfolio securities or other assets or a decline in the value of securities or
assets to be acquired. In the event of the occurrence of any of the foregoing
adverse market events, a Fund's overall return may be lower than if it had not
engaged in the hedging transactions. Furthermore, the cost of using these
techniques may make it economically infeasible for a Fund to engage in such
transactions.
The Funds may enter transactions in options (except for Options on Foreign
Currencies), Futures Contracts, Options on Futures Contracts and Forward
Contracts for non-hedging purposes as well as hedging purposes. Non-hedging
transactions in such investments involve greater risks and may result in losses
which may not be offset by increases in the value of portfolio securities or
declines in the cost of securities to be acquired. The Funds will only write
covered options, such that liquid assets necessary to satisfy an option exercise
will be segregated at all times, unless the option is covered in such other
manner as may be in accordance with the rules of the exchange on which the
option is
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traded and applicable laws and regulations. Nevertheless, the method of covering
an option employed by a 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. Entering into transactions in
Futures Contracts, Options on Futures Contracts and Forward Contracts for other
than hedging purposes could expose the Fund to significant risk of loss if
foreign currency exchange rates do not move in the direction or to the extent
anticipated.
With respect to the writing of straddles on securities, a 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. Such transactions, therefore,
create an opportunity for increased return by providing a Fund with two
simultaneous premiums on the same security, but involve additional risk, since
the Fund may have an option exercised against it regardless of whether the price
of the security increases or decreases.
Risk of a 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 Funds 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 a 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 has insufficient cash
available to meet margin requirements, it will be necessary to liquidate
portfolio securities or other assets at a time when it is 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 portfolio,
and could result in trading losses.
The liquidity of a secondary market in a Futures Contract or option thereon may
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.
Once the daily limit has been reached in the contract, no trades may be entered
into at a price beyond the limit, thus preventing the liquidation of open
futures or option positions and requiring traders to make additional margin
deposits. Prices have in the past moved to the daily limit on a number of
consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk of
trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse 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 or forward 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.
Where a Fund enters into such transactions 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 or other
assets held by the Fund or decreases in the prices of securities or other assets
the Fund intends to acquire. Where a Fund enters into such transactions for
other than hedging purposes, the margin requirements associated with such
transactions could expose the Fund to greater risk.
Trading and position limits. The exchange on which futures 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). Further, 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 portfolios
of the Fund.
Risks of Options on Futures Contracts. The amount of risk a 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 security, index, currency or Futures Contract.
Risks of transactions related to foreign currencies and transactions not
conducted on U.S. exchanges. Transactions in Forward Contracts on foreign
currencies, as well as futures and options on foreign currencies and
transactions executed on foreign exchanges, 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
13
<PAGE>
contracts, which could restrict or eliminate trading and could have a
substantial adverse effect on the value of positions held by a Fund. Further,
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 a 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 in that market which will not be reflected in
the forward, futures or options market until the following day, thereby making
it more difficult for the Fund to respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options 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 U.S. or foreign restrictions and regulations
regarding the maintenance of foreign banking relationships, fees, taxes or other
charges.
Unlike transactions entered into by a Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts and
over-the-counter options on securities are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. To the contrary, such instruments are traded through financial
institutions acting as market-makers, although foreign currency options are also
traded on certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation. In
an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of Forward Contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of a
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 a 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 guarantee of an
exchange clearinghouse, and a Fund will therefore be subject to the risk of
default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency or security, thereby
restricting the Fund's ability to enter into desired hedging transactions. A
Fund will enter into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts, Options on
Futures Contracts and options on foreign currencies may be traded on exchanges
located in foreign countries. Such transactions may not be conducted in the same
manner as those entered into on U.S. exchanges, and may be subject to different
margin, exercise, settlement or expiration procedures. As a result, many of the
risks of over-the-counter trading may be present in connection with such
transactions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation (the "OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting a Fund to liquidate
open positions at a profit prior to exercise or expiration, or to limit losses
in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
14
<PAGE>
Policies on the use of futures and options on futures contracts. In order to
assure that a Fund will not be deemed to be a "commodity pool" for purposes of
the Commodity Exchange Act, regulations of the CFTC require that a Fund enter
into transactions in Futures Contracts, Options on Futures Contracts (including
Options on Futures 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 purposes, provided that the aggregate initial margin and
premiums required to establish 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 a 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 of the time of purchase.
Risks of investing in Lower Rated Bonds
Each 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 International Value Fund and the Asia Pacific 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 International Value Fund or the Asia Pacific 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 a 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 a 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 PIK bonds.
- -------------------------------------------------------------------------------
The policies stated above are not fundamental and may be changed without
shareholder approval, as may each Fund's investment objective.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following restrictions which cannot be changed without
the approval of the holders of a majority of a 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 series or class, as applicable or (ii) 67% or more of the outstanding
shares of the Trust or a series or class, as applicable, present at a meeting at
which holders of more than 50% of the outstanding shares of the Trust or a
series or class, as applicable are represented in person or by proxy):
Each Fund may not:
(1) borrow amounts in excess of 331/3 of its total assets including amounts
borrowed;
(2) underwrite securities issued by other persons except insofar as a Fund may
technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security;
(3) purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal
in real estate or interests therein), interests in oil, gas or mineral
leases, commodities or commodity contracts (excluding Options, Options on
Futures Contracts, Options on Stock Indices, Options on Foreign Currency
and any other type of option, Futures Contracts, any other type of futures
contract, and Forward Contracts) in the ordinary course of its business.
Each Fund reserves the freedom of action to hold and
15
<PAGE>
to sell real estate, mineral leases, commodities or commodity contracts
(including Options, Options on Futures Contracts, Options on Stock Indices,
Options on Foreign Currency and any other type of option, Futures
Contracts, any other type of futures contract, and Forward Contracts)
acquired as a result of the ownership of securities;
(4) issue any senior securities except as permitted by the 1940 Act. For
purposes of this restriction, collateral arrangements with respect to any
type of option (including Options on Futures Contracts, Options, Options on
Stock Indices and Options on Foreign Currencies), short sale, Forward
Contracts, Futures Contracts, any other type of futures contract, and
collateral arrangements with respect to initial and variation margin, are
not deemed to be the issuance of a senior security;
(5) make loans to other persons; for these purposes, the purchase of short-term
commercial paper, the purchase of a portion or all of an issue of debt
securities, the lending of portfolio securities, or the investment of a
Fund's assets in repurchase agreements, shall not be considered the making
of a loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result, 25% or more of its gross assets would be invested in securities of
issuers whose principal business activities are in the same industry
(except obligations issued or guaranteed by the U.S. Government or its
agencies and instrumentalities and repurchase agreements collateralized by
such obligations).
Except with respect to Investment Restriction (1) above and policy (1) below,
these investment restrictions and policies 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.
In addition, each Fund has the following nonfundamental policies which may be
changed without shareholder approval. Each Fund will not:
(1) invest in illiquid investments, including securities 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, where no market exists), if more than 15% of
a Fund's net assets (taken at market value) would be invested in such
securities. Repurchase agreements maturing in more than seven days will
be deemed to be illiquid for purposes of a Fund's limitation on
investment in illiquid securities. Securities that are not registered
under the 1933 Act and sold in reliance on Rule 144A thereunder, but are
determined to be liquid by the Trust's Board of Trustees (or its
delegee), will not be subject to this 15% limitation;
(2) invest for the purpose of exercising control or management; or
(3) pledge, mortgage or hypothecate in excess of 33 1/3% of its total assets.
For purposes of this restriction, collateral arrangements with respect to
any type of option (including Options on Futures Contracts, Options,
Options on Stock Indices and Options on Foreign Currencies), any short
sale, any type of futures contract (including Futures Contracts), Forward
Contracts and payments of initial and variation margin in connection
therewith, are not considered a pledge of assets.
3. MANAGEMENT OF THE FUNDS
The Trust's Board of Trustees provides broad supervision over the affairs of
each Fund. The Adviser is responsible for the investment management of each
Fund's assets, and the officers of the Trust are responsible for its operations.
The Trustees and officers are listed below, together with their ages and
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,
Secretary and Director
16
<PAGE>
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 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Messrs. Shames and Scott, Directors of MFD, and Mr.
Cavan, the Secretary of MFD, hold similar positions with certain other MFS
affiliates. Mr. Bailey is a Director of Sun Life Assurance Company of Canada
(U.S.), a subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
While each Fund pays the compensation of the non-interested Trustees and Mr.
Bailey, the Trustees are currently waiving their rights to receive such fees.
Each Fund 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 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.
Each Fund will accrue its allocable portion of compensation expenses under the
retirement plan each year to cover the current year's service and amortize past
service cost.
17
<PAGE>
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TRUSTEE COMPENSATION TABLE
- -------------------------------------------------------------------------------
RETIREMENT TOTAL
TRUSTEE BENEFIT TRUSTEE
FEES ACCRUED FEES
FROM AS PART FROM
EACH OF FUND FUND
TRUSTEE FUND(1) EXPENSE(1) COMPLEX(2)
Richard B. $0 $0 $259,430
Bailey
Peter G. 0 0 150,511
Harwood
J. Atwood 0 0 149,491
Ives
Lawrence 0 0 129,371
T. Perera
William J. 0 0 139,006
Poorvu
Charles 0 0 129,301
W. Schmidt
Arnold D. 0 0 0
Scott
Jeffrey L. 0 0 0
Shames
David B. 0 0 165,826
Stone
Elaine R. 0 0 150,511
Smith
1) For the fiscal year ending September 30, 1998.
2) For calendar year 1998. All non-interested Trustees served as Trustees of
24 funds within the MFS fund complex (having aggregate net assets at
December 31, 1998, of approximately $43.3 billion) while Mr. Bailey served
as Trustee of 60 funds within the MFS fund complex (having aggregate net
assets at December 31, 1998, of approximately $68.2 billion).
As of October 30, 1998, the Trustees owned less than 1% of the shares of each
Fund, not including the Class I shares owned of record by the MFS Defined
Contribution Plan of which Messrs. Scott and Shames are Trustees (see chart
below).
Fund
Owner & Address and Class % of Class
Ellen F. Bradley & International 5.38%
Mary Louise Smith TTEES Strategic
Joseph T. Flanagan Trust Growth
c/o The Landmark Class A
550 Washington St., Apt. 302
Braintree, MA 02184-5641
Heather L. Buchanan International 7.42%
145 Pinckney St., Apt 632 Strategic
Boston, MA 02114-3247 Growth
Class A
Dorothy E. Tameo & International 5.38%
Raymond F. Tameo JT WROS Strategic
128 Thurber Ave. Growth
Attleboro, MA 02703-6218 Class A
David R. Mannheim International 53.85%
3 Indian Springs Way Strategic
Wellesley, MA 02181-3217 Growth
Class A
Scott A. Lysko International 7.77%
47 Alpine St., Apt. 2 Strategic
Somerville, MA 02144-2624 Growth
Class A
Trustees of the
MFS Def Contribution Plan1 International 99.99%
c/o Mark Leary Strategic
Mass Financial Services Growth
500 Boylston St. Class I
Boston, MA 02116-3740
Trustees of the
MFS Def Contribution Plan1 International 99.90%
c/o Mark Leary Value
Mass Financial Services Class I
500 Boylston St.
Boston, MA 02116-3740
MFS Fund Distributors Inc. International 97.12%
c/o MA Financial Services Co Value
Attn: Thomas B. Hastings Class A
500 Boylston St.
15th Floor
Boston, MA 02116-3740
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<PAGE>
Fund
Owner & Address and Class % of Class
MFS Fund Distributors Inc. International 69.84%
c/o MA Financial Services Co Opportunities
Attn: Thomas B. Hastings Class A
500 Boylston St.
15th Floor
Boston, MA 02116-3740
Wayne L. Woodman International 21.44%
MA Financial Services Co Opportunities
500 Boylston St. Class A
Boston, MA 02116-3740
Trustees of the
MFS Def Contribution Plan1 International 99.99%
c/o Mark Leary Opportunities
Mass Financial Services Class I
500 Boylston St.
Boston, MA 02116-3740
MFS Fund Distributors, Inc. Asia Pacific 65.4%
c/o MA Financial Services Co Class A
Attn: Thomas B. Hastings
500 Boylston St.
15th Floor
Boston, MA 02116-3740
Trustees of the
MFS Def Contribution Plan1 Asia Pacific 20.2%
c/o Mark Leary Class I
Mass Financial Services
500 Boylston St.
Boston, MA 02116-3740
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1 The MFS Defined Contribution Plan (the "Plan") is a qualified retirement
plan under section 401(a) of the Internal Revenue Code of 1986, as amended.
The Plan benefits employees of MFS and its subsidiaries.
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,
as to liabilities of the Trust or its shareholders, it is determined 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 settlement, such indemnification will not be provided unless it has
been determined pursuant to the Declaration of Trust, that they have not engaged
in willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
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.
Investment Advisory Agreements -- The Adviser manages each Fund pursuant to
separate Investment Advisory Agreements, dated October 8, 1997 (the "Advisory
Agreements"). The Adviser provides each Fund with overall investment advisory
services. Subject to such policies as the Trustees may determine, the Adviser
makes investment decisions for each Fund. For these services, the Adviser
receives an annual management fee, computed and paid monthly, as disclosed in
the Prospectus under the heading "Management of the Funds."
Each Advisory Agreement will remain in effect until October 8, 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 a Fund's
shares (as defined in "Investment Objective, Policies and 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.
Each Advisory Agreement terminates automatically if it is assigned and may be
terminated without penalty by vote of a majority of a Fund's shares (as defined
in "Investment Objectives, Policies and Restrictions"), or by either party on
not more than 60 days' nor less than 30 days' written notice. Each Advisory
Agreement provides that if MFS ceases to serve as the Adviser to a Fund, a Fund
will change its name so as to delete the initials "MFS" and that MFS may render
services to others and may permit other fund clients to use the initials "MFS"
in their names. Each Advisory Agreement also 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 a 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 each 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, a Fund pays MFS an administrative fee of 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 October 9, 1997,
each Fund's commencement of investment operations, through September 30, 1998,
MFS
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received fees under the Administrative Services Agreement as follows:
International Opportunities $154
International Value $133
International Strategic Growth $132
Asia Pacific Fund $220
Custodian
State Street Bank and Trust Company (the "Custodian") is the custodian of each
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling each Fund's cash and securities, handling the receipt and delivery
of securities, determining income and collecting interest and dividends on each
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 each Fund. The Custodian does not
determine the investment policies of each Fund or decide which securities a Fund
will buy or sell. Each 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 each Fund.
Shareholder Servicing Agent
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is each 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 the keeping of records in connection with the
issuance, transfer and redemption of each class of shares of each Fund. For
these services, the Shareholder Servicing Agent will receive a fee calculated as
a percentage of the average daily net assets of each Fund at an effective annual
rate of 0.1125%. In addition, the Shareholder Servicing Agent will be reimbursed
by each Fund for certain expenses incurred by the Shareholder Servicing Agent on
behalf of the Fund. The Custodian has contracted with the Shareholder Servicing
Agent to perform certain dividend and distribution disbursing agent functions
for the Fund.
Distributor
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of each Fund pursuant to a Distribution Agreement with the
Trust dated as of January 1, 1995 (the "Distribution Agreement").
Class A Shares: MFD acts as agent in selling Class A shares of each Fund to
dealers. The public offering price of Class A shares of each 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
each 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 each 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" below).
Class A shares of each Fund may be sold at their net asset value to certain
persons and in certain instances, 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 a 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 a 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 4.00% and MFD retains approximately 3/4 of 1% of the public
offering price. MFD, on behalf of each Fund, pays a commission to dealers who
initiate and are responsible for 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 each Fund. 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 a Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
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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 Objective, Policies and Restrictions
- -- 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 Funds are made by
persons affiliated with the Adviser. Any such person may serve other clients of
the Adviser, or any subsidiary of the Adviser, in a similar capacity. Changes in
each Fund's investments are reviewed by the Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and broker-dealers through which it seeks this result. In the
U.S. and in some other countries debt securities are traded principally in the
over-the-counter market on a net basis through dealers acting for their own
account and not as brokers. In other countries both debt and equity securities
are traded on exchanges at fixed commission rates. The cost of securities
purchased from underwriters includes an underwriter's commission or concession,
and the prices at which securities are purchased and sold from and to dealers
include a dealer's mark-up or mark-down. The Adviser normally seeks to deal
directly with the primary market makers or on major exchanges unless, in its
opinion, better prices are available elsewhere. Subject to the requirement of
seeking execution at the best available price, securities may, as authorized by
the Advisory Agreement, be bought from or sold to dealers who have furnished
statistical, research and other information or services to the Adviser. At
present no arrangements for the recapture of commission payments are in effect.
Consistent with the foregoing primary consideration, the Conduct Rules of the
National Association of Securities Dealers, Inc. ("NASD") and such other
policies as the Trustees may determine, the Adviser may consider sales of shares
of a 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.
Under an Advisory Agreement and as permitted by Section 28(e) of the Securities
Exchange Act of 1934, the Adviser may cause a 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 their
respective overall responsibilities to the Fund or to their other clients. Not
all of such services are useful or of value in advising a 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 a
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 a Fund. The 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 a 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.
The management fee of the Adviser will not be reduced as a consequence of the
Adviser's receipt of brokerage and research service. To the extent a Fund's
portfolio transactions are used to obtain brokerage and research services, the
brokerage commissions paid by the Fund will exceed those that might otherwise be
paid for such portfolio transactions, or for such portfolio transactions and
research, by an amount which cannot be presently determined. Such services would
be useful and of value to the Adviser in serving both a 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
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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 Funds' fiscal year ended September 30, 1998 total brokerage commissions
of $12,562 on total transactions of $4,380,617 were paid for the International
Opportunities Fund, total brokerage commissions of $7,639 on total transactions
of $2,629,849 were paid for the International Strategic Growth Fund, total
brokerage commissions of $5,417 on total transactions of $2,065,429 were paid
for the International Value Fund, and total brokerage commissions of $25,570 on
total transactions of $5,168,289 were paid for the Asia Pacific Fund.
In certain instances there may be securities which are suitable for a 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 a 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 a Fund is
concerned. In other cases, however, a Fund believes that its ability to
participate in volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
Investment and Withdrawal Programs -- Each 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 a 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 a
Fund alone or in combination with shares of any class of 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 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 a 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 his new investment, together
with the current offering price value of all holdings of Class A, Class B and
Class C shares of that shareholder in the MFS Funds or MFS Fixed Fund reaches a
discount level. See "Purchases" in the Prospectus for the sales charges on
quantity discounts. For example, if a shareholder owns shares with a current
offering price value of $75,000 and purchases an additional $25,000 of Class A
shares of a Fund, the sales charge for the $25,000 purchase would be at the rate
of 4.00% (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
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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 a 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 that 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 ("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 generally are limited to 10% of the value of the account at the time of
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 "Reinvested Shares"; (ii) to the extent necessary, any
"Free Amount"; 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 received in full
and fractional shares of a 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 a 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 a 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 a Fund
ceases to assume the cost of these services. Each 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 a Fund.
Invest by Mail: Additional investments of $50 or more may be made at
any time by mailing a check payable to a 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 the 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 participate in the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the
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same class of shares of other MFS Funds selected by the shareholder (if
available for sale). 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 transfer 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 each Fund and shareholders of
the other MFS Funds (except MFS Money Market Fund, MFS Government Money Market
Fund and Class A shares of MFS Cash Reserve Fund in the case where 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
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
the initial purchase in the case of Class B shares or 12 months of the initial
purchase in the case 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 adviser for further
information.
Exchange Privilege -- Subject to the requirements set forth below, some or all
of the shares of the same class in an account with a Fund for which payment has
been received by the Fund (i.e., an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for sale
and if 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 ($50 in the case of retirement plan participants whose sponsoring
organizations subscribe to 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. 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
Exchange the exchange usually will occur on that day if all the requirements set
forth above have been complied with at that time. However, payment of the
redemption proceeds by a Fund, and thus the purchase of shares of the other MFS
Fund, may be delayed for up
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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 fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund and
Class A Shares of MFS Cash Reserve Fund for shares acquired through direct
purchase and dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of each Fund, subject to the conditions, if
any, set forth in their respective prospectuses. In addition, unitholders of the
MFS Fixed Fund have the right to exchange their units (except units acquired
through direct purchases) for shares of a 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 -- Shares of each Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available through investment
dealers plans and/or custody agreements for the following:
Traditional Individual Retirement Accounts (IRAs) (for individuals 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 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.
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 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 Section 401(a) or 403(b) recordkeeping program made available by the
Shareholder Servicing Agent.
6. TAX STATUS
Each 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 each 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 any Fund will be required to pay any federal income or
excise taxes, although a Fund's foreign-source income may be subject to foreign
withholding taxes. If a 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 each Fund will normally 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. 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 a Fund's
shareholders as long-term capital gains for federal tax purposes without regard
to the length of time shareholders have held their shares. Any Fund dividend
that is declared in October, November or December, that is payable to
shareholders of record in such a month, and that is paid the following January
will be taxable to shareholders as if
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received on December 31 of the year in which the dividend is declared. Each Fund
will notify shareholders regarding the federal tax status of the Fund's
distributions after the end of each calendar year.
Any distribution will have the effect of reducing the per share net asset value
of shares in a 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 a
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
12 months and otherwise as a short-term capital gain or loss. However, any loss
realized upon a disposition of shares in a 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 a
Fund within 90 days after their purchase followed by any purchase without
payment of an additional sales charge (including purchases by exchange or by
reinvestment) of Class A shares of that Fund or of another MFS Fund (or any
other shares of an MFS Fund generally sold subject to a sales charge).
Each 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. A
Fund's investments in zero coupon bonds, deferred interest bonds, PIK 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.
Each Fund's transactions in options, Futures Contracts, Forward Contracts, short
sales "against the box," 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
a Fund on the last business day of each taxable year will be marked to market
(i.e., treated as if closed out) on such 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 a Fund that substantially diminish its
risk of loss with respect to other positions in its portfolio may constitute
"straddles," and may be subject to special tax rules that would cause deferral
of Fund losses, adjustments in the holding periods of Fund securities, and
conversion of short-term into long-term capital losses. Certain tax elections
exist for straddles that may alter the effects of these rules. Each 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 a Fund.
Foreign exchange gains or losses realized by a Fund will generally be treated as
ordinary income or losses. Use of foreign currencies for non-hedging purposes
and investment by a Fund in certain "passive foreign investment companies" may
be limited in order to avoid imposition of a tax on the Fund. Each 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 a Fund from foreign securities may be subject to
foreign income taxes withheld at the source. The United States has entered into
tax treaties with many foreign countries that may entitle a Fund to a reduced
rate of tax or an exemption from tax on such income; each Fund intends to
qualify for treaty reduced rates where available. It is not possible, however,
to determine a Fund's effective rate of foreign tax in advance since the amount
of each Fund's assets to be invested within various countries is not known. If a
Fund holds more than 50% of its assets in foreign stock and securities at the
close of its taxable year, the Fund may elect to "pass through" to its
shareholders foreign income taxes paid. If a Fund so elects, its shareholders
will be required to treat their pro rata portions of the foreign income taxes
paid by that Fund as part of the amounts distributed to them by the Fund and
thus includable in their gross income for federal income tax purposes.
Shareholders who itemize deductions would then be allowed to claim a deduction
or credit (but not both) on their federal income tax returns for such amounts,
subject to certain limitations. Shareholders who do not itemize deductions would
(subject to such limitations) be able to claim a credit but not a deduction. No
deduction for such amounts will be permitted to individuals in computing their
alternative minimum tax liability. If a Fund does not qualify or elect to "pass
through" to its shareholders foreign income taxes paid by it, its shareholders
will not be able to claim any deduction or credit for any part of the foreign
taxes paid by that Fund.
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%. Each Fund intends
to withhold U.S. federal income tax at the rate of 30% (or any lower rate
permitted by 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 applicable to such claims.
Distributions received from a Fund by Non-U.S. Persons may also be subject to
tax under the laws of their own jurisdictions. Each Fund is also
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<PAGE>
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.
A Fund will not be required to pay Massachusetts income or excise taxes as long
as it qualifies as a regulated investment company under the Code.
7. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for each Fund (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 each Fund and each respective class of
shareholders. The provisions of the Distribution Plan are severable with respect
to each Class of shares offered by each Fund. The Distribution Plan is designed
to promote sales, thereby increasing the net assets of each Fund. Such an
increase may reduce the expense ratio to the extent a Fund's fixed costs are
spread over a larger net asset base. Also, an increase in net assets may lessen
the adverse effect that could result were a Fund required to liquidate portfolio
securities to meet redemptions. There is, however, no assurance that the net
assets of a 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 or 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 a 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 a 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 expense and equipment.
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 any of 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 a 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.
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8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
Net Asset Value: The net asset value per share of each class of each 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 days on which they are observed): New Year's Day,
Martin Luther King 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 a Fund's portfolio are
valued at the last sale price on the exchange on which they are primarily traded
or on the NASDAQ stock market for unlisted national market issues, or at the
last quoted bid price for listed securities in which there were no sales during
the day or for unlisted securities not reported on the NASDAQ stock market.
Bonds and other fixed income securities (other than short-term obligations) of
U.S. issuers in a 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 institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data without exclusive reliance upon quoted prices or 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 services has been approved by the Board of
Trustees. All other securities, futures contracts and options in a 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
stock market, 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 in a Fund's portfolio are valued at amortized cost, which
constitutes fair value as determined by the Board of Trustees. Short-term
obligations with a remaining maturity in excess of 60 days will be valued upon
dealer supplied valuations. Portfolio investments 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 a 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 prior to the
close of that business day.
PERFORMANCE INFORMATION
Total Rate of Return: Each 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. Each 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 sales charge (4.75% maximum with respect to Class A shares) and/or (iii)
a total rate of return which represents 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.
Each 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 inception date than another class of shares of a 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 a 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
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<PAGE>
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 Fund are presented in Appendix A
attached hereto.
Total rate of return figures would have been lower if fee reductions were not in
place. These figures are not calculated on an annualized basis. The aggregate
total return represents a limited time frame and may not be indicative of future
performance.
General: From time to time each Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. Each Fund may also
quote evaluations mentioned in independent radio or television broadcasts and
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. Each 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, each 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.
Each Fund may also quote evaluations mentioned in independent radio or
television broadcasts.
From time to time a 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.
Each 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 a 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 intergenerational 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.
Each 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 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, a 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.
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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(R)becomes money manager of MFS(R)Union
Standard(R)Equity Fund, the first Fund to
invest solely 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. 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 each Fund and two 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 Fund (Class A, Class B, Class C and Class I
shares). Each share of a class of a Fund represents an equal proportionate
interest in the assets of the Fund allocable to that class. Upon liquidation of
a 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 a number of
series and additional 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, the Declaration
of Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the Trust. A
meeting of shareholders will be called upon the request of shareholders of
record holding in the aggregate not less than 10% of the outstanding voting
securities of the Trust. No material amendment may be made to the Declaration of
Trust without the affirmative vote of a majority of the Trust's outstanding
shares (as defined in "Investment Restrictions"). The Trust or any series of the
Trust may be terminated (i) upon the merger or consolidation of the Trust or any
series of the Trust with another organization or upon the sale of 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 or the affected series' outstanding shares voting as a
single class, or of the affected series of the Trust, except that if the
Trustees 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 will be sufficient, or (ii) upon liquidation and distribution of the
assets of a Fund, if approved by the vote of the holders of two-thirds of its
outstanding shares of the Trust, or (iii) by the Trustees by written notice to
its shareholders. 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
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Declaration of Trust contains an express disclaimer of shareholder liability for
acts or obligations of the Trust and provides for indemnification and
reimbursement of expenses out of 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 and its shareholders and the Trustees, officers, employees and agents of
the Trust 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 his 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
Ernst & Young LLP are each Fund's independent auditors, providing audit
services, tax services, and assistance and consultation with respect to the
preparation of filings with the SEC.
The Funds' Portfolios of Investments and the Statements of Assets and
Liabilities at September 30, 1998, the Statements of Operations and the
Statements of Changes in Net Assets for the period October 10, 1997 to 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
Funds and are incorporated by reference into this SAI and have been so
incorporated in reliance upon the report of Ernst & Young, independent auditors,
as experts in accounting and auditing. A copy of the Annual Report accompanies
this SAI.
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<PAGE>
Appendix A
Performance Quotations
Performance Quotations are as of September 30, 1998
Aggregate Annual Total Returns(1)
Life of Fund(2)
MFS International Opportunities Fund
Class A Shares with sales charge (10.27)%
Class A Shares without sales charge (5.80)
Class I Shares (5.80)
MFS International Strategic Growth Fund
Class A Shares with sales charge (7.80)
Class A Shares without sales charge (3.20)
Class I Shares (3.00)
MFS International Value Fund
Class A Shares with sales charge (0.27)
Class A Shares without sales charge 4.70
Class I Shares 4.70
MFS Asia Pacific Fund
Class A Shares with sales charge (37.92)
Class A Shares without sales charge (34.82)
Class I Shares (34.72)
Class B and Class C shares were not available for sale during the period.
(1) Total rate of return figures would have been lower if certain fee waivers
were not in place.
(2) Aggregate total return from inception of Class A and Class I shares on
October 9, 1997.
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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 and 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
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
MFS(R) International Opportunities Fund
MFS(R) International Strategic Growth Fund
MFS(R) International Value Fund
MFS(R) Asia Pacific Fund
500 BOYLSTON STREET
BOSTON, MA 02116
[GRAPHIC OMITTED]
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