<PAGE>
------------------------
MFS(R) TOTAL RETURN FUND
------------------------
FEBRUARY 1, 1999
PROSPECTUS
CLASS A SHARES OF BENEFICIAL INTEREST
CLASS B SHARES OF BENEFICIAL INTEREST
CLASS C SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
The primary investment objective of the MFS(R) Total Return Fund (the "Fund")
is to obtain above-average income (compared to a portfolio entirely invested
in equity securities) consistent with prudent employment of capital. The
Fund's secondary objective is to take advantage of opportunities for growth of
capital and income. Under normal market conditions, at least 25% of the Fund's
assets will be invested in fixed income securities and at least 40% and no
more than 75% of the Fund's assets will be invested in equity securities (see
"Investment Objectives and Policies"). The Fund is a diversified series of
MFS(R) Series Trust V (the "Trust"), an open-end investment company. The
minimum initial investment generally is $1,000 per account (see "Purchases").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS") and MFS Fund Distributors, Inc. ("MFD"),
respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT
AGENCY, AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY
FINANCIAL INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE
IN VALUE. YOU MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR
SHARES.
This Prospectus sets forth concisely the information concerning the Trust and
the Fund that a prospective investor ought to know before investing. The Trust,
on behalf of the Fund, has filed with the Securities and Exchange Commission
(the "SEC") a Statement of Additional Information, dated February 1, 1999, as
amended or supplemented from time to time (the "SAI"), which contains more
detailed information about the Trust and the Fund. The SAI is incorporated into
this Prospectus by reference. See page 44 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number). The SEC maintains an Internet World Wide Web site at
http://www.sec.gov that contains the SAI, materials that are incorporated by
reference into this Prospectus and the SAI, and other information regarding the
Fund. This Prospectus is available on the Adviser's Internet World Wide Web site
at http://www.mfs.com.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
TABLE OF CONTENTS
Page
1. Expense Summary .................................... 3
2. Condensed Financial Information .................... 5
3. The Fund ........................................... 8
4. Investment Objectives and Policies ................. 9
5. Management of the Fund ............................. 21
6. Year 2000 Issues ................................... 23
7. Information Concerning Shares of the Fund .......... 24
Purchases ...................................... 24
Exchanges ...................................... 31
Redemptions and Repurchases .................... 33
Distribution Plan .............................. 36
Distributions .................................. 38
Tax Status ..................................... 38
Net Asset Value ................................ 39
Description of Shares, Voting Rights and
Liabilities .................................. 40
Performance Information ........................ 40
Provision of Annual and Semiannual Reports ..... 41
8. Shareholder Services ............................... 42
Appendix A ......................................... A-1
Appendix B ......................................... B-1
<PAGE>
1. EXPENSE SUMMARY
CLASS A CLASS B CLASS C
------- ------- -------
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Initial Sales Charge Imposed on
Purchases of Fund Shares (as a
percentage of offering price) 4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase
price or
redemption proceeds, as applicable) ... See Below(1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ......................... 0.34% 0.34% 0.34%
Rule 12b-1 Fees ......................... 0.35%(2) 1.00%(3) 1.00%(3)
Other Expenses(4) ....................... 0.21% 0.21% 0.21%
---- ---- ----
Total Operating Expenses ................ 0.90% 1.55% 1.55%
- ------------
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a Contingent Deferred
Sales Charge ("CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such
purchases. See "Information Concerning Shares of the Fund -- Purchases"
below.
(2) The Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act"), which provides that it will pay distribution/service fees
aggregating up to (but not necessarily all of) 0.35% per annum of the
average daily net assets attributable to the Class A shares. The 0.35% per
annum distribution/service fee is reduced to 0.25% per annum for shares
purchased prior to October 1, 1989. Distribution expenses paid under the
Distribution Plan with respect to Class A shares, together with the
initial sales charge, may cause long-term shareholders to pay more than
the maximum sales charge that would have been permissible if imposed
entirely as an initial sales charge. See "Information Concerning Shares of
the Fund -- Distribution Plan" below.
(3) The Fund's Distribution Plan provides that it will pay distribution/
service fees aggregating up to 1.00% per annum of the average daily net
assets attributable to Class B shares and Class C shares, respectively.
Distribution expenses paid under the Distribution Plan with respect to
Class B or Class C shares, together with any CDSC payable upon redemption
of Class B shares, may cause long-term shareholders to pay more than the
maximum sales charge that would have been permissible if imposed entirely
as an initial sales charge. See "Information Concerning Shares of the Fund
-- Distribution Plan" below.
(4) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have
the effect of reducing the Fund's expenses). Any such fee reductions are
not reflected under "Other Expenses."
<PAGE>
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
PERIOD CLASS A CLASS B CLASS C
- ------ ------- ------------ ------------
(1) (1)
1 year ....................... $ 56 $ 56 $ 16 $ 26 $ 16
3 years ...................... 75 79 49 49 49
5 years ...................... 95 104 84 84 84
10 years ...................... 153 167(2) 167(2) 185 185
- ------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Fund will bear
directly or indirectly. More complete descriptions of the following Fund
expenses are set forth in the following sections of the Prospectus: (i)
varying sales charges on share purchases -- "Purchases"; (ii) varying CDSCs --
"Purchases"; (iii) management fees -- "Investment Adviser"; and (iv) Rule
12b-1 (i.e., distribution plan) fees -- "Distribution Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
<PAGE>
2. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the SAI in reliance upon the report of the
Fund's independent auditors given upon their authority, as experts in
accounting and auditing. The Fund's current independent auditors are Deloitte
& Touche LLP.
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
CLASS A
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ...................... $16.92 $15.03 $14.46 $12.80 $13.70 $12.42
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) .... $ 0.57 $ 0.60 $ 0.64 $ 0.64 $ 0.54 $ 0.45
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions .............. 0.53 2.94 1.21 1.64 (0.69) 1.74
------ ------ ------ ------ ------ ------
Total from investment
operations ............ $ 1.10 $ 3.54 $ 1.85 $ 2.28 $(0.15) $ 2.19
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income .. $(0.58) $(0.59) $(0.62) $(0.61) $(0.54) $(0.59)
From net realized gain on
investments and foreign
currency transactions ..... $(1.37) (1.06) (0.66) (0.01) (0.10) (0.32)
In excess of net investment
income .................... (0.01) -- -- -- -- --
In excess of net realized
gain on investments and
foreign currency
transactions .............. -- -- -- -- (0.11) --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(1.96) $(1.65) $(1.28) $(0.62) $(0.75) $(0.91)
------ ------ ------ ------ ------ ------
Net asset value -- end of
period ...................... $16.06 $16.92 $15.03 $14.46 $12.80 $13.70
====== ====== ====== ====== ====== ======
TOTAL RETURN(+) ............... 6.98% 25.27% 13.50% 18.36% (1.07)% 18.32%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## .................. 0.90% 0.93% 0.91% 0.87% 0.85% 0.84%
Net investment income ....... 3.44% 3.84% 4.35% 4.82% 4.26% 4.51%
PORTFOLIO TURNOVER ............ 126% 143% 140% 102% 91% 95%
NET ASSETS AT END OF PERIOD
(000,000 OMITTED) ........... $3,503 $3,199 $2,568 $2,242 $1,857 $1,702
- ------------
# Per shares data for the periods subsequent to September 30, 1993, are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(S) The distributor did not impose a portion of its distribution fee for the periods indicated. If this fee had been incurred
by the Fund, the net investment income per share and the ratios would have been:
Net investment income ....... $ -- $ -- $ -- $ 0.63 $ 0.52 $ --
Ratios (to average net assets):
Expenses## ................ -- -- -- 0.97% 0.95% --
Net investment income ..... -- -- -- 4.72% 4.16% --
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------
1992 1991 1990 1989
---- ---- ---- ----
CLASS A
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period .......... $11.82 $10.25 $11.58 $10.13
------ ------ ------ ------
Income from investment operations --
Net investment income ......................... $ 0.65 $ 0.67 $ 0.64 $ 0.65
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.75 1.57 (1.25) 1.71
------ ------ ------ ------
Total from investment operations .......... $ 1.40 $ 2.24 $(0.61) $ 2.36
------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income(++) ................ $(0.66) $(0.61) $(0.66) $(0.63)
From net realized gain on investments and
foreign currency transactions ............... (0.14) (0.06) (0.06) (0.28)
From paid-in capital .......................... -- -- -- --
------ ------ ------ ------
Total distributions declared to
shareholders ............................ $(0.80) $(0.67) $(0.72) $(0.91)
------ ------ ------ ------
Net asset value -- end of period ................ $12.42 $11.82 $10.25 $11.58
====== ====== ====== ======
TOTAL RETURN(+) ................................. 12.26% 22.25% (5.59)% 23.46%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ...................................... 0.84% 0.87% 0.85% 0.72%
Net investment income ......................... 5.40% 5.89% 5.71% 5.97%
PORTFOLIO TURNOVER .............................. 84% 74% 50% 53%
NET ASSETS AT END OF PERIOD (000,000 OMITTED) ... $1,198 $ 909 $ 707 $ 628
- ------------
(+) Total returns for Class A shares do not include the applicable sales charge (except for reinvested dividends
prior to October 1, 1989). If the charge had been included, the results would have been lower.
(++) For the years ended September 30, 1992 and 1991, $0.0508 and $0.0596, respectively, of per share distributions
from net investment income have been redesignated as distributions from capital gains.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993*
---- ---- ---- ---- ---- -----
CLASS B
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD):
Net asset value -- beginning
of period .................. $16.92 $15.02 $14.46 $12.80 $13.70 $13.53
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income ...... $ 0.46 $ 0.50 $ 0.52 $ 0.53 $ 0.39 $ 0.06
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions ............. 0.53 2.95 1.21 1.64 (0.65) 0.16
------ ------ ------ ------ ------ ------
Total from investment
operations ........... $ 0.99 $ 3.45 $ 1.73 $ 2.17 $(0.26) $ 0.22
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income . $(0.48) $(0.49) $(0.51) $(0.50) $(0.43) $(0.05)
From net realized gain on
investments and foreign
currency transactions .... (1.37) (1.06) (0.66) -- -- --
In excess of net investment
income ................... (0.01) -- -- (0.01) (0.10) --
From paid-in capital ....... -- -- -- -- (0.11) --
------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders ......... $(1.86) $(1.55) $(1.17) $(0.51) $(0.64) $(0.05)
------ ------ ------ ------ ------ ------
Net asset value -- end of
period ..................... $16.05 $16.92 $15.02 $14.46 $12.80 $13.70
====== ====== ====== ====== ====== ======
TOTAL RETURN ................. 6.22% 24.51% 12.49% 17.46% (1.93)% 15.24%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ................. 1.55% 1.60% 1.67% 1.71% 1.70% 1.75%+
Net investment income ...... 2.80% 3.17% 3.56% 3.97% 3.45% 3.98%+
PORTFOLIO TURNOVER ........... 126% 143% 140% 102% 91% 95%
NET ASSETS AT END OF PERIOD
(000,000 OMITTED) .......... $ 1,984 $ 1,707 $ 1,284 $1,005 $ 843 $ 532
- ----------
* For the period from the inception of Class B shares, August 23, 1993, through September 30, 1993.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to September 30, 1993, are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------
1998 1997 1996 1995 1994**
---- ---- ---- ---- -----
CLASS C
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD):
Net asset value -- beginning of period $16.96 $15.06 $14.49 $12.80 $12.92
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income .............. $ 0.46 $ 0.50 $ 0.53 $ 0.54 $ 0.08
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions ............ 0.53 2.95 1.22 1.66 (0.13)
------ ------ ------ ------ ------
Total from investment operations $ 0.99 $ 3.45 $ 1.75 $ 2.20 $(0.05)
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income ......... $(0.47) $(0.49) $(0.52) $(0.50) $(0.07)
From net realized gain on
investments and foreign currency
transactions ..................... (1.37) (1.06) (0.66) (0.01) --
In excess of net investment income . (0.01) -- -- -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders ................. $(1.85) $(1.55) $(1.18) $(0.51) $(0.07)
------ ------ ------ ------ ------
Net asset value -- end of period ..... $16.10 $16.96 $15.06 $14.49 $12.80
====== ====== ====== ====== ======
TOTAL RETURN ......................... 6.27% 24.39% 12.67% 17.66% (0.41)%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ......................... 1.55% 1.60% 1.63% 1.67% 1.76%+
Net investment income .............. 2.80% 3.16% 3.67% 4.14% 4.08%+
PORTFOLIO TURNOVER ................... 126% 143% 140% 102% 91%
NET ASSETS AT END OF PERIOD (000,000
OMITTED) ........................... $ 336 $ 190 $ 83 $ 23 $ 1
- ----------
** For the period from the inception of Class C, August 1, 1994, through September 30, 1994.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
</TABLE>
3. THE FUND
The Fund is a diversified series of the Trust, an open-end management
investment company which was organized as a business trust under the laws of
The Commonwealth of Massachusetts in 1984. The Fund and its predecessor have
been in business since 1970. The Trust presently consists of six series, each
of which represents a portfolio with separate investment objectives and
policies. Shares of the Fund are continuously sold to the public and the Fund
then uses the proceeds to buy securities (stocks, bonds and other instruments)
for its portfolio. Three classes of shares of the Fund currently are offered
for sale to the general public. Class A shares are offered at net asset value
plus an initial sales charge up to a maximum of 4.75% of the offering price
(or a CDSC of 1.00% upon redemption during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans) and
subject to an annual distribution and service fee up to a maximum of 0.35% per
annum. Class B shares are offered at net asset value without an initial sales
charge but subject to a CDSC upon redemption declining from 4.00% during the
first year to 0% after six years and an annual distribution fee and service
fee up to a maximum of 1.00% per annum. Class B shares will convert to Class A
shares approximately eight years after purchase. Class C shares are offered at
net asset value without an initial sales charge but are subject to a CDSC of
1.00% upon redemption during the first year and an annual distribution fee and
service fee up to a maximum of 1.00% per annum. Class C shares do not convert
to any other class of shares of the Fund. In addition, the Fund offers an
additional class of shares, Class I shares, exclusively to certain
institutional investors. Class I shares are made available by means of a
separate Prospectus Supplement provided to institutional investors eligible to
purchase Class I shares and are offered at net asset value without an initial
sales charge or CDSC upon redemption and without an annual distribution and
service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of
the Fund. Massachusetts Financial Services Company, a Delaware corporation
("MFS" or the "Adviser"), is the Fund's investment adviser. The Adviser is
responsible for the management of the Fund's assets and the officers of the
Trust are responsible for the Fund's operations. The Adviser manages the
portfolio from day to day in accordance with the Fund's investment objectives
and policies. The selection of investments and the way they are managed depend
on conditions and trends in the economy and the financial marketplaces. The
Fund also offers to buy back (redeem) its shares from its shareholders at any
time at net asset value, less any applicable CDSC.
4. INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES: The Fund's primary investment objective is to obtain
above-average income (compared to a portfolio entirely invested in equity
securities) consistent with the prudent employment of capital. While current
income is the primary objective, the Fund believes that there should also be a
reasonable opportunity for growth of capital and income, since many securities
offering a better than average yield may also possess growth potential. Thus,
in selecting securities for its portfolio, the Fund considers each of these
objectives. Under normal market conditions, at least 25% of the Fund's assets
will be invested in fixed income securities and at least 40% and no more than
75% of the Fund's assets will be invested in equity securities. Any investment
involves risk and there can be no assurance that the Fund will achieve its
investment objectives.
INVESTMENT POLICIES: The Fund's policy is to invest in a broad list of
securities, including short-term obligations. The list may be diversified not
only by companies and industries, but also by type of security. Fixed income
securities and equity securities (which include: common stocks, preferred
stocks and preference stocks; securities such as bonds, warrants or rights
that are convertible into stock; and depositary receipts for those securities)
may be held by the Fund. Some fixed income securities may also have a call on
common stock by means of a conversion privilege or attached warrants. The Fund
may vary the percentage of assets invested in any one type of security in
accordance with the Adviser's interpretation of economic and money market
conditions, fiscal and monetary policy and underlying security values. The
Fund's debt investments may consist of both "investment grade" securities
(rated Baa or better by Moody's Investors Service, Inc. ("Moody's") or BBB or
better by Standard and Poor's Ratings Services ("S&P"), Fitch IBCA ("Fitch")
or Duff & Phelps Credit Rating Co. ("Duff & Phelps")) and securities that are
unrated or are in the lower rating categories (rated Ba or lower by Moody's or
BB or lower by S&P, or Fitch or Duff & Phelps) (commonly known as "junk
bonds") including up to 20% of its net assets in nonconvertible fixed income
securities that are in these lower rating categories and comparable unrated
securities (see "Risk Factors -- Lower Rated Bonds" below). Generally, most of
the Fund's long-term debt investments will consist of "investment grade"
securities. It is not the Fund's policy to rely exclusively on ratings issued
by established credit rating agencies but rather to supplement such ratings
with the Adviser's own independent and ongoing review of credit quality. See
Appendix B for a description of these ratings.
U.S. GOVERNMENT SECURITIES: The Fund may also invest in U.S. Government
securities, including the following: (1) U.S. Treasury obligations, which
differ only in their interest rates, maturities and times of issuance: U.S.
Treasury bills (maturities of one year or less); U.S. Treasury notes
(maturities of one to ten years); and U.S. Treasury bonds (generally
maturities of greater than ten years), all of which are backed by the full
faith and credit of the U.S. Government; and (2) obligations issued or
guaranteed by U.S. Government agencies or instrumentalities, some of which are
backed by the full faith and credit of the U.S. Treasury, e.g., direct pass-
through certificates of the Government National Mortgage Association ("GNMA");
some of which are supported by the right of the issuer to borrow from the U.S.
Government, e.g., obligations of Federal Home Loan Banks; and some of which
are backed only by the credit of the issuer itself, e.g., obligations of the
Student Loan Marketing Association.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage pass-
through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage pools
are paid off. Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the case of
securities guaranteed by GNMA); or guaranteed by U.S. Government-sponsored
corporations (such as the Federal National Mortgage Association or the Federal
Home Loan Mortgage Corporation, which are supported only by the discretionary
authority of the U.S. Government to purchase the agency's obligations).
Mortgage pass-through securities may also be issued by non-governmental
issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers). See the SAI for a further discussion of these securities.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: Fixed income
securities that the Fund may invest in also include zero coupon bonds,
deferred interest bonds and bonds on which the interest is payable in kind
("PIK bonds"). Zero coupon and deferred interest bonds are debt obligations
which are issued or purchased at a significant discount from face value. The
discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity or the first interest payment date at
a rate of interest reflecting the market rate of the security at the time of
issuance. While zero coupon bonds do not require the periodic payment of
interest, deferred interest bonds provide for a period of delay before the
regular payment of interest begins. PIK bonds are debt obligations which
provide that the issuer thereof may, at its option, pay interest on such bonds
in cash or in the form of additional debt obligations. Such investments
benefit the issuer by mitigating its need for cash to meet debt service, but
also require a higher rate of return to attract investors who are willing to
defer receipt of such cash. Such investments may experience greater volatility
in market value due to changes in interest rates than debt obligations which
make regular payments of interest. The Fund will accrue income on such
investments for tax and accounting purposes, as required, which is
distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the Fund's distribution obligations.
FOREIGN SECURITIES: The Fund may invest up to, but not including, 20% (and
generally expects to invest between 5% and 20%) of its total assets in foreign
securities which are not traded on a U.S. exchange (not including American
Depositary Receipts). Investing in securities of foreign issuers generally
involves risks not ordinarily associated with investing in securities of
domestic issuers. These include changes in currency rates, exchange control
regulations, governmental administration or economic or monetary policy (in
the United States or abroad) or circumstances in dealings between nations.
Costs may be incurred in connection with conversions between various
currencies. Special considerations may also include more limited information
about foreign issuers, higher brokerage costs, different accounting standards
and thinner trading markets. Foreign securities markets may also be less
liquid, more volatile and less subject to government supervision than in the
United States. Investments in foreign countries could be affected by other
factors including expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations and could be subject to
extended settlement periods. The Fund may hold foreign currency received in
connection with investments in foreign securities when, in the judgment of the
Adviser, it would be beneficial to convert such currency into U.S. dollars at
a later date, based on anticipated changes in the relevant exchange rate. The
Fund may also hold foreign currency in anticipation of purchasing foreign
securities. See the SAI for further discussion of foreign securities and the
holding of foreign currency, as well as the associated risks.
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low- to
middle-income economy according to the International Bank for Reconstruction
and Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets.
The Adviser determines whether an issuer's principal activities are located in
an emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source
of its revenues and location of its assets. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the
security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c) the
issuer has its principal securities trading market in that country; (d) the
issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; or (e) the issuer has 50% or more of its assets in
that country.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan
debt restructurings have been implemented to date in Argentina, Brazil,
Bulgaria, Costa Rica, Croatia, Dominican Republic, Ecuador, Jordan, Mexico,
Morocco, Nigeria, Panama, Peru, the Philippines, Poland, Slovenia, Uruguay and
Venezuela. Brady Bonds have been issued only recently, and for that reason do
not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the U.S.
dollar) and are actively traded in over-the-counter secondary markets. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed rate bonds
or floating-rate bonds, are generally collateralized in full as to principal
by U.S. Treasury zero coupon bonds having the same maturity as the bonds.
Brady Bonds are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments
in Brady Bonds may be viewed as speculative.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually
a bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. Because ADRs trade on
United States securities exchanges, the Adviser does not treat them as foreign
securities. However, they are subject to many of the risks of foreign
securities such as changes in exchange rates and more limited information
about foreign issuers.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order
to earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize risk.
LENDING OF SECURITIES: The Fund may seek to increase its income by lending
portfolio securities. Such loans will usually be made only to member firms
(and subsidiaries thereof) of the New York Stock Exchange and to member banks
of the Federal Reserve System, and would be required to be secured
continuously by collateral in cash, U.S. Government securities or an
irrevocable letter of credit maintained on a current basis at an amount at
least equal to the market value of the securities loaned. The Fund will
continue to collect the equivalent of interest on the securities loaned and
will also receive either interest (through investment of cash collateral) or a
fee (if the collateral is U.S. Government securities or a letter of credit).
"WHEN-ISSUED" SECURITIES: The Fund may purchase securities on a "when-issued"
or on a "forward delivery" basis, which means that the securities will be
delivered to the Fund at a future date usually beyond customary settlement
time. The commitment to purchase a security for which payment will be made on
a future date may be deemed a separate security. The Fund does not pay for the
securities until received, and does not start earning interest on the
securities until the contractual settlement date. While awaiting delivery of
securities purchased on such bases, the Fund will segregate liquid assets
sufficient to cover its commitments.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices, or other
financial indicators. Most indexed securities are short to intermediate term
fixed-income securities whose values at maturity (i.e., principal value) or
interest rates rise or fall according to changes in the value of one or more
specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their principal value or interest rates may increase
or decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or
to one or more options on the underlying instrument. Indexed securities may be
more volatile than the underlying instrument itself and could involve the loss
of all or a portion of the principal amount of or interest on the instrument.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which
the Fund sells mortgage-backed securities for delivery in the future
(generally within 30 days) and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a
specified future date. The Fund will only enter into covered rolls. A "covered
roll" is a specific type of dollar roll for which there is an offsetting cash
position or a cash equivalent security position which matures on or before the
forward settlement date of the dollar roll transaction.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a
portion of its assets in "loan participations." By purchasing a loan
participation, the Fund acquires some or all of the interest of a bank or
other lending institution in a loan to a corporate borrower. Many such loans
are secured, and most impose restrictive covenants which must be met by the
borrower. These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans may be in default at the time of purchase. The Fund may
also purchase trade or other claims against companies, which generally
represent money owed by the company to a supplier of goods or services. These
claims may also be purchased at a time when the company is in default. Certain
of the loan participations acquired by the Fund may involve revolving credit
facilities or other standby financing commitments which obligate the Fund to
pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loan
participations and other direct investments may not be in the form of
securities or may be subject to restrictions on transfer, and only limited
opportunities may exist to resell such instruments. As a result, the Fund may
be unable to sell such investments at an opportune time or may have to resell
them at less than fair market value. For a further discussion of loan
participations and the risks related to transactions therein, see the SAI.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors. Swaps involve the exchange by the Fund with another party
of cash payments based upon different interest rate indices, currencies, or
other prices or rates, such as the value of mortgage prepayment rates. For
example, in the typical interest rate swap, the Fund might exchange a sequence
of cash payments based on a floating rate index for cash payments based on a
fixed rate. Payments made by both parties to a swap transaction are based on a
notional principal amount determined by the parties and the payment
obligations of the parties are typically netted on the payment dates.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the
extent that a specified index exceeds a predetermined interest rate, to
receive payments of interest on a contractually-based principal amount from
the counterparty selling such interest rate cap. The sale of an interest rate
floor obligates the seller to make payments to the extent that a specified
interest rate falls below an agreed-upon level. A collar arrangement combines
elements of buying a cap and selling a floor.
Swap agreements could be used to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease the Fund's exposure to
U.S. interest rates and increase its exposure to foreign currency and interest
rates. Caps and floors have an effect similar to buying or writing options.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of the Fund's investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed or no
investment of cash. As a result, swaps can be highly volatile and may have a
considerable impact on the Fund's performance. Swap agreements are subject to
risks related to the counterparty's ability to perform, and may decline in
value if the counterparty's creditworthiness deteriorates. The Fund may also
suffer losses if it is unable to terminate outstanding swap agreements or
reduce its exposure through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which
involve certain risks. See the SAI for risks involved in these activities.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933 ("1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). A determination is made, based upon a continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to the Fund's limitation on investing not more
than 15% of its net assets in illiquid investments. The Board of Trustees has
adopted guidelines and delegated to MFS the daily function of determining and
monitoring the liquidity of Rule 144A securities. The Board, however, retains
oversight of the liquidity determinations, focusing on factors, such as
valuation, liquidity and availability of information. Investing in Rule 144A
securities could have the effect of decreasing the level of liquidity in the
Fund to the extent that qualified institutional buyers become for a time
uninterested in purchasing Rule 144A securities held in the Fund's portfolio.
Subject to the Fund's 15% limitation on investments in illiquid investments,
the Fund may also invest in restricted securities that may not be sold under
Rule 144A, which presents certain risks. As a result, the Fund might not be
able to sell these securities when the Adviser wishes to do so, or might have
to sell them at less than fair value. In addition, market quotations are less
readily available. Therefore, judgment may at times play a greater role in
valuing these securities than in the case of unrestricted securities.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card or
automobile loan receivables, representing the obligations of a number of
different parties. Corporate asset-backed securities present certain risks.
For instance, in the case of credit card receivables, these securities may not
have the benefit of any security interest in the related collateral. See the
SAI for further information on these securities.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call options
on securities and purchase put and call options on securities. The Fund will
write such options for the purpose of increasing its return and/or to protect
the value of its portfolio. In particular, where the Fund writes an option
which expires unexercised or is closed out by the Fund at a profit, it will
retain the premium paid for the option, which will increase its gross income
and will offset in part the reduced value of a portfolio security in
connection with which the option may have been written or the increased cost
of portfolio securities to be acquired. However, the writing of options
constitutes only a partial hedge, up to the amount of the premium, less any
transaction costs. In contrast, if the price of the security underlying the
option moves adversely to the Fund's position, the option may be exercised and
the Fund will be required to purchase or sell the security at a
disadvantageous price, resulting in losses which may only be partially offset
by the amount of the premium. The Fund may also write combinations of put and
call options on the same security, known as "straddles." Such transactions can
generate additional premium income but also present increased risk.
The Fund may purchase put or call options in anticipation of declines in the
value of portfolio securities or increases in the value of securities to be
acquired. In the event that such declines or increases occur, the Fund may be
able to offset the resulting adverse effect on its portfolio, in whole or in
part, through the options purchased. The risk assumed by the Fund in
connection with such transactions is limited to the amount of the premium and
related transaction costs associated with the option, although the Fund may be
required to forfeit such amounts in the event that the prices of securities
underlying the options do not move in the direction or to the extent
anticipated.
The Fund may also enter into options on the yield "spread," or yield
differential, between two securities, a transaction referred to as a "yield
curve" option, for hedging and non-hedging (an effort to increase current
income) purposes. In contrast to other types of options, a yield curve option
is based on the difference between the yields of designated securities rather
than the actual prices of the individual securities, and is settled through
cash payments. Accordingly, a yield curve option is profitable to the holder
if this differential widens (in the case of a call) or narrows (in the case of
a put), regardless of whether the yields of the underlying securities increase
or decrease. Yield curve options written by the Fund will be covered as
described in the SAI. The trading of yield curve options is subject to all the
risks associated with trading other types of options, as discussed below under
"Risk Factors" and in the SAI. In addition, such options present risks of loss
even if the yield on one of the underlying securities remains constant, if the
spread moves in a direction or to an extent which was not anticipated.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. The Fund may write
options on stock indices for the purpose of increasing its gross income and to
protect its portfolio against declines in the value of securities it owns or
increases in the value of securities to be acquired. When the Fund writes an
option on a stock index, and the value of the index moves adversely to the
holder's position, the option will not be exercised, and the Fund will either
close out the option at a profit or allow it to expire unexercised. The Fund
will thereby retain the amount of the premium, which will increase its gross
income and offset part of the reduced value of portfolio securities or the
increased cost of securities to be acquired. Such transactions, however, will
constitute only partial hedges against adverse price fluctuations, since any
such fluctuations will be offset only to the extent of the premium received by
the Fund for the writing of the option. In addition, if the value of an
underlying index moves adversely to the Fund's option position, the option may
be exercised, and the Fund will experience a loss which may only be partially
offset by the amount of the premium received.
The Fund may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to
attempt to reduce the risk of missing a market or industry segment advance.
The Fund's possible loss in either case will be limited to the premium paid
for the option, plus related transaction costs.
OPTIONS ON FOREIGN CURRENCIES: The Fund may also purchase and write options on
foreign currencies ("Options on Foreign Currencies") for the purpose of
protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. As in the
case of other types of options, however, the writing of an Option on Foreign
Currency will constitute only a partial hedge, up to the amount of the premium
received, and the Fund may be required to purchase or sell foreign currencies
at disadvantageous exchange rates, thereby incurring losses. The purchase of
an Option on Foreign Currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements
adverse to the Fund's position, it may forfeit the entire amount of the
premium paid for the option plus related transaction costs. The Fund may also
choose to, or be required to, receive delivery of the foreign currencies
underlying Options on Foreign Currencies it has entered into. Under certain
circumstances, such as where the Adviser believes that the applicable exchange
rate is unfavorable at the time the currencies are received or the Adviser
anticipates, for any other reason, that the exchange rate will improve, the
Fund may hold such currencies for an indefinite period of time. See
"Investment Objectives and Policies -- Foreign Securities" in the SAI for
information on the risks associated with holding foreign currency.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities or foreign currencies or
contracts based on interest rates, indices of securities or currencies
(including any index of U.S. or foreign securities) as such instruments become
available for trading ("Futures Contracts"). Such transactions will be entered
into for hedging purposes, in order to protect the Fund's current or intended
investments from the effects of changes in interest or exchange rates or
declines in a securities market, as well as for non-hedging purposes, to the
extent permitted by applicable law. The Fund will incur brokerage fees when it
purchases and sells Futures Contracts, and will be required to maintain margin
deposits. In addition, Futures Contracts entail risks. Although the Adviser
believes that use of such contracts will benefit the Fund, if its investment
judgment about the general direction of interest or exchange rates or a
securities market is incorrect, the Fund's overall performance may be poorer
than if it had not entered into any such contract and the Fund may realize a
loss.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options on
Futures Contracts ("Options on Futures Contracts") for hedging purposes or for
non-hedging purposes to the extent permitted by applicable law. Purchases of
Options on Futures Contracts may present less risk in hedging the Fund's
portfolio than the purchase or sale of the underlying Futures Contracts since
the potential loss is limited to the amount of the premium plus related
transaction costs, although it may be necessary to exercise the option to
realize any profit, which results in the establishment of a futures position.
The writing of Options on Futures Contracts, however, does not present less
risk than the trading of Futures Contracts and will constitute only a partial
hedge, up to the amount of the premium received. In addition, if an option is
exercised, the Fund may suffer a loss on the transaction.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a fixed quantity of a foreign currency
at a future date ("Forward Contracts"). The Fund may enter into Forward
Contracts for hedging purposes as well as for non-hedging purposes (i.e.,
speculative purposes). By entering into transactions in Forward Contracts, for
hedging purposes, the Fund may be required to forego the benefits of
advantageous changes in exchange rates and, in the case of Forward Contracts
entered into for non-hedging purposes, the Fund may sustain losses which will
reduce its gross income. Such transactions, therefore, could be considered
speculative. Forward Contracts are traded over-the-counter and not on
organized commodities or securities exchanges. As a result, Forward Contracts
operate in a manner distinct from exchange-traded instruments, and their use
involves certain risks beyond those associated with transactions in Futures
Contracts or options traded on exchanges. The Fund may choose to, or be
required to, receive delivery of the foreign currencies underlying Forward
Contracts it has entered into. Under certain circumstances, such as where the
Adviser believes that the applicable exchange rate is unfavorable at the time
the currencies are received or the Adviser anticipates, for any other reason,
that the exchange rate will improve, the Fund may hold such currencies for an
indefinite period of time. The Fund may also enter into a Forward Contract on
one currency to hedge against risk of loss arising from fluctuations in the
value of a second currency (referred to as a "cross hedge") if, in the
judgment of the Adviser, a reasonable degree of correlation can be expected
between movements in the values of the two currencies. The Fund has
established procedures which require the use of segregated assets or "cover"
in connection with the purchase and sale of such contracts. See "Investment
Objective and Policies -- Foreign Securities" in the SAI for information on
the risks associated with holding foreign currency.
RISK FACTORS
LOWER RATED BONDS: The Fund may invest in fixed income securities rated
Baa by Moody's or BBB by S&P or Fitch and comparable unrated securities. These
securities, while normally exhibiting adequate protection parameters, have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade fixed income
securities.
The Fund may also invest in securities rated Ba or lower by Moody's or BB or
lower by S&P or Fitch and comparable unrated securities (commonly known as
"junk bonds") to the extent described above. No minimum rating standard is
required by the Fund. These securities are considered speculative and, while
generally providing greater income than investments in higher rated
securities, will involve greater risk of principal and income (including the
possibility of default or bankruptcy of the issuers of such securities) and
may involve greater volatility of price (especially during periods of economic
uncertainty or change) than securities in the higher rating categories.
However, since yields vary over time, no specific level of income can ever be
assured. These lower rated high yielding fixed income securities generally
tend to reflect economic changes and short-term corporate and industry
developments to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates (although
these lower rated fixed income securities are also affected by changes in
interest rates, the market's perception of their credit quality, and the
outlook for economic growth). In the past, economic downturns or an increase
in interest rates have, under certain circumstances, caused a higher incidence
of default by the issuers of these securities and may do so in the future,
especially in the case of highly leveraged issuers. During certain periods,
the higher yields on the Fund's lower rated high yielding fixed income
securities are paid primarily because of the increased risk of loss of
principal and income, arising from such factors as the heightened possibility
of default or bankruptcy of the issuers of such securities. Due to the fixed
income payments of these securities, the Fund may continue to earn the same
level of interest income while its net asset value declines due to portfolio
losses, which could result in an increase in the Fund's yield despite the
actual loss of principal. The market for these lower rated fixed income
securities may be less liquid than the market for investment grade fixed
income securities, and judgment may at times play a greater role in valuing
these securities than in the case of investment grade fixed income securities.
Changes in the value of securities subsequent to their acquisition will not
affect cash income or yield to maturity to the Fund but will be reflected in
the net asset value of shares of the Fund. See the SAI for more information on
lower rated securities.
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although the Fund will
enter into transactions in options, Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies for hedging purposes, such
transactions nevertheless involve certain risks. For example, a lack of
correlation between the instrument underlying an option or Futures Contract
and the assets being hedged, or unexpected adverse price movements, could
render the Fund's hedging strategy unsuccessful and could result in losses.
The Fund also may enter into transactions in options, Futures Contracts,
Options on Futures Contracts and Forward Contracts for other than hedging
purposes, which involves greater risk. In particular, such transactions may
result in losses for the Fund which are not offset by gains on other portfolio
positions, thereby reducing gross income. In addition, foreign currency
markets may be extremely volatile from time to time. There also can be no
assurance that a liquid secondary market will exist for any contract purchased
or sold, and the Fund may be required to maintain a position until exercise or
expiration, which could result in losses. The SAI contains a description of
the nature and trading mechanics of options, Futures Contracts, Options on
Futures Contracts, Forward Contracts and Options on Foreign Currencies, and
includes a discussion of the risks related to transactions therein.
Transactions in Forward Contracts may be entered into only in the over-the-
counter market. Futures Contracts and Options on Futures Contracts may be
entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities underlying
options, Futures Contracts and Options on Futures Contracts traded by the Fund
will include both domestic and foreign securities.
EMERGING MARKET SECURITIES: The risks of investing in foreign securities
may be intensified in the case of investments in emerging markets. Securities
of many issuers in emerging markets may be less liquid and more volatile than
securities of comparable domestic issuers. Emerging markets also have
different clearance and settlement procedures, and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of the Fund is uninvested and no return is earned thereon. The
inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result in losses to the Fund due to subsequent declines in value of the
portfolio security, a decrease in the level of liquidity in the Fund
portfolio, or if the Fund has entered into a contract to sell the security, in
possible liability to the purchaser. Certain markets may require payment for
securities before delivery and in such markets the Fund bears the risk that
the securities will not be delivered and that the Fund's payments will not be
returned. Securities prices in emerging markets can be significantly more
volatile than in the more developed nations of the world, reflecting the
greater uncertainties of investing in less established markets and economies.
In particular, countries with emerging markets may have relatively unstable
governments, present the risk of nationalization of businesses, restrictions
on foreign ownership, or prohibitions of repatriation of assets, and may have
less protection of property rights than more developed countries. The
economies of countries with emerging markets may be predominantly based on
only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of substantial holdings
difficult or impossible at times. Securities of issuers located in countries
with emerging markets may have limited marketability and may be subject to
more abrupt or erratic price movements.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. The Fund could
be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the
application to the Fund of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls
may at times preclude investment in certain foreign emerging market debt
obligations and increase the expenses of the Fund.
--------------------
PORTFOLIO TRADING: The primary consideration in placing portfolio security
transactions with broker-dealers for execution is to obtain and maintain the
availability of execution at the most favorable prices and in the most
effective manner possible. Consistent with the foregoing primary
consideration, the Conduct Rules of the National Association of Securities
Dealers, Inc. (the "NASD"), and such other policies as the Trustees may
determine, the Adviser may consider sales of shares of the Fund and of the
other investment company clients of MFD as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions. From time to
time, the Adviser may direct certain portfolio transactions to broker-dealer
firms which, in turn, have agreed to pay a portion of the Fund's operating
expenses (e.g., fees charged by the custodian of the Fund's assets). For a
further discussion of portfolio trading, see "Portfolio Transactions and
Brokerage Commissions" in the SAI. For the fiscal year ended September 30,
1998, the Fund had a portfolio turnover rate in excess of 100%. Transaction
costs incurred by the Fund and the realized capital gains and losses of the
Fund may be greater than that of a fund with a lesser portfolio turnover rate.
The portfolio will be managed actively with respect to the Fund's fixed income
securities and the asset allocations modified as the Adviser deems necessary.
Although the Fund does not intend to seek short-term profits, fixed income
securities in its portfolio will be sold whenever the Adviser believes it is
appropriate to do so without regard to the length of time the particular asset
may have been held.
With respect to its equity securities, the Fund does not intend to trade in
securities for short-term profits and anticipates that such securities
ordinarily will be held for one year or longer. However, the Fund will effect
trades whenever it believes that changes in its portfolio securities are
appropriate.
--------------------
The investment objectives and policies described above, including investing in
Options, Options on Foreign Currency, Futures Contracts, Options on Futures
Contracts and Forward Contracts, are not fundamental and may be changed
without shareholder approval. A change in the Fund's investment objectives may
result in the Fund having investment objectives different from the objectives
which the shareholder considered appropriate at the time of investment in the
Fund.
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise (see "Investment Restrictions"
in the SAI). Except with respect to the Fund's policy on borrowing and
investing in illiquid securities, the Fund's investment limitations, policies
and rating standards are adhered to at the time of purchase or utilization of
assets; a subsequent change in circumstances will not be considered to result
in a violation of policy.
5. MANAGEMENT OF THE FUND
INVESTMENT ADVISER: The Adviser manages the Fund pursuant to an Investment
Advisory Agreement, dated January 18, 1985 (the "Advisory Agreement"). Under
the Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services.
David M. Calabro, a Senior Vice President of the Adviser, Geoffrey L. Kurinsky,
a Senior Vice President of the Adviser, Constantinos G. Mokas, a Vice President
of the Adviser, Lisa B. Nurme, a Senior Vice President of the Adviser, and
Kenneth J. Enright, a Vice President of the Adviser, are the Fund's portfolio
managers. Mr. Calabro is the head of this portfolio management team and a
manager of the common stock portion of the Fund's portfolio. Mr. Calabro has
been a portfolio manager of the Fund since 1995 and has been employed by the
Adviser as a portfolio manager since 1992. Mr. Kurinsky, the manager of the
Fund's fixed income securities, has been a portfolio manager of the Fund since
1989 and has been employed by the Adviser as a portfolio manager since 1987. Mr.
Mokas, the manager of the Fund's convertible securities, has been a portfolio
manager of the Fund since April 1, 1998, and has been employed by the Adviser as
a portfolio manager since 1990. Ms. Nurme, a manager of the common stock portion
of the Fund's portfolio, has been a portfolio manager of the Fund since 1995 and
has been employed by the Adviser as a portfolio manager since 1987. Mr. Enright,
also a manager of the common stock portion of the Fund's portfolio, has been a
portfolio manager of the Fund since January 15, 1999 and has been employed by
the Adviser as a portfolio manager since 1986.
Subject to such policies as the Trustees may determine, the Adviser makes
investment decisions for the Fund. For these services and facilities, the
Adviser receives a management fee, computed and paid monthly, fixed by a
formula based upon a percentage of the Fund's average daily net assets plus a
percentage of the Fund's gross income other than gains from the sale of
securities. The applicable percentages are reduced as assets and income reach
the following levels:
ANNUAL RATE OF MANAGEMENT FEE BASED ON ANNUAL RATE OF MANAGEMENT FEE BASED
AVERAGE DAILY NET ASSETS ON GROSS INCOME
- -------------------------------------- ------------------------------------
0.250% of the first $200 million 3.57% of the first $14 million
0.212% of average daily net assets in 3.04% of gross income in excess of
excess of $200 million $14 million
For the Fund's fiscal year ended September 30, 1998, MFS received management
fees under the Advisory Agreement of $19,252,268 (of which $11,957,988 was
based on average daily net assets and $7,294,280 on gross income), equivalent,
on an annualized basis, to 0.34% of the Fund's average daily net assets.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R)/Sun Life Series Trust, MFS
Institutional Trust, MFS Variable Insurance Trust, MFS Municipal Income Trust,
MFS Government Markets Income Trust, MFS Multimarket Income Trust, MFS
Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value Trust,
and seven variable accounts, each of which is a registered investment company
established by Sun Life Assurance Company of Canada (U.S.), a subsidiary of
Sun Life Assurance Company of Canada ("Sun Life"), in connection with the sale
of various fixed/variable annuity contracts. MFS and its wholly-owned
subsidiary, MFS Institutional Advisors, Inc., also provide investment advice
to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts
Investors Trust. Net assets under the management of the MFS organization were
approximately $92.8 billion on behalf of approximately 3.6 million investor
accounts as of November 30, 1998. As of such date, the MFS organization
managed approximately $21.8 billion of assets in fixed income securities. MFS
is a subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings,
Inc., which in turn is an indirect subsidiary of Sun Life. The Directors of
MFS are John W. Ballen, Thomas J. Cashman, Joseph Dello Russo, John D. McNeil,
Kevin R. Parke, Arnold D. Scott, William W. Scott, Jr., Jeffrey L. Shames and
Donald A. Stewart. Mr. Shames is the Chairman and Chief Executive Officer of
MFS, Mr. Ballen is the President and the Chief Investment Officer of MFS, Mr.
Cashman is an Executive Vice President of MFS, Mr. Dello Russo is the Chief
Financial Officer and an Executive Vice President of MFS, Mr. Parke is the
Chief Equity Officer, Director of Equity Research and an Executive Vice
President of MFS, Mr. Arnold Scott is the Secretary and a Senior Executive
Vice President of MFS and Mr. William Scott is the President of MFS Fund
Distributors, Inc. (the distributor of MFS Funds). Messrs. McNeil and Stewart
are the Chairman and the President, respectively, of Sun Life. Sun Life, a
mutual life insurance company, is one of the largest international life
insurance companies and has been operating in the U.S. since 1895,
establishing a headquarters office here in 1973. The executive officers of MFS
report to the Chairman of Sun Life.
Mr. Shames, the Chairman, Chief Executive Officer and a Director of MFS, is
also the President and a Trustee of the Trust. W. Thomas London, Stephen E.
Cavan, James O. Yost, Ellen Moynihan, Mark E. Bradley and James R. Bordewick,
Jr., all of whom are officers of MFS, are officers of the Trust.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS. Some simultaneous
transactions are inevitable when several clients receive investment advice
from MFS, particularly when the same security is suitable for more than one
client. While in some cases this arrangement could have a detrimental effect
on the price or availability of the security as far as the Fund is concerned,
in other cases, however, it may produce increased investment opportunities for
the Fund.
DISTRIBUTOR: MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
ADMINISTRATOR: MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, the Fund pays MFS an administrative fee up to
0.015% per annum of the Fund's average daily net assets. This fee reimburses
MFS for a portion of the costs it incurs to provide such services.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and certain other services for the Fund.
6. YEAR 2000 ISSUES
The Fund could be adversely affected if the computer systems used by MFS, the
Fund's other service providers or the companies in which the Fund invests do
not properly process date-related information from and after January 1, 2000
(the "Year 2000 Issue"). MFS recognizes the importance of the Year 2000 Issue
and, to address Year 2000 compliance, created a Year 2000 Program Management
Office in 1996, which is separately funded, has a specialized staff and
reports directly to MFS senior management. The Office, with the help of
external consultants, is responsible for ascertaining that all internal
systems, data feeds and third party applications are Year 2000 compliant.
While MFS is confident that all MFS systems will be Year 2000 compliant before
the turn of the century, there are significant systems interdependencies in
the domestic and foreign markets for securities, the business environments in
which companies held by the Fund operate and in MFS' own business environment.
MFS has been actively working with the Fund's other service providers to
identify and respond to potential problems in an effort to ensure Year 2000
compliance or develop contingency plans. Year 2000 compliance is also one of
the factors considered by MFS in its ongoing assessment of companies in which
the Fund invests. There can be no assurance, however, that these steps will be
sufficient to avoid any adverse impact on the Fund.
7. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, B and C shares of the Fund may be purchased at the public offering
price through any dealer. As used in the Prospectus and any appendices thereto
the term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement or other similar agreement
with MFD. Dealers may also charge their customers fees relating to investments
in the Fund.
This Prospectus offers Class A, B and C shares to the general public, which
bear sales charges and distribution fees in different forms and amounts, as
described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus
an initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
SALES CHARGE* AS
PERCENTAGE OF:
--------------------------- DEALER ALLOWANCE
OFFERING NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE PRICE INVESTED OF OFFERING PRICE
- ------------------ -------------- -------- -----------------
Less than $100,000 .............. 4.75% 4.99% 4.00%
$100,000 but less than $250,000 . 4.00 4.17 3.20
$250,000 but less than $500,000 . 2.95 3.04 2.25
$500,000 but less than $1,000,000 2.20 2.25 1.70
$1,000,000 or more .............. None** None** See Below**
- ------------
* Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above.
** A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the
sales charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge).
In the following five circumstances, Class A shares are offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of
the lesser of the value of the shares redeemed (exclusive of reinvested
dividend and capital gain distributions) or the total cost of such shares, in
the event of a share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares; and
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if, prior to July 1, 1996: (a) the Plan had established
an account with the Shareholder Servicing Agent and (b) the
sponsoring organization had demonstrated to the satisfaction of MFD
that either (i) the employer had at least 25 employees or (ii) the
aggregate purchases by the retirement plan of Class A shares of the
MFS Funds would be in an amount of at least $250,000 within a
reasonable period of time, as determined by MFD in its sole
discretion.
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing
Agent (the "MFS Participant Recordkeeping System"); (b) the plan
establishes an account with the Shareholder Servicing Agent on or
after July 1, 1996; (c) the aggregate purchases by the retirement
plan of Class A shares of the MFS Funds will be in an aggregate
amount of at least $500,000 within a reasonable period of time, as
determined by MFD in its sole discretion; and (d) the plan has not
redeemed its Class B shares in the MFS Funds in order to purchase
Class A shares under this category.
(iv) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1996 and (b) the plan
has, at the time of purchase, a market value of $500,000 or more
invested in shares of any class or classes of the MFS Funds. THE
RETIREMENT PLAN WILL QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR
ITS SPONSORING ORGANIZATION INFORMS THE SHAREHOLDER SERVICING AGENT
PRIOR TO THE PURCHASES THAT THE PLAN HAS A MARKET VALUE OF $500,000
OR MORE INVESTED IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS.
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO
DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY; and
(v) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1997; (b) such plan's records are
maintained on a pooled basis by the Shareholder Servicing Agent; and
(c) the sponsoring organization demonstrates to the satisfaction of
MFD that, at the time of purchase, the employer has at least 200
eligible employees and the plan has aggregate assets of at least
$2,000,000.
In the case of all such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
--------------------------------- --------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers
with respect to a shareholder's new investment in Class A, purchases for each
shareholder account (and certain other accounts for which the shareholder is a
record or beneficial holder) will be aggregated over a 12-month period
(commencing from the date of the first such purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemptions of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus. In addition to these
circumstances, the CDSC imposed upon the redemption of Class A shares is
waived with respect to shares held by certain retirement plans qualified under
Section 401(a) or 403(b) of the Internal Revenue Code of 1986, as amended (the
"Code"), and subject to ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe
to the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to
the satisfaction of, and certifies to the Shareholder Servicing Agent
that the retirement plan has, at the time of certification or will
have pursuant to a purchase order placed with the certification, a
market value of $500,000 or more invested in shares of any class or
classes of the MFS Funds and aggregate assets of at least $10
million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the Plan makes
a complete redemption of all of its shares in the MFS Funds, or (b) with
respect to plans which established an account with the Shareholder Servicing
Agent prior to November 1, 1997, in the event that there is a change in law or
regulation which results in a material adverse change to the tax advantaged
nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated under
ERISA or is liquidated or dissolved; or (iii) is acquired by, merged into, or
consolidated with, any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC upon redemption as follows:
CONTINGENT
YEAR OF REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
- -------------- ------
First ................................................... 4%
Second .................................................. 4%
Third ................................................... 3%
Fourth .................................................. 3%
Fifth ................................................... 2%
Sixth ................................................... 1%
Seventh and following ................................... 0%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a
dealer upon the sale of Class B shares is 4% of the purchase price of the
shares (commission rate of 3.75% plus a service fee equal to 0.25% of the
purchase price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has
established its account with the Shareholder Servicing Agent between July 1,
1996 and December 31, 1998 will be subject to the CDSC described above, only
under limited circumstances, as explained below under "Waivers of CDSC." With
respect to such purchases, MFD pays an amount to dealers equal to 3.00% of the
amount purchased through such dealers (rather than the 4.00% payment described
above), which is comprised of a commission of 2.75% plus the advancement of
the first year service fee equal to 0.25% of the purchase price payable under
the Fund's Distribution Plan.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which
establishes its account with the Shareholder Servicing Agent on or after
January 1, 1999 (provided that the plan establishment paperwork is received by
the Shareholder Servicing Agent in good order on or after November 15, 1998),
MFD pays no up front commissions to dealers, but instead pays an amount to
dealers equal to 1% per annum of the average daily net assets of the Fund
attributable to plan assets, payable at the rate of 0.25% at the end of each
calendar quarter, in arrears. This commission structure is not available with
respect to a plan with a pre-existing account(s) with any MFS Fund which seeks
to switch to the MFS Recordkeeper Plus product.
Certain retirement plans are eligible to purchase Class A shares of the Fund
at net asset value without an initial sales charge but subject to a 1% CDSC if
the plan has, at the time of purchase, a market value of $500,000 or more
invested in shares of any class or classes of the MFS Funds. IN THIS EVENT,
THE PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER
SERVICING AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER
THIS CATEGORY; THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY
TO DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE
PURCHASE OF CLASS A SHARES.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class B shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class B shares is waived with respect to shares
held by a retirement plan whose sponsoring organization subscribes to the MFS
Participant Recordkeeping System and which established an account with the
Shareholder Servicing Agent between July 1, 1996 and December 31, 1998;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated under ERISA or is liquidated or dissolved; or
(iii) is acquired by, merged into, or consolidated with, any other entity.
In addition to these circumstances, the CDSC imposed upon the redemption of
Class B shares is waived with respect to shares held by a retirement plan
whose sponsoring organization subscribes to the MFS Recordkeeper Plus product
and which establishes its account with the Shareholder Servicing Agent on or
after January 1, 1999 (provided that the plan establishment paperwork is
received by the Shareholder Servicing Agent in good order on or after November
15, 1998). A plan with a pre-existing account(s) with any MFS Fund which
switches to the MFS Recordkeeper Plus product will not become eligible for
this waiver category.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain
outstanding for approximately eight years will convert to Class A shares of
the Fund. Shares purchased through the reinvestment of distributions paid in
respect of Class B shares will be treated as Class B shares for purposes of
the payment of the distribution and service fees under the Fund's Distribution
Plan applicable to Class B shares. See "Information Concerning Shares of the
Fund -- Distribution Plan" below. However, for purposes of conversion to
Class A shares, all shares in a shareholder's account that were purchased
through the reinvestment of dividends and distributions paid in respect of
Class B shares (and which have not converted to Class A shares as provided in
the following sentence) will be held in a separate sub-account. Each time any
Class B shares in the shareholder's account (other than those in the sub-
account) convert to Class A shares, a portion of the Class B shares then in
the sub-account will also convert to Class A shares. The portion will be
determined by the ratio that the shareholder's Class B shares not acquired
through reinvestment of dividends and distributions that are converting to
Class A shares bear to the shareholder's total Class B shares not acquired
through reinvestment. The conversion of Class B shares to Class A shares is
subject to the continuing availability of a ruling from the Internal Revenue
Service or an opinion of counsel that such conversion will not constitute a
taxable event for federal tax purposes. There can be no assurance that such
ruling or opinion will be available, and the conversion of Class B shares to
Class A shares will not occur if such ruling or opinion is not available. In
such event, Class B shares would continue to be subject to higher expenses
than Class A shares for an indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an
initial sales charge or a CDSC but are subject to a CDSC of 1.00% upon
redemption during the first year. Class C shares do not convert to any other
class of shares of the Fund. The maximum investment in Class C shares that may
be made is up to $1,000,000 per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below
for further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Fund's Distribution Plan to
MFD for the first year after purchase (see "Distribution Plan" below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Internal Revenue Code of
1986, as amended (the "Code"), if the retirement plan and/or the sponsoring
organization subscribe to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping program made available by the Shareholder Servicing Agent.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class C shares is waived. These circumstances are described in Appendix A to
this Prospectus.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other
than IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and
the minimum additional investment is $50 per account. Accounts being
established for participation in the Automatic Exchange Plan are subject to a
$50 minimum on initial and additional investments per account. There are also
other limited exceptions to these minimums for certain tax-deferred retirement
programs. Any minimums may be changed at any time at the discretion of MFD.
The Fund reserves the right to cease offering its shares at any time.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-
free at (800) 225-2606. The minimum purchase amount is $50 and the maximum
purchase amount is $100,000. Shareholders wishing to avail themselves of this
telephone purchase privilege must so elect on their Account Application and
designate thereon a bank and account number from which purchases will be made.
If a telephone purchase request is received by the Shareholder Servicing Agent
on any business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the closing
net asset value of the shares purchased on that day. The Shareholder Servicing
Agent may be liable for any losses resulting from unauthorized telephone
transactions if it does not follow reasonable procedures designed to verify
the identity of the caller. The Shareholder Servicing Agent will request
personal or other information from the caller, and will normally also record
calls. Shareholders should verify the accuracy of confirmation statements
immediately after their receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserves
the right to reject or restrict any specific purchase or exchange request.
Because an exchange request involves both a request to redeem shares of one
fund and to purchase shares of another fund, the Fund considers the underlying
redemption request conditioned upon the acceptance of the underlying purchase
request. Therefore, in the event that the Fund or MFD rejects an exchange
request, neither the redemption nor the purchase side of the exchange will be
processed.
The MFS Family of Funds is not designed for professional market timing
organizations or other entities using programmed or frequent exchanges. The
MFS Family of Funds defines a "market timer" as an individual, or organization
acting on behalf of one or more individuals, if (i) the individual or
organization makes six or more exchange requests among the MFS Family of Funds
or three or more exchange requests out of any of the MFS high yield bond funds
or MFS municipal bond funds per calendar year and (ii) any one of such
exchange requests represents shares equal in value to $1 million or more.
Accounts under common ownership or control, including accounts administered by
market timers, will be aggregated for purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose
specific limitations with respect to market timers, including (i) delaying for
up to seven days the purchase side of an exchange request by market timers,
(ii) rejecting or otherwise restricting purchase or exchange requests by
market timers; and (iii) permitting exchanges by market timers only into
certain MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with
respect to sales of Class A, Class B and Class C shares. In addition, from
time to time, MFD may pay dealers 100% of the applicable sales charge on sales
of Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset
value of all of the Class B and/or Class C shares of certain specified MFS
Funds sold by such dealer during a specified sales period. In addition, from
time to time, MFD, at its expense, may provide additional commissions,
compensation or promotional incentives ("concessions") to dealers which sell
or arrange for the sale of shares of the Fund. Such concessions provided by
MFD may include financial assistance to dealers in connection with preapproved
conferences or seminars, sales or training programs for invited registered
representatives and other employees, payment for travel expenses, including
lodging, incurred by registered representatives and other employees for such
seminars or training programs, seminars for the public, advertising and sales
campaigns regarding one or more MFS Funds, and/or other dealer-sponsored
events. From time to time, MFD may make expense reimbursements for special
training of a dealer's registered representatives and other employees in group
meetings or to help pay the expenses of sales contests. Other concessions may
be offered to the extent not prohibited by state laws or any self-regulatory
agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal
charitable contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting,
selling or distributing securities. Although the scope of the prohibition has
not been clearly defined, MFD believes that such Act should not preclude banks
from entering into agency agreements with MFD. If, however, a bank were
prohibited from so acting, the Trustees would consider what actions, if any,
would be necessary to continue to provide efficient and effective shareholder
services in respect of shareholders who invested in the Fund through a
national bank. It is not expected that shareholders would suffer any adverse
financial consequence as a result of these occurrences. In addition, state
securities laws on this issue may differ from the interpretation of federal
law expressed herein and banks and financial institutions may be required to
register as broker-dealers pursuant to state law.
--------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services)
that the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e.,
an established account) may be exchanged for shares of the same class of any
of the other MFS Funds at net asset value (if available for sale). Shares of
one class may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING MFS MONEY MARKET FUNDS): No initial sales
charges or CDSC will be imposed in connection with an exchange from shares of
an MFS Fund to shares of any other MFS Fund, except with respect to exchanges
from an MFS money market fund to another MFS Fund which is not an MFS money
market fund (discussed below). With respect to an exchange involving shares
subject to a CDSC, the CDSC will be unaffected by the exchange and the holding
period for purposes of calculating the CDSC will carry over to the acquired
shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to
the imposition of an initial sales charge or a CDSC for exchanges from an MFS
money market fund to another MFS Fund which is not an MFS money market fund.
These rules are described under the caption "Exchanges" in the Prospectuses of
those MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of
participation of the MFS Fixed Fund (a bank collective investment fund) (the
"Units"), and Units may be exchanged for Class A shares of any MFS Fund. With
respect to exchanges between Class A shares subject to a CDSC and Units, the
CDSC will carry over to the acquired shares or Units and will be deducted from
the redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units
and then exchanges into Class A shares subject to an initial sales charge of
an MFS Fund, the initial sales charge shall be due upon such exchange, but
will not be imposed with respect to any subsequent exchanges between such
Class A shares and Units with respect to shares on which the initial sales
charge has already been paid. In the event that a shareholder initially
purchases Units and then exchanges into Class A shares subject to a CDSC of an
MFS Fund, the CDSC period will commence upon such exchange, and the
applicability of the CDSC with respect to subsequent exchanges shall be
governed by the rules set forth above in this paragraph.
GENERAL: A shareholder should read the prospectus of the other MFS Funds into
which an exchange is made and consider the differences in objectives, policies
and restrictions before making any exchange. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received
for an established account by the Shareholder Servicing Agent in proper form
(i.e., if in writing -- signed by the record owner(s) exactly as the shares
are registered; if by telephone -- proper account identification is given by
the dealer or shareholder of record) and each exchange must involve either
shares having an aggregate value of at least $1,000 ($50 in the case of
retirement plan participants whose sponsoring organizations subscribe to the
MFS FUNDamental 401(k) Plan or another similar 401(k) recordkeeping system
made available by the Shareholder Servicing Agent) or all the shares in the
account. If an Exchange Request is received by the Shareholder Servicing Agent
on any business day prior to the close of regular trading on the New York
Stock Exchange (generally, 4:00 p.m., Eastern time) (the "Exchange"), the
exchange will occur on that day if all the requirements set forth above have
been complied with at that time and subject to the Fund's right to reject
purchase orders. No more than five exchanges may be made in any one Exchange
Request by telephone. Additional information concerning this exchange
privilege and prospectuses for any of the other MFS Funds may be obtained from
dealers or the Shareholder Servicing Agent. For federal and (generally) state
income tax purposes, an exchange is treated as a sale of the shares exchanged
and, therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to
most non-retirement plan accounts and certain retirement plan accounts. For
further information regarding exchanges by telephone, see "Redemptions by
Telephone." The exchange privilege (or any aspect of it) may be changed or
discontinued and is subject to certain limitations, including certain
restrictions on purchases by market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on
any date on which the Fund is open for business by redeeming shares at their
net asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however,
subject to a CDSC. See "Contingent Deferred Sales Charge" below. Because the
net asset value of shares of the account fluctuates, redemptions or
repurchases, which are taxable transactions, are likely to result in gains or
losses to the shareholder. When a shareholder withdraws an amount from his
account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except for shares purchased or received in
exchange for shares purchased by check (including certified checks or
cashier's checks). Payment of redemption proceeds may be delayed for up to 15
days from the purchase date in an effort to assure that such check has
cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the
shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power with a written request for
redemption or letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally
means that the stock power, written request for redemption, letter of
instruction or certificate must be endorsed by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed in the
manner set forth below under the caption "Signature Guarantee." In addition,
in some cases "good order" will require the furnishing of additional
documents. The Shareholder Servicing Agent may make certain de minimis
exceptions to the above requirements for redemption. Within seven days after
receipt of a redemption request in "good order" by the Shareholder Servicing
Agent, the Fund will make payment in cash of the net asset value of the shares
next determined after such redemption request was received, reduced by the
amount of any applicable CDSC described above and the amount of any income tax
required to be withheld, except during any period in which the right of
redemption is suspended or date of payment is postponed because the Exchange
is closed or trading on such Exchange is restricted or to the extent otherwise
permitted by the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his
account by telephoning the Shareholder Servicing Agent toll-free at (800)
225-2606. Shareholders wishing to avail themselves of this telephone
redemption privilege must so elect on their Account Application, designate
thereon a bank and account number to receive the proceeds of such redemption,
and sign the Account Application Form with the signature(s) guaranteed in the
manner set forth below under the caption "Signature Guarantee." The proceeds
of such a redemption, reduced by the amount of any applicable CDSC and the
amount of any income tax required to be withheld, are mailed by check to the
designated account, without charge, if the redemption proceeds do not exceed
$1,000, and are wired in federal funds to the designated account if the
redemption proceeds exceed $1,000. If a telephone redemption request is
received by the Shareholder Servicing Agent by the close of regular trading on
the Exchange on any business day, shares will be redeemed at the closing net
asset value of the Fund on that day. Subject to the conditions described in
this section, proceeds of a redemption are normally mailed or wired on the
next business day following the date of receipt of the order for redemption.
The Shareholder Servicing Agent will not be responsible for any losses
resulting from unauthorized telephone transactions if it follows reasonable
procedures designed to verify the identity of the caller. The Shareholder
Servicing Agent will request personal or other information from the caller,
and will normally also record calls. Shareholders should verify the accuracy
of confirmation statements immediately after their receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares
through his dealer (a repurchase), the shareholder can place a repurchase
order with his dealer, who may charge the shareholder a fee. IF THE DEALER
RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE
EXCHANGE AND COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME
DAY, THE SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY,
REDUCED BY THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX
REQUIRED TO BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B and Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of (i) with
respect to Class A and Class C shares, 12 months (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of
Class A shares or purchases by certain retirement plans of Class A shares), or
(ii) with respect to Class B shares, six years. Purchases of Class A shares
made during a calendar month, regardless of when during the month the
investment occurred, will age one month on the last day of the month and each
subsequent month. Class C shares and Class B shares purchased on or after
January 1, 1993 will be aggregated on a calendar month basis -- all
transactions made during a calendar month, regardless of when during the month
they have occurred, will age one year at the close of business on the last day
of such month in the following calendar year and each subsequent year. For
Class B shares of the Fund purchased prior to January 1, 1993, transactions
will be aggregated on a calendar year basis -- all transactions made during a
calendar year, regardless of when during the year they have occurred, will age
one year at the close of business on December 31 of that year and each
subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases
exceeds the sum of the six calendar year aggregations (12 months in the case
of purchases of Class C shares and of purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore,
at the time of redemption of a particular class, (i) any Free Amount is not
subject to the CDSC and (ii) the amount of the redemption equal to the then-
current value of Reinvested Shares is not subject to the CDSC, but (iii) any
amount of the redemption in excess of the aggregate of the then-current value
of Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will
first be applied against the amount of Direct Purchases which will result in
any such charge being imposed at the lowest possible rate. The CDSC to be
imposed upon redemptions of shares will be calculated as set forth in
"Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days
of the redemption pursuant to the Reinstatement Privilege. If the shares
credited for any CDSC paid are then redeemed within six years of the initial
purchase in the case of Class B shares or within 12 months of the initial
purchase for Class C shares and certain Class A share purchases, a CDSC will
be imposed upon redemption. Such purchases under the Reinstatement Privilege
are subject to all limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund
solely in cash up to the lesser of $250,000 or 1% of the net asset value of
the Fund during any 90-day period for any one shareholder. The Fund has
reserved the right to pay other redemptions either totally or partially, by a
distribution in-kind of securities (instead of cash) from the Fund's
portfolio. The securities distributed in such a distribution would be valued
at the same amount as that assigned to them in calculating the net asset value
for the shares being sold. If a shareholder received a distribution in-kind,
the shareholder could incur brokerage or transaction charges when converting
the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in
any account for their then-current value if at any time the total investment
in such account drops below $500 because of redemptions or exchanges, except
in the case of accounts being established for monthly automatic investments
and certain payroll savings programs, Automatic Exchange Plan accounts and
tax-deferred retirement plans, for which there is a lower minimum investment
requirement. See "Purchases -- General -- Minimum Investment." Shareholders
will be notified that the value of their account is less than the minimum
investment requirement and allowed 60 days to make an additional investment
before the redemption is processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder
(the "Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Plan would benefit the Fund and its shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the
heading "Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are common to each class of shares, as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, Class B
or Class C shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom
such dealer is the dealer or holder of record. MFD may from time to time
reduce the amount of the service fees paid for shares sold prior to a certain
date. Service fees may be reduced for a dealer that is the holder or dealer of
record for an investor who owns shares of the Fund having an aggregate net
asset value at or above a certain dollar level. Dealers may from time to time
be required to meet certain criteria in order to receive service fees. MFD or
its affiliates are entitled to retain all service fees payable under the
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for
personal services and/or account maintenance services performed by MFD or its
affiliates to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay
MFD a distribution fee based on the average daily net assets attributable to
the Designated Class as partial consideration for distribution services
performed and expenses incurred in the performance of MFD's obligations under
its distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the
use by MFD of such distribution fees. Such amounts and uses are described
below in the discussion of the provisions of the Distribution Plan relating to
each class of shares. While the amount of compensation received by MFD in the
form of distribution fees during any year may be more or less than the expense
incurred by MFD under its distribution agreement with the Fund, the Fund is
not liable to MFD for any losses MFD may incur in performing services under
its distribution agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the Designated
Class. The provisions of the Distribution Plan relating to operating policies
as well as initial approval, renewal, amendment and termination are
substantially identical as they relate to each class of shares covered by the
Distribution Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered with an initial sales
charge, a substantial portion of which is paid to or retained by the dealer
making the sale (and the remainder of which is paid to MFD). See "Purchases
- -- Class A Shares" above. In addition to the initial sales charge, the dealer
also generally receives the ongoing 0.25% per annum service fee, as discussed
above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.10% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission to dealers with respect to
purchases of $1 million or more and purchases by certain retirement plans of
Class A shares which are sold at net asset value but which are subject to a 1%
CDSC for one year after purchase). See "Purchases -- Class A Shares" above.
In addition, to the extent that the aggregate service and distribution fees
paid under the Distribution Plan do not exceed 0.35% per annum of the average
daily net assets of the Fund attributable to Class A shares, the Fund is
permitted to pay such distribution-related expenses or other distribution-
related expenses.
CLASS B SHARES. Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases -- Class B Shares"
above. MFD will advance to dealers the first year service fee described above
at a rate equal to 0.25% of the purchase price of such shares and, as
compensation therefore, MFD may retain the service fee paid by the Fund with
respect to such shares for the first year after purchase. Dealers will become
eligible to receive the ongoing 0.25% per annum service fee with respect to
such shares commencing in the thirteenth month following purchase.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES. Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases -- Class C shares"
above. MFD will pay a commission to dealers of 1.00% of the purchase price of
Class C shares purchased through dealers at the time of purchase. In
compensation for this 1.00% commission paid by MFD to dealers, MFD will retain
the 1.00% per annum Class C distribution and service fees paid by the Fund
with respect to such shares for the first year after purchase, and dealers
will become eligible to receive from MFD the ongoing 1.00% per annum
distribution and service fees paid by the Fund to MFD with respect to such
shares commencing in the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn
pays to dealers) under the Distribution Plan equal, on an annual basis, to
0.75% of the Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A, Class B
and Class C distribution and service fees for its current fiscal year are
0.35%, 1.00% and 1.00% per annum, respectively. The 0.35% per annum Class A
distribution/service fee is reduced to 0.25% per annum for shares purchased
prior to October 1, 1989.
DISTRIBUTIONS
The Fund intends to declare as dividends daily and pay to its shareholders as
dividends monthly substantially all of its net investment income (dividends
will only accrue on shares for which payment has been received). Dividends
generally are distributed on the first business day of the month. The Fund may
make one or more distributions during the calendar year to its shareholders
from any long-term capital gains and may also make one or more distributions
during the calendar year to its shareholders from short-term capital gains.
Shareholders may elect to receive dividends and capital gain distributions in
either cash or additional shares of the same class with respect to which a
distribution is made (see "Tax Status" and "Shareholder Services --
Distribution Options" below). Distributions paid by the Fund with respect to
Class A shares will generally be greater than those paid with respect to Class
B and Class C shares because expenses attributable to Class B and Class C
shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust
for federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code. Because the
Fund intends to distribute all of its net investment income and net realized
capital gains to its shareholders in accordance with the timing requirements
imposed by the Code, it is not expected that the Fund will be required to pay
entity-level federal income or excise taxes, although the Fund's foreign-
source income may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and
any state or local taxes, on the dividends and capital gain distributions they
receive from the Fund, whether paid in cash or reinvested in additional
shares. A portion of the dividends received from the Fund (but none of the
Fund's capital gain distributions) may qualify for the dividends-received
deduction for corporations.
Shortly after the end of each calendar year, each shareholder will be sent a
statement setting forth the federal income tax status of all dividends and
distributions for that year, including the portion taxable as ordinary income,
the portion taxable as long term capital gain (as well as the rate category or
categories under which such gain is taxable), the portion, if any,
representing a return of capital (which is generally free of current taxes but
which results in a basis reduction), and the amount, if any, of federal income
tax withheld.
Fund distributions of net capital gains or net short-term capital gains will
reduce the Fund's net asset value per share. Shareholders who buy shares
shortly before the Fund makes such a distribution may thus pay the full price
for the shares and then effectively receive a portion of the purchase price
back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% (or
any lower rate permitted under an applicable treaty) on taxable dividends and
other payments that are subject to such withholding and that are made to
persons who are neither citizens nor residents of the U.S. The Fund is also
required in certain circumstances to apply backup withholding at the rate of
31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the U.S.)
who does not furnish to the Fund certain information and certifications or who
is otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
Prospective investors should read the Fund's Account Application for
additional information regarding backup withholding of federal income tax and
should consult their own tax advisers as to the tax consequences to them of an
investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of shares of the Fund is
determined each day during which the Exchange is open for trading. This
determination is made once each day as of the close of regular trading on the
Exchange by deducting the amount of liabilities attributable to the class from
the value of the Fund's assets attributable to the class and dividing the
difference by the number of shares of the class outstanding. Assets in the
Fund's portfolio are valued on the basis of their market values as described
in the SAI. The net asset value of each class of shares is effective for
orders received in "good order" by the dealer prior to its calculation and
received by MFD prior to the close of that business day. The Fund has
authorized one or more dealers to receive purchase and redemption orders on
behalf of the Fund. Such dealers are authorized to designate other
intermediaries to receive purchase and redemption orders on behalf of the
Fund. The Fund will be deemed to have received a purchase or redemption order
when an authorized dealer or, if applicable, a dealer's authorized designee.
receives the order. Customer orders will be priced at the net asset value of
the Fund next computed after such orders are received by an authorized dealer
or the dealer's authorized designee.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of six series of the Trust, has three classes of shares which it
offers to the general public, entitled Class A, Class B and Class C Shares of
Beneficial Interest (without par value). The Fund also has a class of shares
which it offers exclusively to certain institutional investors, entitled Class
I shares. The Trust has reserved the right to create and issue additional
classes and series of shares, in which case each class of shares of a series
would participate equally in the earnings, dividends and assets attributable
to that class of that particular series. Shareholders are entitled to one vote
for each share held and shares of each series would be entitled to vote
separately to approve investment advisory agreements or changes in investment
restrictions, but shares of all series would vote together in the election of
Trustees and selection of accountants. Additionally, each class of shares of a
series will vote separately on any material increases in the fees under the
Distribution Plan or on any other matter that affects solely its class of
shares, but will otherwise vote together with all other classes of shares of
the series on all other matters. The Trust does not intend to hold annual
shareholder meetings. The Declaration of Trust provides that a Trustee may be
removed from office in certain instances (see "Description of Shares, Voting
Rights and Liabilities" in the SAI).
Each share of a class of the Fund represents an equal proportionate interest
in the Fund with each other class share, subject to the liabilities of that
class. Shares have no pre-emptive or conversion rights (except as set forth
above in "Purchases -- Conversion of Class B Shares"). Shares are fully paid
and non-assessable. Should the Fund be liquidated, shareholders of each class
are entitled to share pro rata in the net assets attributable to that class
available for distribution to shareholders. Shares will remain on deposit with
the Shareholder Servicing Agent and certificates will not be issued except in
connection with pledges and assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance (e.g., fidelity bonding and errors and omissions
insurance) existed and the Trust itself is unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote
fund rankings in the relevant fund category from various sources, such as the
Lipper Analytical Securities Corporation, Inc. and Wiesenberger Investment
Companies Service. Yield quotations are based on the annualized net investment
income per share allocated to each class of the Fund over a 30-day period
stated as a percent of the maximum public offering price of that class on the
last day of that period. Yield calculations for Class B and Class C shares
assume no CDSC is paid. The current distribution rate for each class is
calculated by (i) annualizing the distributions (excluding short-term capital
gains) of the class for a stated period; (ii) adding any short-term capital
gains paid within the immediately preceding 12-month period; and (iii)
dividing the result by the maximum offering price or net asset value per share
on the last day of the period. Current distribution rate calculations for
Class B and Class C shares assume no CDSC is paid. The current distribution
rate differs from the yield calculation because it may include distributions
to shareholders from sources other than dividends and interest, such as
premium income from option writing, short-term capital gains, and return of
invested capital, and may be calculated over a different period of time. Total
rate of return quotations will reflect the average annual percentage change
over stated periods in the value of an investment in each class of shares of
the Fund made at the maximum public offering price of the shares of that class
with all distributions reinvested and which will give effect to the imposition
of any applicable CDSC assessed upon redemptions of the Fund's Class B and
Class C shares. Such total rate of return quotations may be accompanied by
quotations which do not reflect the reduction in value of the initial
investment due to the sales charge or the deduction of the CDSC, and which
will therefore be higher. The Fund offers multiple classes of shares which
were initially offered for sale to, and purchased by, the public on different
dates (the class "inception date"). The calculation of total rate of return
for a class of shares which has a later class inception date than another
class of shares of the Fund is based both on (i) the performance of the Fund's
newer class from its inception date and (ii) the performance of the Fund's
oldest class from its inception date up to the class inception date of the
newer class. See the SAI for further information on the calculation of total
rate of return for share classes with different class inception dates.
All performance quotations are based on historical performance and are not
intended to indicate future performance. Yield reflects only annualized net
portfolio income as of a stated period of time and current distribution rate
reflects only the annualized rate of distributions paid by the Fund over a
stated period of time, while total rate of return reflects all components of
investment return. The Fund's quotations may from time to time be used in
advertisements, shareholder reports or other communications to shareholders.
For a discussion of the manner in which the Fund will calculate its yield,
current distribution rate and total rate of return, see the SAI. For further
information about the Fund's performance for the fiscal year ended September
30, 1998, please see the Fund's Annual Report. A copy of the Annual Report may
be obtained without charge by contacting the Shareholder Servicing Agent (see
back cover for address and phone number). In addition to information provided
in shareholder reports, the Fund may, in its discretion, from time to time,
make a list of all or a portion of its holdings available to investors upon
request.
PROVISION OF ANNUAL AND SEMIANNUAL REPORTS
To avoid sending duplicate copies of materials to households, only one copy of
the Fund's annual and semiannual report may be mailed to shareholders having the
same residential address on the Fund's records. However, any shareholder may
call the Shareholder Servicing Agent at 1-800-225-2606 to request that copies of
such reports be sent personally to that shareholder.
8. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described
below or concerning other aspects of the Fund, should contact their investment
dealer or the Shareholder Servicing Agent (see back cover for address and
phone number).
ACCOUNT AND CONFIRMATION STATEMENTS: Each shareholder will receive
confirmation statements showing the transaction activity in his account. At
the end of each calendar year, each shareholder will receive information
regarding the tax status of reportable dividends and distributions for that
year (see "Tax Status" above).
DISTRIBUTION OPTIONS: The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
o Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified.
o Dividends in cash; capital gain distributions reinvested in additional
shares.
o Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the last business day of the quarter. Checks for
dividends and capital gain distributions in amounts less than $10 will
automatically be reinvested in additional shares of the Fund. If a shareholder
has elected to receive dividends and/or capital gain distributions in cash,
and the postal or other delivery service is unable to deliver checks to the
shareholder's address of record, or the shareholder does not respond to
mailings from the Shareholder Servicing Agent with regard to uncashed
distribution checks, such shareholders's distribution option will
automatically be converted to having all dividends and other distributions
reinvested in additional shares. Any request to change a distribution option
must be received by the Shareholder Servicing Agent by the record date for a
dividend or distribution in order to be effective for that dividend or
distribution. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS: For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $100,000 or more of Class A
shares of the Fund alone or in combination with shares of any class of other
MFS Funds or MFS Fixed Fund (a bank collective trust) within a 13-month period
(or 36-month period for purchases of $1 million or more), the shareholder may
obtain such shares at the same reduced sales charge as though the total
quantity were invested in one lump sum, subject to escrow agreements and the
appointment of an attorney for redemptions from the escrow amount if the
intended purchases are not completed, by completing the Letter of Intent
section of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together
with the current offering price value of all holdings of Class A, B and C
shares of that shareholder in the MFS Funds or MFS Fixed Fund (a bank
collective trust), reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the
same class of another MFS Fund. Furthermore, distributions made by the Fund
may be automatically invested at net asset value in shares of the same class
of another MFS Fund, if shares of such Fund are available for sale (without a
sales charge and not subject to any applicable CDSC).
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic
payments based upon the value of his account. Each payment under a Systematic
Withdrawal Plan (a "SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B and Class C shares in any
year pursuant to a SWP will not be subject to a CDSC and are generally limited
to 10% of the value of the account at the time of the establishment of the
SWP. The CDSC will not be waived in the case of SWP redemptions of Class A
shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur
on the first business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares
of the other MFS Funds (and, in the case of Class C shares, for shares of MFS
Money Market Fund) under the Automatic Exchange Plan, a dollar cost averaging
program. The Automatic Exchange Plan provides for automatic monthly or
quarterly exchanges of funds from the shareholder's account in an MFS Fund for
investment in the same class of shares of other MFS Funds selected by the
shareholder if such fund is available for sale. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to six different funds.
A shareholder should consider the objectives and policies of a fund and review
its prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales
charge. For federal and (generally) state income tax purposes, an exchange is
treated as a sale of the shares exchanged and, therefore, could result in a
capital gain or loss to the shareholder making the exchange. See the SAI for
further information concerning the Automatic Exchange Plan. Investors should
consult their tax advisers for information regarding the potential capital
gain and loss consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charge
included in share purchases in the case of Class A shares and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS: Except as noted under "Purchases -- Class C
Shares," shares of the Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans
and other corporate pension and profit-sharing plans. Investors should consult
with their tax adviser before establishing any of the tax-deferred retirement
plans described above.
--------------------
The Fund's SAI, dated February 1, 1999, as amended or supplemented from time
to time, contains more detailed information about the Trust and the Fund,
including, but not limited to, information related to (i) investment
objectives, policies and restrictions, (ii) Trustees, officers and investment
adviser, (iii) portfolio transactions and brokerage commissions, (iv)
Distribution Plan, (v) the method used to calculate performance quotations of
the Fund, and (vi) various services and privileges provided by the Fund for
the benefit of its shareholders, including additional information with respect
to the exchange privilege.
<PAGE>
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
contingent deferred sales charge ("CDSC") for Class A shares are waived
(Section II), and the CDSC for Class B and Class C shares is waived (Section
III). Some of the following information will not apply to certain MFS Funds,
depending on which classes of shares are offered by such Fund. As used in this
Appendix, the term "dealer" includes any broker, dealer, bank (including bank
trust departments), registered investment adviser, financial planner and any
other financial institutions having a selling agreement or other similar
agreement with MFS Fund Distributors, Inc. ("MFD").
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, is waived:
1. DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any MFS Fund in the MFS Family of
Funds ("MFS Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of
assets of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
o Officers, eligible directors, employees (including retired employees)
and agents of Massachusetts Financial Services Company ("MFS"), Sun
Life Assurance Company of Canada ("Sun Life") or any of their
subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to an MFS Fund; and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
("MFSI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/ Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
o Death or disability of the IRA owner.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
o Death, disability or retirement of 401(a) or ESP Plan participant;
o Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
o Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
o Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
o Tax-free return of excess 401(a) or ESP Plan contributions;
o To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes
to the MFS FUNDamental 401(k) Plan or another similar recordkeeping
system made available by the Shareholder Servicing Agent; and
o Distributions from a 401(a) or ESP Plan that has invested its assets
in one or more of the MFS Funds for more than 10 years from the later
to occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP
Plan first invests its assets in one or more of the MFS Funds. The
sales charges will be waived in the case of a redemption of all of
the Plan's shares in all MFS Funds (i.e., all the assets of the
401(a) or ESP Plan invested in the MFS Funds are withdrawn), unless
immediately prior to the redemption, the aggregate amount invested by
the 401(a) or ESP Plan in shares of the MFS Funds (excluding the
reinvestment of distributions) during the prior four years equals 50%
or more of the total value of the 401(a) or ESP Plan's assets in the
MFS Funds, in which case the sales charges will not be waived.
o Shares purchased by certain retirement plans or trust accounts if:
(i) the plan is currently a party to a retirement plan recordkeeping
or administrative services agreement with MFD or one of its
affiliates and (ii) the shares purchased or redeemed represent
transfers from or transfers to plan investments other than the MFS
Funds of which retirement plan recordkeeping services are provided
under the terms of such agreement.
SECTION 403(b) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
o Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
o To an IRA rollover account where any sales charges with respect to
the shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants of such Plan, provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent.
7. LOAN REPAYMENTS
o Shares acquired pursuant to repayments by retirement plan
participants of loans from 401(a) or ESP Plans with respect to which
such Plan or its sponsoring organization subscribes to the MFS
FUNDamental 401(k) Program or the MFS Recordkeeper Plus Program (but
not the MFS Recordkeeper Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemptions of Class A shares are
waived:
1. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund "supermarket" account
or a similar program under which such clients pay a fee to such
dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
o Shares acquired by retirement plans or trust accounts whose third
party administrators, or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
o Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRA'S
o Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
o Tax-free returns of excess IRA contributions.
401(a) PLANS
o Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
o Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a Plan.
ESP PLANS AND SRO PLANS
o Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
4. PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases Subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund,
MFS Municipal Limited Maturity Fund, MFS Money Market Fund, MFS
Government Money Market Fund and MFS Cash Reserve Fund.
5. BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFS and are acquiring such
shares for the benefit of their trust account clients.
6. INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions
of Class A shares, are waived with respect to Class A shares acquired
of any of the MFS Funds through the immediate reinvestment of the
proceeds of a redemption of Class I shares of any of the MFS Funds.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C
shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRAs
where the redemption is made pursuant to Section 72(t) of the
Internal Revenue Code of 1986, as amended) of the account value at
the time of establishment.
2. DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made
under the following circumstances:
IRA'S, 401(a) PLANS, ESP PLANS AND SRO PLANS
o Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
applicable Internal Revenue Code ("Code") rules.
SALARY REDUCTION EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
o Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
o Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this
obligation are being continued.
D: An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly unlikely
to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility, Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50% -- 90% of such outstandings,
and D the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable economic/
industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt-obligations. Issuer failed to meet scheduled principal and/
or interest payments.
DP: Preferred stock with dividend arrearages.
DUFF & PHELPS SHORT-TERM RATINGS
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3: Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
<PAGE>
Investment Adviser
Massachusetts Financial
Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Principal Underwriter
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
MTR-1-2/99/864M 15/215/315/815
