<PAGE>
<TABLE>
<CAPTION>
<S> <C>
MFS(R) TOTAL RETURN FUND MFS(R) ALABAMA MUNICIPAL BOND FUND
MASSACHUSETTS INVESTORS GROWTH STOCK FUND MFS(R) ARKANSAS MUNICIPAL BOND FUND
MFS(R) GROWTH OPPORTUNITIES FUND MFS(R) CALIFORNIA MUNICIPAL BOND FUND
MFS(R) EMERGING GROWTH FUND MFS(R) FLORIDA MUNICIPAL BOND FUND
MFS(R) CAPITAL GROWTH FUND MFS(R) GEORGIA MUNICIPAL BOND FUND
MFS(R) INTERMEDIATE INCOME FUND MFS(R) LOUISIANA MUNICIPAL BOND FUND
MFS(R) GOLD & NATURAL RESOURCES FUND MFS(R) MARYLAND MUNICIPAL BOND FUND
MFS(R) MANAGED SECTORS FUND MFS(R) MASSACHUSETTS MUNICIPAL BOND FUND
MFS(R) VALUE FUND MFS(R) MISSISSIPPI MUNICIPAL BOND FUND
MFS(R) UTILITIES FUND MFS(R) NEW YORK MUNICIPAL BOND FUND
MFS(R) WORLD EQUITY FUND MFS(R) NORTH CAROLINA MUNICIPAL BOND FUND
MFS(R) WORLD TOTAL RETURN FUND MFS(R) PENNSYLVANIA MUNICIPAL BOND FUND
MFS(R) BOND FUND MFS(R) SOUTH CAROLINA MUNICIPAL BOND FUND
MFS(R) LIMITED MATURITY FUND MFS(R) TENNESSEE MUNICIPAL BOND FUND
MFS(R) GOVERNMENT MORTGAGE FUND MFS(R) TEXAS MUNICIPAL BOND FUND
MFS(R) GOVERNMENT LIMITED MATURITY FUND MFS(R) VIRGINIA MUNICIPAL BOND FUND
MFS(R) GOVERNMENT SECURITIES FUND MFS(R) WASHINGTON MUNICIPAL BOND FUND
MFS(R) HIGH INCOME FUND MFS(R) WEST VIRGINIA MUNICIPAL BOND FUND
MFS(R) STRATEGIC INCOME FUND MFS(R) MUNICIPAL LIMITED MATURITY FUND
MFS(R) WORLD GOVERNMENTS FUND MFS(R) MUNICIPAL BOND FUND
MFS(R) WORLD GROWTH FUND MFS(R) MUNICIPAL INCOME FUND
MFS(R) OTC FUND MFS(R) RESEARCH FUND
MFS(R) MUNICIPAL HIGH INCOME FUND MFS(R) WORLD ASSET ALLOCATION FUND
MASSACHUSETTS INVESTORS TRUST
</TABLE>
SUPPLEMENT TO THE CURRENT PROSPECTUS
During the period from January 3, 1995 through April 28, 1995 (the "Sales
Period") (unless extended by MFS Fund Distributors, Inc. ("MFD"), the funds'
principal underwriter), MFD will pay A. G. Edwards and Sons, Inc., ("A. G.
Edwards") 100% of the applicable sales charge on sales of Class A shares of each
of the funds listed above (the "Funds") sold for investment in Individual
Retirement Accounts ("IRAs") (excluding SEP-IRAs). In addition, MFD will pay A.
G. Edwards an additional commission equal to 0.50% of the net asset value of all
of the Class B shares of the Funds sold by A. G. Edwards during the Sales
Period.
THE DATE OF THIS SUPPLEMENT IS JANUARY 3, 1995.
MFS-16AG-1/95/3.5M
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
MFS(R) MANAGED SECTORS FUND MFS(R) MUNICIPAL LIMITED MATURITY FUND
MFS(R) CASH RESERVE FUND MFS(R) ALABAMA MUNICIPAL BOND FUND
MFS(R) WORLD ASSET ALLOCATION FUND MFS(R) ARKANSAS MUNICIPAL BOND FUND
MFS(R) EMERGING GROWTH FUND MFS(R) CALIFORNIA MUNICIPAL BOND FUND
MFS(R) CAPITAL GROWTH FUND MFS(R) FLORIDA MUNICIPAL BOND FUND
MFS(R) GOLD & NATURAL RESOURCES FUND MFS(R) GEORGIA MUNICIPAL BOND FUND
MFS(R) INTERMEDIATE INCOME FUND MFS(R) LOUISIANA MUNICIPAL BOND FUND
MFS(R) HIGH INCOME FUND MFS(R) MARYLAND MUNICIPAL BOND FUND
MFS(R) MUNICIPAL HIGH INCOME FUND MFS(R) MASSACHUSETTS MUNICIPAL BOND FUND
MFS(R) MONEY MARKET FUND MFS(R) MISSISSIPPI MUNICIPAL BOND FUND
MFS(R) GOVERNMENT MONEY MARKET FUND MFS(R) NEW YORK MUNICIPAL BOND FUND
MFS(R) MUNICIPAL BOND FUND MFS(R) NORTH CAROLINA MUNICIPAL BOND FUND
MFS(R) OTC FUND MFS(R) PENNSYLVANIA MUNICIPAL BOND FUND
MFS(R) TOTAL RETURN FUND MFS(R) SOUTH CAROLINA MUNICIPAL BOND FUND
MFS(R) RESEARCH FUND MFS(R) TENNESSEE MUNICIPAL BOND FUND
MFS(R) WORLD TOTAL RETURN FUND MFS(R) TEXAS MUNICIPAL BOND FUND
MFS(R) UTILITIES FUND MFS(R) VIRGINIA MUNICIPAL BOND FUND
MFS(R) WORLD EQUITY FUND MFS(R) WASHINGTON MUNICIPAL BOND FUND
MFS(R) WORLD GOVERNMENTS FUND MFS(R) WEST VIRGINIA MUNICIPAL BOND FUND
MFS(R) VALUE FUND MFS(R) GROWTH OPPORTUNITIES FUND
MFS(R) STRATEGIC INCOME FUND MFS(R) GOVERNMENT MORTGAGE FUND
MFS(R) WORLD GROWTH FUND MFS(R) GOVERNMENT SECURITIES FUND
MFS(R) BOND FUND MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS(R) LIMITED MATURITY FUND MFS(R) GOVERNMENT LIMITED MATURITY FUND
MASSACHUSETTS INVESTORS TRUST
</TABLE>
SUPPLEMENT TO THE CURRENT PROSPECTUS
Effective as of January 1, 1995, MFS Fund Distributors, Inc. ("MFD") has
replaced MFS Financial Services, Inc. ("FSI") as the Fund's distributor. Both
MFD and FSI are wholly-owned subsidiaries of Massachusetts Financial Services
Company ("MFS"), the Fund's investment adviser.
-----------------------------------------------
Class A shares of the Fund may be purchased at net asset value by certain
retirement plans subject to the Employee Retirement Income Security Act of 1974,
as amended, subject to the following:
(i) The sponsoring organization must demonstrate to the satisfaction of
MFD that either (a) the employer has at least 25 employees or (b) the
aggregate purchases by the retirement plan of Class A shares of the
Funds will be in an amount of at least $250,000 within a reasonable
period of time, as determined by MFD in its sole discretion; and
(ii) A contingent deferred sales charge of 1% will be imposed on such
purchases in the event of certain redemption transactions within 12
months following such purchases.
-----------------------------------------------
Class A shares may be sold at net asset value, subject to appropriate
documentation, through a dealer where the amount invested represents redemption
proceeds from a registered open-end management investment company not
distributed or managed by MFD or its affiliates if: (i) the redeemed shares were
subject to an initial sales charge or a deferred sales charge (whether or not
actually imposed); (ii) such redemption has occurred no more than 90 days prior
to the purchase of Class A shares of the Fund; and (iii) the Fund, MFD or its
affiliates have not agreed with such company or its affiliates, formally or
informally, to sell Class A shares at net asset value or provide any other
incentive with respect to such redemption and sale.
-----------------------------------------------
Class A shares of the Fund may be purchased at net asset value by
retirement plans whose third party administrators have entered into an
administrative services agreement with MFD or one or more of its affiliates to
perform certain administrative services, subject to certain operational
requirements specified from time to time by MFD or one or more of its
affiliates.
-----------------------------------------------
(Over)
<PAGE>
Class A shares of the Fund (except of the MFS municipal bond funds
identified above) may be purchased at net asset value by retirement plans
qualified under Section 401(k) of the Code through certain broker-dealers and
other financial institutions which have entered into an agreement with MFD which
includes certain minimum size qualifications for such retirement plans and
provides that the broker-dealer or other financial institution will perform
certain administrative services with respect to the plan's account.
-----------------------------------------------
The CDSC on Class A and Class B shares will be waived upon redemption by a
retirement plan where the redemption proceeds are used to pay expenses of the
retirement plan or certain expenses of participants under the retirement plan
(e.g., participant account fees), provided that the retirement plan's sponsor
subscribes to the MFS Fundamental 401(k) Plan(sm) or another similar
recordkeeping system made available by MFS Service Center, Inc. (the
"Shareholder Servicing Agent").
-----------------------------------------------
The CDSC on Class A and B shares will be waived upon the transfer of
registration from shares held by a retirement plan through a single account
maintained by the Shareholder Servicing Agent to multiple Class A and B share
accounts, respectively, maintained by the Shareholder Servicing Agent on behalf
of individual participants in the retirement plan, provided that the retirement
plan's sponsor subscribes to the MFS Fundamental 401(k) Plan(sm) of another
similar recordkeeping system made available by the Shareholder Servicing Agent.
-----------------------------------------------
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except that, with respect to transfers of registration to an IRA
rollover account, the CDSC will be waived if the shares being reregistered would
have been eligible for a CDSC waiver had they been redeemed.
-----------------------------------------------
The current Prospectus discloses that "Class A shares of the Fund may also
be purchased at net asset value where the purchase is in an amount of $3 million
or more and where the dealer and FSI enter into an agreement in which the dealer
agrees to return any commission paid to it on the sale (or a pro rata portion
thereof) as described above if the shareholder redeems his or her shares within
one year of purchase. (Shareholders who purchase shares at NAV pursuant to these
conditions are called ("$3 Million Shareholders")." This policy is terminated
effective as of the date of this Supplement and the above-referenced language,
and all references to "$3 Million Shareholders," are deleted from the
Prospectus.
-----------------------------------------------
From time to time, MFD may pay dealers 100% of the applicable sales charge
on sales of Class A shares of certain specified 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 shares of certain specified Funds sold by such dealer
during a specified sales period.
-----------------------------------------------
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to reinvest all dividends
and other distributions reinvested in additional shares.
-----------------------------------------------
From time to time, MFS 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).
THE DATE OF THIS SUPPLEMENT IS JANUARY 13,1995.
MFS-16-1/95/605M
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
MASSACHUSETTS INVESTORS TRUST MFS(R) WORLD TOTAL RETURN FUND
MASSACHUSETTS INVESTORS GROWTH STOCK FUND MFS(R) MUNICIPAL BOND FUND
MFS(R) CAPITAL GROWTH FUND MFS(R) MUNICIPAL HIGH INCOME FUND
MFS(R) EMERGING GROWTH FUND MFS(R) MUNICIPAL INCOME FUND
MFS(R) GOLD & NATURAL RESOURCES FUND MFS(R) ALABAMA MUNICIPAL BOND FUND
MFS(R) GROWTH OPPORTUNITIES FUND MFS(R) ARKANSAS MUNICIPAL BOND FUND
MFS(R) MANAGED SECTORS FUND MFS(R) CALIFORNIA MUNICIPAL BOND FUND
MFS(R) OTC FUND MFS(R) FLORIDA MUNICIPAL BOND FUND
MFS(R) RESEARCH FUND MFS(R) GEORGIA MUNICIPAL BOND FUND
MFS(R) VALUE FUND MFS(R) LOUISIANA MUNICIPAL BOND FUND
MFS(R) TOTAL RETURN FUND MFS(R) MARYLAND MUNICIPAL BOND FUND
MFS(R) UTILITIES FUND MFS(R) MASSACHUSETTS MUNICIPAL BOND FUND
MFS(R) BOND FUND MFS(R) MISSISSIPPI MUNICIPAL BOND FUND
MFS(R) GOVERNMENT MORTGAGE FUND MFS(R) NEW YORK MUNICIPAL BOND FUND
MFS(R) GOVERNMENT SECURITIES FUND MFS(R) NORTH CAROLINA MUNICIPAL BOND FUND
MFS(R) HIGH INCOME FUND MFS(R) PENNSYLVANIA MUNICIPAL BOND FUND
MFS(R) INTERMEDIATE INCOME FUND MFS(R) SOUTH CAROLINA MUNICIPAL BOND FUND
MFS(R) STRATEGIC INCOME FUND MFS(R) TENNESSEE MUNICIPAL BOND FUND
MFS(R) GOVERNMENT LIMITED MATURITY FUND MFS(R) TEXAS MUNICIPAL BOND FUND
MFS(R) LIMITED MATURITY FUND MFS(R) VIRGINIA MUNICIPAL BOND FUND
MFS(R) MUNICIPAL LIMITED MATURITY FUND MFS(R) WASHINGTON MUNICIPAL BOND FUND
MFS(R) WORLD EQUITY FUND MFS(R) WEST VIRGINIA MUNICIPAL BOND FUND
MFS(R) WORLD GOVERNMENTS FUND MFS(R) WORLD ASSET ALLOCATION FUND
MFS(R) WORLD GROWTH FUND
</TABLE>
SUPPLEMENT TO THE CURRENT PROSPECTUS
During the period from February 1, 1995 through April 14, 1995 (the "Sales
Period") (unless extended by MFS Fund Distributors, Inc. ("MFD"), the Funds'
distributor), MFD will pay Corelink Financial Inc. ("Corelink") an additional
commission equal to 0.10% of the gross commissonable sales for Class A shares
and Class B shares and the net asset value for Class C shares (if applicable) of
the Funds sold by Corelink during the Sales Period.
THE DATE OF THIS SUPPLEMENT IS FEBRUARY 1, 1995.
MFS-16CL-2/95/5M
<PAGE>
PROSPECTUS
MFS(R) MUNICIPAL June 1, 1994
HIGH INCOME FUND Class A Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) Class B Shares of Beneficial Interest
Page
1. The Fund ............................................................... 2
2. Expense Summary ........................................................ 3
3. Condensed Financial Information ........................................ 4
4. Investment Objective and Policies ...................................... 4
5. Risk Factors ........................................................... 9
6. Management of the Fund ................................................. 10
7. Information Concerning Shares of the Fund .............................. 11
Purchases .......................................................... 11
Exchanges .......................................................... 16
Redemptions and Repurchases ........................................ 16
Distribution Plan .................................................. 18
Distributions ...................................................... 19
Tax Status ......................................................... 19
Net Asset Value .................................................... 20
Description of Shares, Voting Rights and Liabilities ............... 20
Performance Information ............................................ 20
8. Shareholder Services ................................................... 21
Appendix A ......................................................... 23
Appendix B ......................................................... 23
Appendix C ......................................................... 27
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS MUNICIPAL HIGH INCOME FUND
500 Boylston Street, Boston, MA 02116 (617) 954-5000
The investment objective of MFS Municipal High Income Fund (the "Fund") is to
provide high current income exempt from federal income taxes. The Fund is a
non-diversified series of MFS Series Trust III (the "Trust"), an open-end
investment company. The Fund seeks to achieve this objective by investing its
assets primarily in municipal bonds and notes which may be of medium and lower
quality (see "Investment Objective and Policies").
TAX-EXEMPT SECURITIES OFFERING THE HIGH CURRENT INCOME SOUGHT BY THE FUND
(COMMONLY KNOWN AS "JUNK BONDS") ARE ORDINARILY IN THE MEDIUM AND LOWER RATING
CATEGORIES OF RECOGNIZED RATING AGENCIES (HIGH RISK SECURITIES) OR ARE UNRATED
AND, THEREFORE, GENERALLY INVOLVE GREATER VOLATILITY OF PRICE AND RISK OF
PRINCIPAL AND INCOME THAN SECURITIES IN THE HIGHER RATING CATEGORIES (SEE "RISK
FACTORS"). ACCORDINGLY, AN INVESTMENT IN THE FUND MAY NOT BE APPROPRIATE FOR ALL
INVESTORS.
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company and MFS Financial Services, Inc., respectively, both of which
are located at 500 Boylston Street, Boston, Massachusetts 02116.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
This Prospectus sets forth concisely the information concerning the Trust and
the Fund that a prospective investor ought to know before investing. The Trust,
on behalf of the Fund, has filed with the Securities and Exchange Commission
(the "SEC") a Statement of Additional Information, dated June 1, 1994, which
contains more detailed information about the Trust and the Fund and is
incorporated into this Prospectus by reference. See page 22 for a further
description of the information set forth in the Statement of Additional
Information. A copy of the Statement of Additional Information may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
1. THE FUND
MFS(R) Municipal High Income Fund is a non-diversified series of MFS Series
Trust III, an open-end management investment company which was organized as a
business trust under the laws of The Commonwealth of Massachusetts in 1977. The
Trust presently consists of two series, each of which represents a portfolio
with separate investment policies. Two classes of shares of the Fund are offered
to the general public. Class A shares are offered at net asset value plus an
initial sales charge (or a contingent deferred sales charge (a "CDSC") in the
case of certain purchases of $1 million or more). Class B shares (which will be
available for sale effective June 3, 1994) are offered at net asset value
without a sales charge but subject to a CDSC and a Distribution Plan providing
for an annual distribution fee and service fee. Class B shares will convert to
Class A shares approximately eight years after purchase.
In June 1985, the Trust's Board of Trustees decided to terminate sales of Fund
shares, other than to the Fund's shareholders, because the Fund had attained
optimal size for management purposes. The Board of Trustees voted to re-open the
Fund for sales to new shareholders for the period from March 1, 1989 to the
close of business on March 23, 1989. During such period the Fund's net assets
were increased by approximately $109 million as a result of such additional
investments. The Board of Trustees voted again to re-open the Fund for sales to
new shareholders for the period from February 6, 1990, to the close of business
on February 7, 1990. During such period, the Fund's net assets were increased by
approximately $205 million as a result of such additional investments. On
February 28, 1990, the sale of Fund shares to existing shareholders (other than
through the reinvestment of dividends and capital gains of the Fund) was
terminated. On November 5, 1990, Fund shares were made available for sales to
existing shareholders only. In May 1994, the Trust's Board of Trustees voted to
re-open the Fund for sales to new shareholders for the period from June 3, 1994
until the earlier of the following: (i) June 10, 1994; or (ii) the close of
business on the day on which aggregate subscription orders for shares of the
Fund received since June 3, 1994 approximate $200 million. The Fund buys
securities (primarily municipal bonds and notes that may be in the medium or
lower rating categories or may be unrated, the interest on which is exempt from
federal income tax) for its portfolio.
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. A majority of the Trustees are
not affiliated with the Adviser. The Adviser is responsible for the management
of the assets of the Fund and the officers of the Trust are responsible for the
Fund's operations. The Adviser manages the Fund's portfolio from day to day in
accordance with the investment objective and policies of the Fund. The selection
of investments and the way they are managed depend on the conditions and trends
in the economy and the financial marketplaces. The Trust also offers to buy back
(redeem) shares of the Fund from shareholders at any time at their net asset
value, less any applicable CDSC.
<PAGE>
2. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B
------- -------
Maximum Initial Sales Charge Imposed on Purchases of
Fund Shares (as a percentage of offering price) .... 4.75% 0.00%
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase or
redemption proceeds, as applicable) ................ See Below(1) 4.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE
NET ASSETS):(2)
Management Fees ...................................... 0.70% 0.70%
Rule 12b-1 Fees ...................................... 0.00% 1.00%(3)
Other Expenses ....................................... 0.40% 0.47%(4)
---- ----
Total Operating Expenses ............................. 1.10% 2.17%
- ------------
(1) Purchases of $1 million or more are not subject to an initial sales charge;
however, a CDSC of 1% will be imposed on such purchases in the event of
certain redemption transactions within 12 months following such purchases
(see "Purchases").
(2) For Class A shares, percentages are based on expenses incurred during the
fiscal year ended January 31, 1994. Percentages for Class B shares are based
on Class A fees and expenses adjusted for Class B specific expenses.
(3) The Fund has adopted a Distribution Plan for its Class B 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) 1.00% per annum
of the average daily net assets attributable to the Class B shares (see
"Distribution Plan"). After a substantial period of time, distribution
expenses paid under this Plan, together with any CDSC, may total more than
the maximum sales charge that would have been permissible if imposed
entirely as an initial sales charge.
(4) Based on Class A expenses incurred during the fiscal year ended January 31,
1994, except for the shareholder servicing agent fee component of "Other
Expenses".
EXAMPLE OF EXPENSES
-------------------
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) 5% annual return and (b) redemption at the
end of each of the time periods indicated (unless otherwise noted):
PERIOD CLASS A CLASS B
------- -------
(1)
1 year .......................... $ 58 $ 62 $ 22
3 years ......................... 81 98 68
5 years ......................... 105 136 116
10 years ........................ 175 223(2) 223(2)
- ------------
(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 provided 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
expenses of the Fund 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.
3. CONDENSED FINANCIAL INFORMATION
The following information should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which is
incorporated by reference into the Statement of Additional Information in
reliance upon the report of Coopers & Lybrand, independent accountants, as
experts in accounting and auditing. For the fiscal years after January 31, 1994,
Ernst & Young will audit the Fund's financial statements and report on those
future fiscal years.
<TABLE>
FINANCIAL HIGHLIGHTS
CLASS A AND CLASS B SHARES
<CAPTION>
YEAR ENDED JANUARY 31,
- --------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985<F2> 1994
------ ---- ------ ------ ------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A CLASS B<F3>
PER SHARE DATA ------ -------
(FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -
beginning of period ..... $ 9.26 $ 9.22 $ 9.09 $ 9.45 $ 9.55 $ 9.68 $10.38 $10.49 $ 9.80 $ 9.525 $ 9.40
Income from investment operations -
Net investment
income ................ $ 0.77 $ 0.73 $ 0.73 $ 0.74 $ 0.85 $ 0.88 $ 0.84 $ 0.99 $ 0.95 $ 0.839 $ 0.32
Net realized and
unrealized gain (loss)
on investments ........ 0.05 0.06 0.17 (0.32) (0.09) (0.12) (0.67) (0.01) 0.71 0.191 (0.14)
------ ------ ------ ------ ------ ------ ------- ------ ------ ------- ------
Total from investment
operations ........... $ 0.82 $ 0.79 $ 0.90 $ 0.42 $ 0.76 $ 0.76 $ 0.17 $ 0.98 $ 1.66 $ 1.030 $ 0.18
------ ------ ------ ------ ------ ------ ------- ------ ------ ------- ------
Less distributions declared to shareholders -
From net investment
income ................. $(0.70) $(0.75) $(0.77) $(0.78) $(0.81) $(0.82) $(0.84) $(1.01) $(0.94) $(0.755) $(0.20)
From net realized gain on
investments ............ -- -- -- -- (0.04) (0.07) (0.03) (0.08) (0.03) -- --
From paid-in capital .... -- -- -- -- (0.01) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------- ------ ------ ------- ------
Total distributions
declared to
shareholders ......... $(0.70) $(0.75) $(0.77) $(0.78) $(0.86) $(0.89) $(0.87) $(1.09) $(0.97) $(0.755) $(0.20)
------ ------ ------ ------ ------ ------ ------- ------ ------ ------- ------
Net asset value - end of
period .................. $ 9.38 $ 9.26 $ 9.22 $ 9.09 $ 9.45 $ 9.55 $ 9.68 $10.38 $10.49 $ 9.80 $ 9.38
====== ====== ====== ====== ====== ====== ====== ====== ====== ======= ======
TOTAL RETURN<F4> ......... 9.19%<F1> 9.02% 10.34% 4.65% 8.24% 8.32% 1.87% 10.00% 18.24% 12.36% 1.89%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ................ 1.10% 1.00% 1.03% 1.05% 1.02% 0.65% 1.03% 1.00% 1.04% 1.12%<F1> 2.04%<F1>
Net investment income ... 7.15% 7.95% 7.96% 8.17% 8.90% 9.27% 8.54% 9.54% 9.68% 10.35%<F1> 5.43%<F1>
PORTFOLIO TURNOVER ....... 18% 10% 21% 41% 21% 23% 16% 9% 43% 159% 18%
NET ASSETS AT END OF
PERIOD (000 OMITTED) ....$809,957 $731,968 $648,043 $638,185 $485,037 $325,044 $349,655 $442,036 $294,056 $112,478 $1
<FN>
- ---------
<F1> Annualized.
<F2> For the period from February 24, 1984 (commencement of investment
operations) to January 31, 1985.
<F3> For the period from the initial issuance of Class B shares, September 27,
1993, to January 31, 1994.
<F4> These results do not include the sales charge. If the charge had been
included, the results would have been lower.
</TABLE>
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The investment objective of the Fund is to provide high
current income exempt from federal income taxes. Any investment involves risk
and there can be no assurance that the Fund will achieve its investment
objective.
INVESTMENT POLICIES -- The Fund seeks to achieve its investment objective by
investing primarily (i.e., at least 80% of its assets under normal
circumstances) in debt securities issued by or on behalf of states, territories
and possessions of the United States, the District of Columbia and their
political subdivisions, agencies or instrumentalities, the interest on which is
exempt from federal income tax ("Municipal Bonds" or "tax-exempt securities").
Under normal circumstances, the Fund will invest at least 65% of its total
assets in tax-exempt securities which offer a current yield above that generally
available on tax-exempt securities in the three highest rating categories of the
recognized rating agencies (commonly known as "junk bonds" if rated below the
four highest categories of recognized rating agencies). Such high risk
securities generally involve greater volatility of price and greater risk of
nonpayment of principal and interest (including the possibility of default by or
bankruptcy of the issuers of such securities) than securities in higher rating
categories. See "Risk Factors" below for a further description of the risks
associated with these medium and lower rated securities. However, since
available yields and yield differentials vary over time, no specific level of
income or yield differential can ever be assured. Also, any income earned on
portfolio securities would be reduced by the expenses of the Fund before it is
distributed to shareholders.
The Fund may purchase Municipal Bonds, the interest on which may be subject to
an alternative minimum tax (for the purpose of this Prospectus, the interest
thereon is nonetheless considered to be tax-exempt). For a comparison of yields
on Municipal Bonds and taxable securities, see Appendix A to this Prospectus;
for a general discussion of Municipal Bonds and a description of Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P") and
Fitch Investors Service, Inc. ("Fitch") ratings of Municipal Bonds, see Appendix
B to this Prospectus; and for a chart indicating the composition of the Fund's
portfolio for its most recent fiscal year with the debt securities rated by S&P
separated into rating categories, see Appendix C to this Prospectus.
The value of the tax-exempt securities that the Fund intends to purchase may be
less sensitive to market factors than other securities; however, they may be
more sensitive to changes in the perception of the credit quality of such
securities, or of similar types of securities or of securities issued within the
same geographical region. Changes in the value of securities subsequent to their
acquisition will not affect income or yields to maturity of the Fund's portfolio
securities but will be reflected in the net asset value of the shares of the
Fund. In order to preserve or enhance the value of its investments, the Fund
may, on occasion, make additional capital expenditures beyond the initial cost
of an investment. The Fund will seek to reduce risk through diversification,
credit analysis and attention to current developments and trends in both the
economy and financial markets. The net asset value of the shares of an open-end
investment company, such as the Fund, which invests primarily in fixed income
tax-exempt securities, changes as the general levels of interest rates
fluctuate. When interest rates decline, the value of a portfolio invested at
higher yields can be expected to rise. Conversely, when interest rates rise, the
value of a portfolio invested at lower yields can be expected to decline.
When the Adviser believes that investing for defensive purposes is appropriate,
such as during periods of unusual market conditions or at times when yield
spreads are narrow and the higher yields do not justify the increased risk or if
acceptable quantities of higher yielding securities are unavailable, the Fund
may either invest in tax-exempt securities in the higher rating categories of
recognized rating agencies (that is, ratings of A or higher by Moody's, S&P or
Fitch or comparable unrated tax-exempt securities) or in cash or cash equivalent
short-term obligations of similar quality (i.e., with ratings equivalent to A or
better by Moody's, S&P or Fitch or comparable unrated tax-exempt securities)
including, but not limited to, short-term municipal obligations, certificates of
deposit, commercial paper, short-term notes, obligations issued or guaranteed by
the U.S. Government or any of its agencies or instrumentalities and repurchase
agreements. From time to time, a portion of the Fund's distributions will be
taxable to shareholders (e.g., distributions of income from taxable obligations,
from capital gains, from transactions in certain Municipal Bonds purchased at
market discount and from certain other transactions).
The Fund may invest in a relatively high percentage of municipal bonds issued by
entities having similar characteristics. The issuers may be located in the same
geographic area, or may pay interest on their obligations from revenue of
similar projects such as hospitals, electric utility systems, multi-family
housing, nursing homes, commercial facilities (including hotels), steel
companies or life care facilities. This may make the Fund more susceptible to
similar economic, political, or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation of the net asset value of
shares of the Fund also increases.
The Fund reserves the right to invest more than 25% of its assets in industrial
revenue bonds, including industrial revenue bonds issued for hospitals, electric
utility systems, multi-family housing, nursing homes, commercial facilities
(including hotels), steel companies and life care facilities. See the Statement
of Additional Information for a discussion of the risks which these investments
might entail. Certain of the bonds issued for these purposes provide financing
for construction or rehabilitation of facilities as described above. As such
they are susceptible to various construction related risks, including labor
costs and environmental, zoning and site development considerations, as well as
the ability of contractors to perform within time and cost constraints.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Bonds. See "Tax Status" below for the effect of current
federal tax law on this exemption.
ZERO COUPON BONDS: Municipal Bonds in which the Fund may invest also include
zero coupon bonds. Zero coupon bonds are debt obligations which are issued at a
significant discount from face value and do not require the periodic payment of
interest. 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. Zero coupon bonds 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. Because of
the higher rates of return, such investments are regarded by the Fund as
consistent with its investment objective.
INVERSE FLOATING RATE OBLIGATIONS: The Fund may invest in so called "inverse
floating rate obligations" or "residual interest" bonds, or other obligations or
certificates relating thereto structured to have similar features. Such
obligations generally have floating or variable interest rates that move in the
opposite direction of short-term interest rates and generally increase or
decrease in value in response to changes in short-term interest rates at a rate
which is a multiple (typically two) of the rate at which fixed-rate long-term
tax-exempt securities increase or decrease in response to such changes. As a
result, such obligations have the effect of providing investment leverage and
may be more volatile than long-term fixed rate tax exempt obligations.
Repurchase Agreements: The Fund may enter into repurchase agreements in order to
earn additional income on available cash or as a temporary defensive measure.
Under a repurchase agreement, the Fund acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Fund's right to liquidate the securities
may be restricted (during which time the value of the securities could decline).
As discussed in the Statement of Additional Information, the Fund has adopted
certain procedures intended to minimize any risk.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion of its assets
in "loans." By purchasing a loan, 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 and services. These claims may
also be purchased at a time when the company is in default. Certain of the loans
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. Loans 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 loans and the risks related to transactions therein,
see the Statement of Additional Information.
"WHEN-ISSUED" SECURITIES: Some tax-exempt securities may be purchased on a
"when-issued" or on a "forward delivery" basis, which means that the obligations
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. Although the Fund is
not limited as to the amount of tax-exempt securities for which it has such
commitments, it is expected that under normal circumstances, the Fund will not
commit more than 30% of its assets to such purchases. The Fund does not pay for
the securities until received, and does not start earning interest on the
securities until the contractual settlement date. In order to invest its assets
immediately while awaiting delivery of securities purchased on such bases, the
Fund will normally invest in short-term securities that offer same-day
settlement and earnings, but that may bear interest at a lower rate than
longer-term securities; however, the Fund also may invest in longer-term
securities. It is the intention of the Fund that these investments will usually
be in securities the interest on which is exempt from federal income tax. For
additional information concerning the use, risks and costs of "when-issued" and
"forward delivery" securities, see the Statement of Additional Information.
OPTIONS: The Fund intends to write (sell) "covered" put and call options on
fixed income securities. Call options written by the Fund give the holder the
right to buy the underlying securities from the Fund at a fixed exercise price
up to a stated expiration date or, in the case of certain options, on such date.
Put options written by the Fund give the holder the right to sell the underlying
securities to the Fund during the term of the option at a fixed exercise price
up to a stated expiration date or, in the case of certain options, on such date.
Call options are "covered" by the Fund, for example, when it owns the underlying
securities, and put options are "covered" by the Fund, for example, when it has
established a segregated account of cash or short-term money market instruments
which can be liquidated promptly to satisfy any obligation of the Fund to
purchase the underlying securities. The Fund may also write straddles
(combinations of puts and calls on the same underlying security). Such
transactions generate additional premium income but also include greater risk.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand and interest rates. By writing a call option, the Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option. By writing a put option, the
Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price higher than its then-current market value,
resulting in a potential capital loss unless the security subsequently
appreciates in value.
The Fund may terminate an option that it has written prior to its expiration by
entering into a closing purchase transaction in which it purchases an option
having the same terms as the option written. It is possible, however, that
illiquidity in the options markets may make it difficult from time to time for
the Fund to close out its written option positions. The Fund may also purchase
put or call options in anticipation of changes in interest rates which may
adversely affect the value of its portfolio or the prices of securities that the
Fund wants to purchase at a later date. The premium paid for a put or call
option plus any transaction costs will reduce the benefit, if any, realized by
the Fund upon exercise of the option, and, unless the price of the underlying
security changes sufficiently, the option may expire without value to the Fund.
The Fund intends to write and purchase options on securities for hedging
purposes and also in an effort to increase current income. Options on securities
that are written or purchased by the Fund will be traded on U.S. exchanges and
over-the-counter.
The Fund may purchase detachable call options on municipal securities, which are
options issued by an issuer of the underlying municipal securities giving the
purchaser the right to purchase the securities at a fixed price, up to at a
stated time in the future, or in some cases, on a future date. In addition, the
Fund may purchase warrants on fixed income securities. A warrant on a fixed
income security is a long-dated call option conveying to the holder of the
warrant the right, but not the obligation, to purchase a fixed income security
of a specific description (from the issuer) on a certain date or dates (the
exercise date) at a fixed exercise price.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and
sell futures contracts on fixed income securities or indices of such securities,
including Municipal Bond indices and any other indices of fixed income
securities which may become available for trading ("Futures Contracts"). The
Fund may also purchase and write options on such Futures Contracts ("Options on
Futures Contracts"). These instruments will be used to hedge against anticipated
future changes in interest rates which otherwise might either adversely affect
the value of the Fund's portfolio securities or adversely affect the prices of
securities which the Fund intends to purchase at a later date. Should interest
rates move in an unexpected manner, the Fund may not achieve the anticipated
benefits of the hedging transactions and may realize a loss. Such transactions
may also be entered into for non-hedging purposes to the extent permitted by
applicable law, which involves greater risk and may result in losses which are
not offset by gains on other portfolio assets.
In order to assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the Commodity Futures
Trading Commission (the "CFTC") require that the Fund enter into transactions in
Futures Contracts and Options on Futures Contracts only (i) for bona fide
hedging purposes (as defined in CFTC regulations), or (ii) for non-hedging
purposes, provided that the aggregate initial margin and premiums on such
non-hedging positions does not exceed 5% of the liquidation value of the Fund's
assets. In addition, the Fund must comply with the requirements of various state
securities laws in connection with such transactions.
The Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
options on securities or on Futures Contracts, if as a result, more than 5% of
its total assets would be invested in such options.
Futures Contracts and Options on Futures Contracts that are entered into by the
Fund will be traded on U.S. exchanges.
RISK FACTORS: Although the Fund will enter into certain transactions in options,
Futures Contracts and Options on Futures Contracts for hedging purposes, such
transactions nevertheless involve 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 and Options on Futures
Contracts for other than hedging purposes, to the extent permitted by applicable
law, which involves greater risk. In addition, there can be no assurance that a
liquid secondary market will exist for any contract purchased or sold, and the
Fund may be required to maintain a position until exercise or expiration, which
could result in losses. The Statement of Additional Information contains a
further description of options, Futures Contracts and Options on Futures
Contracts, and a discussion of the risks related to transactions therein.
Transactions entered into for non-hedging purposes involve greater risk and
could result in losses which are not offset by gains on other portfolio assets.
Transactions in options may be entered into on U.S. exchanges regulated by the
SEC and in the over-the-counter market, while Futures Contracts and Options on
Futures Contracts may be entered into on U.S. commodities exchanges regulated by
the CFTC. Over-the-counter transactions involve certain risks which may not be
present in exchange-traded transactions.
Gains recognized from options and futures transactions engaged in by the Fund
are taxable to shareholders upon distribution.
PORTFOLIO TRADING: The Fund intends to engage in portfolio trading rather than
holding all portfolio securities to maturity. In trading portfolio securities,
the Fund seeks to take advantage of market developments, yield disparities and
variations in the creditworthiness of issuers.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., (the "NASD")
and such other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund and of the other investment company clients of MFS
Financial Services, Inc. ("FSI"), the Fund's distributor, as a factor in the
selection of broker-dealers to execute the portfolio transactions of the Fund.
For a further discussion of portfolio trading, see "Portfolio Trading" in the
Fund's Statement of Additional Information.
---------------------------
The investment objective and policies of the Fund described above may be changed
without shareholder approval. The Statement of Additional Information includes a
discussion of other investment policies and a listing of specific investment
restrictions which govern the investment policies of the Fund. Except as
otherwise indicated, the Fund's specific investment restrictions listed in the
Statement of Additional Information may not be changed without the approval of
the shareholders of the Fund.
The Fund's investment limitations and policies are adhered to at the time of
purchase or utilization of assets; a subsequent change in circumstances will not
be considered to result in a violation of policy.
5. RISK FACTORS
Tax-exempt securities offering the high current income sought by the Fund are
ordinarily in the medium and lower rating categories of recognized rating
agencies or are unrated and, therefore, generally are high risk securities
involving greater volatility of price (especially during periods of economic
uncertainty or change) and risk of principal (including the possibility of
default by or bankruptcy of the issuers of such securities) and income than
securities in the higher rating categories and because yields vary over time, no
specific level of income can ever be assured. No minimum rating is required by
the Fund. In particular, securities rated BBB by S&P or Fitch or Baa by Moody's
or comparable unrated securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic conditions
and other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than in the case of higher grade Municipal
Bonds. Securities rated lower than BBB by S&P or Fitch or Baa by Moody's or
comparable unrated securities (high risk securities) are considered speculative.
While such high risk securities may have some quality and protective
characteristics, they can be expected to be outweighed by large uncertainties or
major risk exposures to adverse conditions. These Municipal Bonds will be
affected by the market's perception of their credit quality, economic changes
and the outlook for economic growth to a greater extent than higher rated
securities which react primarily to fluctuations in the general level of
interest rates. Medium and lower rated Municipal Bonds are also affected by
changes in interest rates, as noted in "Investment Objective and Policies"
above. Furthermore, an economic downturn may result in a higher incidence of
defaults by issuers of these securities. 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.
In addition, these medium and lower rated or unrated tax-exempt securities are
frequently traded only in markets where the number of potential purchasers and
sellers, if any, is very limited. Furthermore, the liquidity of these securities
may be affected by the market's perception of the issuer's credit quality.
Therefore, judgment may at times play a greater role in valuing these securities
than in the case of higher grade tax-exempt securities. This consideration may
also have the effect of limiting the availability of such securities for the
Fund to purchase and may also have the effect of limiting the ability of the
Fund to sell such securities at their fair value either to meet redemption
requests or to respond to changes in the economy or the financial markets.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the policy of the Fund to rely exclusively on ratings issued
by these agencies, but rather to supplement such ratings with the Adviser's own
independent and ongoing review of credit quality. The Fund's achievement of its
investment objective may be more dependent on the Adviser's own credit analysis
than in the case of an investment company investing in primarily higher quality
bonds. With respect to those municipal bonds and notes which are not rated by a
major rating agency, the Fund will be more reliant on the Adviser's judgment,
analysis and experience than would be the case if such bonds and notes were
rated. In evaluating the creditworthiness of an issuer, whether rated or
unrated, the Adviser will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and trends,
any operating history of and the community support for the facility financed by
the issue, the ability of the issuer's management and regulatory matters.
The Adviser will attempt to reduce the risks of investing in medium or lower
rated or unrated tax-exempt securities to the greatest extent practicable
through portfolio management techniques (see the Statement of Additional
Information) and through the use of credit analysis and Futures Contracts.
The Fund has registered as a "non-diversified" investment company so that it
will be able to invest more than 5% of its assets in the obligations of an
issuer, subject to the diversification requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended. Since the Fund may invest a
relatively high percentage of its assets in the obligations of a limited number
of issuers, the Fund may be more susceptible to any single economic, political
or regulatory occurrence than a diversified investment company.
For the above reasons, an investment in shares of the Fund should not constitute
a complete investment program and may not be appropriate for investors who
cannot assume the greater risk of capital depreciation or loss inherent in
seeking higher tax-exempt yields.
6. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the assets of the Fund pursuant to an
Investment Advisory Agreement dated September 1, 1993. MFS provides the Fund
with overall investment advisory and administrative services, as well as general
office facilities. Cynthia M. Brown, a Senior Vice President of the Adviser, has
been the Fund's portfolio manager since 1993 and has been employed by the
Adviser since 1984. Subject to such policies as the Trustees may determine, MFS
makes investment decisions for the Fund. For these services and facilities, MFS
receives a management fee, computed and paid monthly, in an amount equal to the
sum of 0.30% of the Fund's average daily net assets plus 4.75% of the Fund's
gross income (i.e., income other than from the sale of securities), in each case
on an annualized basis, for the Fund's then-current fiscal year.
For the fiscal year ended January 31, 1994, MFS earned management fees of
$5,400,831 (of which $2,335,614 was based on average daily net assets and
$3,065,217 on gross income), equivalent on an annualized basis to 0.70% of the
Fund's average daily net assets.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds"), to MFS Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS
Institutional Trust, MFS Union Standard Trust, Sun Growth Variable Annuity Fund,
Inc., MFS/Sun Life Series Trust and seven variable accounts, each of which is a
registered investment company established by Sun Life Assurance Company of
Canada (U.S.) ("Sun Life of Canada (U.S.)") in connection with the sale of
Compass-2 and Compass-3 combination fixed/variable annuity contracts. The MFS
Asset Management Group, a division of the Adviser, provides investment advice to
substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $33.6 billion on behalf of approximately 1.4 million investor
accounts as of April 30, 1994. As of such date, the MFS organization managed
approximately $6.7 billion of assets in municipal bond securities and
approximately $19.6 billion of assets in fixed income securities. MFS is a
subsidiary of Sun Life of Canada (U.S.), which in turn is a subsidiary of Sun
Life Assurance Company of Canada ("Sun Life"). The Directors of MFS are A. Keith
Brodkin, Jeffrey L. Shames, John R. Gardner, John D. McNeil and Arnold D. Scott.
Mr. Brodkin is the Chairman, Mr. Shames is the President and Mr. Scott is a
Senior Executive Vice President and the Secretary of MFS. Messrs. McNeil and
Gardner are the Chairman and the President, respectively, of Sun Life. Sun Life,
a mutual life insurance company, is one of the largest international life
insurance companies and has been operating in the United States since 1895,
establishing a headquarters office here in 1973. The executive officers of MFS
report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman and
President of the Trust. Joan S. Batchelder, Cynthia M. Brown, Matthew N.
Fontaine, Robert J. Manning, Bernard Scozzafava, James T. Swanson, W. Thomas
London, James O. Yost, Stephen E. Cavan, James R. Bordewick, Jr. and Linda J.
Hoard, all of whom are officers of MFS, are officers of the Trust.
DISTRIBUTOR -- MFS Financial Services, Inc. ("FSI"), a wholly owned subsidiary
of MFS, is the distributor of shares of the Fund and also serves as distributor
for each of the other MFS Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. ("Shareholder Servicing
Agent"), a wholly owned subsidiary of MFS, performs transfer agency, certain
dividend disbursing agency and other services for the Fund.
7. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
As noted above under "The Fund," the Fund will be re-opened on June 3, 1994 for
a limited period for sales to new investors. Following this period, only
existing shareholders of the Fund may purchase Class A and Class B shares.
Because of this restriction, certain dealers in the past have transferred and in
the future may transfer a share of the Fund to certain of their clients
interested in becoming shareholders of the Fund so that such clients will then
be able to buy additional shares of the Fund. Subject to the above restriction,
shares of the Fund may be purchased at the public offering price through any
securities dealer, certain banks and other financial institutions having selling
agreements with FSI, the Fund's principal underwriter. Non-securities dealer
financial institutions will receive transaction fees that are the same as
commissions to dealers. Securities dealers and other financial institutions may
also charge their customers service fees relating to investments in the Fund.
The Fund offers two classes of shares which bear sales charges and distribution
fees in different forms and amounts:
CLASS A SHARES. Class A shares are offered at net asset value per share plus an
initial sales charge (or CDSC in the case of certain purchases of $1 million or
more) as follows:
<TABLE>
<CAPTION>
SALES CHARGE<F1> AS
PERCENTAGE OF:
-------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
<S> <C> <C> <C>
Less than $100,000 4.75% 4.99% 4.00%
$100,000 but less than $250,000 4.00 4.17 3.20
$250,000 but less than $500,000 2.95 3.04 2.25
$500,000 but less than $1,000,000 2.20 2.25 1.70
$1,000,000 or more None<F2> None<F2> See Below<F2>
<FN>
<F1>Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above.
<F2>A CDSC may apply in certain circumstances. FSI will pay a commission on
purchases of $1 million or more.
</FN>
</TABLE>
If shares of the Fund are available for sale, no sales charge is payable at the
time of purchase of Class A shares on investments of $1 million or more.
However, a CDSC shall be imposed on such investments in the event of a share
redemption within 12 months following the share purchase, at the rate of 1% on
the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the total cost of such shares.
In determining whether a CDSC on such Class A shares is payable, and, if so, the
amount of the charge, it is assumed that shares not subject to the CDSC are the
first redeemed followed by other shares held for the longest period of time. All
investments made during a calendar month, regardless of when during the month
the investment occurred, will age one month on the last day of the month and
each subsequent month. Except as noted below, the CDSC on Class A shares will be
waived in the case of: (i) exchanges (except that if the shares acquired by
exchange were then redeemed within 12 months of the initial purchase (other than
in connection with subsequent exchanges to other MFS Funds), the charge would
not be waived); (ii) distributions to participants from a retirement plan
qualified under section 401(a) of the Internal Revenue Code of 1986, as amended
(the "Code") (a "Retirement Plan") due to: (a) a loan from the plan (repayments
of loans, however, will constitute new sales for purposes of assessing the
CDSC); (b) "financial hardship" of the participant in the plan, as that term is
defined in Treasury Regulation Section 1.401(k)-1(d)(2), as amended from time to
time; or (c) the death of a participant in such plans; (iii) distributions from
a 403(b) plan or an Individual Retirement Account ("IRA") due to death,
disability or attainment of age 59-1/2; (iv) tax- free returns of excess
contributions to an IRA; (v) distributions by other employee benefit plans to
pay benefits; and (vi) certain involuntary redemptions and redemptions in
connection with certain automatic withdrawals from a qualified retirement plan.
The CDSC on Class A shares will not be waived, however, if the Retirement Plan
withdraws from the Fund except if that Retirement Plan has invested its assets
in Class A shares of one or more of the MFS Funds for more than 10 years from
the later to occur of (i) January 1, 1993 or (ii) the date such Retirement Plan
first invests its assets in Class A shares of one or more of the MFS Funds, the
CDSC on Class A shares will be waived in the case of a redemption of all of the
Retirement Plan's shares (including shares of any other class) in all MFS Funds
(i.e., all the assets of the Retirement Plan invested in the MFS Funds are
withdrawn), unless, immediately prior to the redemption, the aggregate amount
invested by the Retirement Plan in Class A shares of the MFS Funds (excluding
the reinvestment of distributions) during the prior four year period equals 50%
or more of the total value of the Retirement Plan's assets in the MFS Funds, in
which case the CDSC will not be waived. Any applicable CDSC will be deferred
upon an exchange of Class A shares of the Fund for units of participation of the
MFS Fixed Fund (a bank collective investment fund) (the "Units"), and the CDSC
will be deducted from the redemption proceeds when such Units are subsequently
redeemed (assuming the CDSC is then payable). No CDSC will be assessed upon an
exchange of Units for Class A shares of the Fund. For purposes of calculating
the CDSC payable upon redemption of Class A shares of the Fund or Units acquired
pursuant to one or more exchanges, the period during which the Units are held
will be aggregated with the period during which the Class A shares are held. The
applicability of the CDSC will be unaffected by transfers of registration. FSI
shall receive all CDSCs.
FSI 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 FSI retains approximately 3/4 of
1% of the public offering price. In addition, FSI pays a commission to dealers
who initiate and are responsible for purchases of $1 million or more as follows:
1.00% on sales up to $5 million, plus 0.25% on the amount in excess of $5
million. Purchases of $1 million or more for each shareholder account will be
aggregated over a 12-month period (commencing from the date of the first such
purchase) for purposes of determining the level of commission to be paid during
that period with respect to such account. The sales charge may vary depending on
the number of shares of the Fund as well as certain MFS Funds and other funds
owned or being purchased, the existence of an agreement to purchase additional
shares during a 13-month period (or a 36-month period for purchases of $1
million or more) or other special purchase programs. A description of the Right
of Accumulation, Letter of Intent and Group Purchases privileges by which the
sales charge may be reduced is set forth in the Statement of Additional
Information.
If available for sale, Class A shares of the Fund may be sold at their net asset
value to the officers of the Trust, to any of the subsidiary companies of Sun
Life, to eligible Directors, officers, employees (including retired and former
employees) and agents of MFS, Sun Life or any of their subsidiary companies, to
any trust, pension, profit-sharing or any other benefit plan for such persons,
to any trustees and retired trustees of any investment company for which FSI
serves as distributor or principal underwriter, and to certain family members of
such individuals and their spouses, provided the shares will not be resold
except to the Fund. Class A shares of the Fund may be sold at net asset value to
any employee, partner, officer or trustee of any sub-adviser to any MFS Fund
and to certain family members of such individuals and their spouses, or to any
trust, pensions, profit-sharing or other retirement plan for the sole benefit of
such employee or representative, provided such shares will not be resold except
to the Fund. Class A shares, if available for sale, may be sold at their net
asset value to any employee or registered representative of any dealer or other
financial institution which has a sales agreement with FSI or its affiliates, to
certain family members of such employees or representatives and their spouses,
or to any trust, pension, profit-sharing or other retirement plan for the sole
benefit of such employee or representative, as well as to clients of the MFS
Asset Management Group. If available, Class A shares of the Fund also may be
sold at net asset value, subject to appropriate documentation, through a dealer
where the amount invested represents redemption proceeds from a registered
open-end management investment company not distributed or managed by FSI or its
affiliates, if such redemption has occurred no more than 60 days prior to the
purchase of Class A shares of the Fund and the shareholder either (i) paid an
initial sales charge or (ii) was at some time subject to, but did not actually
pay, a deferred sales charge with respect to the redemption proceeds. Class A
shares of the Fund may also be sold at net asset value where the amount invested
represents redemption proceeds from the MFS Fixed Fund. Class A shares, if
available for sale, may be sold at net asset value in connection with the
acquisition or liquidation of the assets of other investment companies or
personal holding companies. Insurance company separate accounts may also
purchase Class A shares of the Fund, if avaliable for sale, at their net asset
value. Furthermore, Class A shares, if available for sale, may be sold at net
asset value through the automatic reinvestment of distribution of dividends and
capital gains of other MFS Funds pursuant to the Distribution Investment Program
(see "Shareholder Services" in the Statement of Additional Information). If
available for sale, Class A shares of the Fund may also be purchased at their
net asset value by retirement plans where third party administrators of such
plans have entered into certain arrangements with FSI or its affiliates provided
that no commission is paid to dealers. Class A shares of the Fund may be
purchased at net asset value by retirement plans qualified under section 401(a)
or 403(b) of the Code which are subject to the Employee Retirement Income
Security Act of 1974, as amended, as follows:
(i) the retirement plan and/or the sponsoring organization must subscribe to
the MFS Fundamental 401(k) Plan(SM) or another similar Section 401(a) or
403(b) recordkeeping program made available by MFS Service Center, Inc.;
(ii) either (a) the sponsoring organization must have at least 25 employees or
(b) the aggregate purchases by the retirement plan of Class A shares of the
MFS Funds must be in an amount of at least $250,000 within a reasonable period
of time, as deterimined by FSI in its sole discretion; and
(iii) a CDSC of 1% will be imposed on such purchases in the event of certain
redemption transactions within 12 months following such purchases.
Dealers who initiate and are responsible for purchases of Class A shares of the
Fund in this manner will be paid a commission by FSI, as follows: 1.00% on sales
up to $5 million, plus 0.25% on the amount in excess of $5 million; provided,
however, that FSI may pay a commission, on sales in excess of $5 million to
certain retirement plans, of 1.00% to certain dealers which, at FSI's
invitation, enter into an agreement with FSI in which the dealer agrees to
return any commission paid to it on the sale (or on a pro rata portion thereof)
if the shareholder redeems his or her shares within a period of time after
purchase as specified by FSI. Purchases of $1 million or more for each
shareholder account will be aggregated over a 12-month period (commencing from
the date of the first such purchase) for purposes of determining the level of
commissions to be paid during that period with respect to such account.
Class A shares of the Fund may be sold at net asset value through the automatic
reinvestment of Class A and Class B periodic distributions which constitute
required withdrawals from qualified retirement plans. Class A shares of the Fund
may also be purchased at net asset value where the purchase is in an amount of
$3 million or more and where the dealer and FSI enter into an agreement in which
the dealer agrees to return any commission paid to it on the sale (or on a pro
rata portion thereof) as described above if the shareholder redeems his or her
shares within a year of purchase. (Shareholders who purchase shares at net asset
value pursuant to these conditions are called "$3 Million Shareholders").
Furthermore, Class A shares of the Fund may be sold at net asset value through
the automatic reinvestment of distirbutions of dividends and capital gains of
other MFS Funds pursuant to the Distribution Investment Program (see
"Shareholder Services" in the Statement of Additional Information).
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First ........................... 4%*
Second .......................... 4%
Third ........................... 3%
Fourth .......................... 3%
Fifth ........................... 2%
Sixth ........................... 1%
Seventh and following ........... 0%
*Class B shares purchased from January 1, 1993 through August 31, 1993 are
subject to a CDSC of 5% in the event of a redemption within the first year
after purchase.
For Class B shares purchased prior to January 1, 1993, the Fund imposes a CDSC
as a percentage of redemption proceeds as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First ........................... 6%
Second .......................... 5%
Third ........................... 4%
Fourth .......................... 3%
Fifth ........................... 2%
Sixth ........................... 1%
Seventh and following ........... 0%
No CDSC is paid upon an exchange of shares. For purposes of calculating the CDSC
upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares. See "Redemptions and Repurchases -
Contingent Deferred Sales Charge" for further discussion of the CDSC.
The CDSC on Class B shares will be waived upon the death or disability (as
defined in section 72(m)(7) of the Code) of any investor, provided the account
is registered (i) in the case of a deceased individual, solely in the deceased
individual's name, (ii) in the case of a disabled individual, solely or jointly
in the disabled individual's name or (iii) in the name of a living trust for the
benefit of the deceased or disabled individual. The CDSC on Class B shares will
also be waived in the case of redemptions of shares of the Fund pursuant to a
systematic withdrawal plan. In addition, the CDSC on Class B shares will be
waived in the case of distributions from an IRA, SAR-SEP or any other retirement
plan qualified under section 401(a), 401(k) or 403(b) of the Code due to death
or disability, or in the case of required minimum distributions from any such
retirement plan due to attainment of age 70-1/2. The CDSC on Class B shares will
be waived in the case of distributions from a retirement planqualified under
Section 401(a) of the Code due to (i) returns of excess contribution to the
plan, (ii) retirement of a participant in the plan, (iii) a borrowing from the
plan (repayments of borrowings, however, will constitute new sales for purposes
of assessing the CDSC), (iv) "financial hardship" of the participant in the
plan, as that term is defined in Treasury Regulation Section 1.401(k)-1(d)(2),
as amended from time to time, and (v) termination of employment of the
participant in the plan (excluding, however, a partial or other termination of
the plan). The CDSC on Class B shares of the Fund will also be waived upon
redemptions by (i) officers of the Trust, (ii) any of the subsidiary companies
of Sun Life, (iii) eligible Directors, officers, employees (including retired
and former employees) and agents of MFS, Sun Life or any of their subsidiary
companies, (iv) any trust, pension, profit-sharing or any other benefit plan for
such persons, (v) any trustees and retired trustees of any investment company
for which FSI serves as distributor or principal underwriter, and (vi) certain
family members of such individuals and their spouses, provided in each case that
the shares will not be resold except to the Fund. The CDSC on Class B shares
will also be waived in the case of redemptions by any employee or registered
representative of any dealer which has a dealer agreement with FSI, by certain
family members of any such employee or representative and his or her spouse or
to any trust, pension, profit-sharing or other retirement plan for the sole
benefit of such employee or representative and by clients of the MFS Asset
Management Group. A retirement plan qualified under section 401(a) of the Code
(a "Retirement Plan") that has invested its assets in Class B shares of one or
more of the MFS Funds for more than 10 years from the later to occur of (i)
January 1, 1993 or (ii) the date the Retirement Plan first invests its assets in
Class B shares of one or more of the MFS Funds will have the CDSC on Class B
shares waived in the case of a redemption of all the Retirement Plan's shares
(including any Class A shares) in all MFS Funds (i.e., all the assets of the
Retirement Plan invested in the MFS Funds are withdrawn), except that if,
immediately prior to the redemption, the aggregate amount invested by the
Retirement Plan in Class B shares of the MFS Funds (excluding the reinvestment
of distributions) during the prior four year period equals 50% or more of the
total value of the Retirement Plan's assets in the MFS Funds, then the CDSC will
not be waived. The CDSC on Class B shares may also be waived in connection with
the acquisition or liquidation of the assets of other investment companies or
personal holding companies.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain outstanding
for approximately eight years will convert to Class A shares of the Fund. Shares
purchased through the reinvestment of distributions paid in respect of Class B
shares will be treated as Class B shares for purposes of the payment of the
distribution and service fees under the Distribution Plan applicable to Class B
shares. However, for purposes of conversion to Class A shares, all shares in a
shareholder's account that were purchased through the reinvestment of dividends
and distributions paid in respect of Class B shares (and which have not
converted to Class A shares as provided in the following sentence) will be held
in a separate sub-account. Each time any Class B shares in the shareholder's
account (other than those in the sub-account) convert to Class A shares, a
portion of the Class B shares then in the sub-account will also convert to Class
A shares. The portion will be determined by the ratio that the shareholder's
Class B shares not acquired through reinvestment of dividends and distributions
that are converting to Class A shares bear to the shareholder's total Class B
shares not acquired through reinvestment. The conversion of Class B shares to
Class A shares is subject to the continuing availability of a ruling from the
Internal Revenue Service or an opinion of counsel that such conversion will not
constitute a taxable event for federal tax purposes. There can be no assurance
that such ruling or opinion will be available, and the conversion of Class B
shares to Class A shares will not occur if such ruling or opinion is not
available. In such event, Class B shares would continue to be subject to higher
expenses than Class A shares for an indefinite period.
GENERAL: If shares of the Fund are made available for sale, 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
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. Any minimums may be changed at
any time at the discretion of FSI. The Fund reserves the right to cease offering
shares at any time.
For shareholders who elect to participate in certain investment programs (e.g.,
the automatic investment plan) or other shareholder services FSI 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.
Although all MFS Funds are generally available as an investment choice for an
IRA, municipal bonds funds, such as the Fund, may not be suitable for inclusion
in an IRA due to their tax-exempt nature. The minimum initial investment for
IRAs is $250 and the minimum additional investment is $50 per account. A
shareholder should consult his or her financial or tax adviser regarding any
such investment.
A shareholder whose shares are held in the name of, or controlled by, an
investment dealer might not receive many of the privileges and services from the
Fund (such as Right of Accumulation, Letter of Intent and certain record-
keeping services) that the Fund ordinarily provides.
The Fund and FSI each reserve the right to reject any specific purchase order or
to restrict purchases by a particular purchaser (or group of related
purchasers). The Fund or FSI may reject or restrict any purchases by a
particular purchaser or group, for example, when a pattern of frequent purchases
and sales of shares of the Fund is evident, or if the purchase and sale orders
are, or a subsequent abrupt redemption might be, of a size that would disrupt
management of the Fund. The Fund and FSI intend specifically to exercise this
right in order to reject or restrict purchases by market timers (including asset
allocators) and the shareholder(s) whose accounts are exchanged periodically
based on an arrangement with or advice from such persons or whose transactions
seem to follow a timing pattern. In particular, action may be taken if: (i) more
than two exchange purchases are effected in a timed account in the same calendar
quarter; or (ii) a purchase would result in shares being held in timed accounts
by an individual or firm representing more than (x) one percent of the Fund's
net assets or (y) specified dollar amounts in the case of certain funds in the
MFS Funds, which may include the Fund and which may change from time to time.
The Fund and FSI each reserve the right to request holders of timed accounts to
redeem their shares at net asset value, less any CDSC otherwise applicable, if
either of these restrictions is violated.
Securities dealers and other financial institutions may receive different
compensation with respect to sales of Class A and Class B shares.
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, FSI believes that such Act should not
preclude banks from entering into agency agreements with FSI (as described
above). If, however, a bank were prohibited from so acting, the Trustees would
consider what actions, if any, would be necessary to continue to provide
efficient and effective shareholder services. It is not expected that
shareholders would suffer any adverse financial consequence as a result of these
occurrences. In addition, state securities laws on this issue may differ from
the interpretation of federal law expressed herein and banks and financial
institutions may be required to register as broker-dealers pursuant to state
law.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds (if available for sale) at net asset value. Shares of one class
may not be exchanged for shares of any other class. Exchanges will be made only
after instructions in writing or by telephone (an "Exchange Request") are
received for an established account by the Shareholder Servicing Agent in proper
form (i.e., if in writing -- signed by the record owner(s) exactly as the shares
are registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($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 MFS
Service Center, Inc.) 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 (the "Exchange"), the
exchange usually will occur on that day if all the restrictions set forth above
have been complied with at that time. No more than five exchanges may be made in
any one Exchange Request by telephone. Additional information concerning this
exchange privilege and prospectuses for any of the other MFS Funds may be
obtained from investment dealers or the Shareholder Servicing Agent. A
shareholder should read the prospectus of the other MFS Fund and consider the
differences in objectives and policies before making any exchange. For federal
and (generally) state income tax purposes, an exchange is treated as a sale of
the shares exchanged and, therefore, an exchange could result in a gain or loss
to the shareholder making the exchange. Exchanges by telephone are automatically
available to most non-retirement plan accounts and certain retirement plan
accounts. For further information regarding exchanges by telephone see
"Redemptions By Telephone". The exchange privilege (or any aspect of it) may be
changed or discontinued and is subject to certain limitations, including certain
restrictions on purchases by market timer accounts (see "Purchases").
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the amount in his account on
any date on which the Fund is open for business by redeeming shares at their net
asset value or by selling such shares to the Fund through a dealer (a
repurchase). Certain purchases, however, may be subject to a CDSC in the event
of certain redemption transactions (see "Contingent Deferred Sales Charge"
below). For the convenience of shareholders, the Fund has arranged for different
procedures for redemption and repurchase. The proceeds of a redemption or
repurchase will normally be available within seven days, except that the Fund
will not make proceeds available until checks (including certified checks or
cashier's checks) received as payment for the purchase of the shares to be
redeemed have cleared. Payment of redemption proceeds may be delayed for up to
seven days if the Fund determines that such a delay would be in the best
interest of all its shareholders.
A. REDEMPTION BY MAIL -- Each shareholder has the right to redeem all or any
portion of the shares in his account by mailing or delivering to the Shareholder
Servicing Agent (see back cover for address) a stock power with a written
request for redemption or a letter of instruction, together with his share
certificates (if any were issued), all in "good order" for transfer. "Good
order" generally means that the stock power, written request for redemption,
letter of instruction or share certificate must be endorsed by the record
owner(s) exactly as the shares are registered and the signature(s) must be
guaranteed in the manner set forth below under the caption "Signature
Guarantee." In addition, in some cases "good order" may require the furnishing
of additional documents. The Shareholder Servicing Agent may make certain de
minimis exceptions to the above requirements for redemption. Within seven days
after receipt of a redemption request by the Shareholder Servicing Agent in
"good order," the Fund will make payment in cash of the net asset value of the
shares next determined after such redemption request was received, reduced by
the amount of any applicable CDSC and the amount of any income tax required to
be withheld, except during any period in which the right of redemption is
suspended or date of payment is postponed because the Exchange is closed or
trading on the Exchange is restricted or, to the extent otherwise permitted by
the 1940 Act, if an emergency exists.
B. REDEMPTION BY TELEPHONE -- Each shareholder may redeem an amount from his
account by telephoning toll-free at (800) 225-2606. Shareholders wishing to
avail themselves of this telephone redemption privilege must so elect on their
Account Application, designate thereon a commercial bank and account number to
receive the proceeds of such redemption, and sign the Account Application Form
with the signature(s) guaranteed in the manner set forth below under the caption
"Signature Guarantee". The proceeds of such a redemption, reduced by the amount
of any applicable CDSC described above and the amount of any income tax required
to be withheld, are mailed by check to the designated account, without charge.
As a special service, investors may arrange to have proceeds in excess of $1,000
wired in federal funds to the designated account. If a telephone redemption
request is received by the Shareholder Servicing Agent by the close of regular
trading on the Exchange on any business day, shares will be redeemed at the
closing net asset value of the Fund on that day. Subject to the conditions
described in this section, proceeds of a redemption are normally mailed or wired
on the next business day following the date of receipt of the order for
redemption. The Shareholder Servicing Agent will not be responsible for any
losses resulting from unauthorized telephone transactions if it follows
reasonable procedures designed to verify the identity of the caller. The
Shareholder Servicing Agent will request personal or other information from the
caller, and will normally also record calls. Shareholders should verify the
accuracy of confirmation statements immediately after their receipt.
C. REPURCHASE THROUGH A DEALER -- If a shareholder desires to sell his shares at
net asset value through his securities dealer (a repurchase), the shareholder
can place a repurchase order with his dealer, who may charge the shareholder a
fee. IF THE DEALER RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF
REGULAR TRADING ON THE EXCHANGE AND COMMUNICATES IT TO FSI ON THE SAME DAY
BEFORE FSI CLOSES FOR BUSINESS, 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.
SIGNATURE GUARANTEE: In order to protect shareholders against fraud to the
greatest extent possible, the Fund requires in certain instances as indicated
above that the shareholder's signature be guaranteed. In these cases the
shareholder's signature must be guaranteed by an eligible bank, broker, dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association. Signature guarantees shall be accepted
in accordance with policies established by the Shareholder Servicing Agent.
Shareholders of the Fund who have redeemed their shares have a one-time right to
reinvest the redemption proceeds in the same class of shares of any of the MFS
Funds (if shares of such Fund are available for sale) at net asset value (with a
credit for any CDSC paid) within 90 days of the redemption pursuant to the
Reinstatement Privilege. If the shares credited for any CDSC paid are then
redeemed within six years of the initial purchase in the case of Class B shares,
or within 12 months of the initial purchase for certain Class A share purchases,
a CDSC will be imposed upon redemption. Such purchases under the Reinstatement
Privilege are subject to all limitations in the Statement of Additional
Information regarding this privilege.
Subject to the Fund's compliance with applicable regulations, the Fund has
reserved the right to pay the redemption or repurchase price of shares of the
Fund, either totally or partially, by a distribution in kind of 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
receives a distribution in kind, the shareholder could incur brokerage or
transaction charges in converting the securities to cash.
Due to the relatively high cost of maintaining small accounts, the Fund reserves
the right to redeem shares in any account for their then-current value (which
will be promptly paid to the shareholder) if at any time the total investment in
such account drops below $500 because of redemptions, except in the case of
accounts established for monthly automatic investments and certain payroll
savings programs and the Automatic Exchange Plan for which there is a lower
minimum investment requirement (see "Purchases"). Shareholders will be notified
that the value of their account is less than the minimum investment requirement
and allowed 60 days to make an additional investment before the redemption is
processed. No CDSC will be imposed with respect to such involuntary redemptions.
CONTINGENT DEFERRED SALES CHARGE. Investments ("Direct Purchases") will be
subject to a CDSC for a period of 12 months (in the case of purchases of $1
million or more of Class A shares) or six years (in the case of purchases of
Class B shares). Purchases of Class A shares made during a calendar month,
regardless of when during the month the investment occurred, will age one month
on the last day of the month and each subsequent month. Class B shares purchased
on or after January 1, 1993 will be aggregated on a calendar month basis -- all
transactions made during a calendar month, regardless of when during the month
they have occurred, will age one year at the close of business on the last day
of such month in the following calendar year and each subsequent year. For Class
B shares of the Fund purchased prior to January 1, 1993, transactions will be
aggregated on a calendar year basis -- all transactions made during a calendar
year, regardless of when during the year they have occurred, will age one year
at the close of business on December 31 of that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class represented by Direct Purchases exceeds the sum
of the six calendar year aggregations (12 months in the case of purchases of $1
million or more of Class A shares) of Direct Purchases may be redeemed without
charge ("Free Amount"). Moreover, no CDSC is ever assessed on additional shares
acquired through the automatic reinvestment of dividends or capital gain
distributions ("Reinvested Shares").
Therefore, at the time of redemption of shares of a particular class, (i) any
Free Amount is not subject to the CDSC, and (ii) the amount of 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.
DISTRIBUTION PLAN
The Trustees have adopted a distribution plan for Class B shares pursuant to
Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the "Rule") after
having concluded that there is a reasonable likelihood that the plan would
benefit the Fund and the Class B shareholders. There is no distribution plan for
Class A shares.
CLASS B DISTRIBUTION PLAN. The Class B Distribution Plan provides that the
Fund will pay FSI a daily distribution fee equal on an annual basis to 0.75% of
the Fund's average daily net assets attributable to Class B shares and may
annually pay FSI a service fee of up to 0.25% of the Fund's average daily net
assets attributable to Class B shares (which FSI will in turn pay to securities
dealers which enter into a sales agreement with FSI at a rate of up to 0.25% of
the Fund's average daily net assets attributable to Class B shares owned by
investors for whom that securities dealer is the holder or dealer of record).
This service fee is intended to be additional consideration for all personal
services and/or account maintenance services rendered by the dealer with respect
to Class B shares. Fees payable under the Class B Distribution Plan are charged
to, and therefore reduce, income allocated to Class B shares. Except in the case
of the first year service fee, no service fee will be paid. This elimination of
the service fee may be amended or terminated without notice to shareholders. The
first year service fee will be paid as noted below. The Class B Distribution
Plan also provides that FSI will receive all CDSCs attributable to Class B
shares which do not reduce the distribution fee. FSI will pay commissions to
dealers of 3.75% of the purchase price of shares purchased through dealers. FSI
will also advance to dealers the first year service fee at a rate equal to 0.25%
of the purchase price of such shares and, as compensation therefor, FSI may
retain the service fee paid by the Fund with respect to such shares for the
first year after purchase. Therefore, the total amount paid to a dealer upon the
sale of shares is 4.00% of the purchase price of the shares (commission rate of
3.75% plus a service fee equal to 0.25% of the purchase price). Dealers will
become eligible for additional service fees with respect to such shares
commencing in the thirteenth month following purchase. Dealers may from time to
time be required to meet certain criteria in order to receive service fees. FSI
or its affiliates are entitled to retain all service fees payable under the
Class B Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by FSI or its affiliates
for shareholder accounts. The purpose of the distribution payments to FSI under
the Class B Distribution Plan is to compensate FSI for its distribution services
to the Fund. Since FSI's compensation is not directly tied to its expenses, the
amount of compensation received by FSI during any year may be more or less than
its actual expenses. For this reason, this type of distribution fee arrangement
is characterized by the staff of the SEC as being of the "compensation" variety.
However, the Fund is not liable for any expenses incurred by FSI in excess of
the amount of compensation it receives. The expenses incurred by FSI, including
commissions to dealers, are likely to be greater than the distribution fees for
the next several years, but thereafter such expenses may be less than the amount
of the distribution fees. Certain banks and other financial institutions that
have agency agreements with FSI will receive agency transaction and service fees
that are the same as commissions and service fees to dealers.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income to its
shareholders as dividends on a monthly basis. In determining the net investment
income available for distributions, the Fund may rely on projections of its
anticipated net investment income over a longer term, rather than its actual net
investment income for the period in order to provide more stable periodic
distributions. 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 shares because expenses attributable to Class B shares will generally
be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, and to make
distributions to its shareholders in accordance with the timing requirements
imposed by the Code. It is expected that the Fund will not be required to pay
entity level federal income or excise taxes. Because the Fund intends to satisfy
certain requirements of the Code, the Fund expects to pay dividends to
shareholders from interest on Municipal Bonds that are generally exempt from
federal income tax. From time to time a portion of the Fund's distributions will
be taxable to shareholders (e.g., distributions of income from investments in
taxable securities, including repurchase agreements, income from transactions in
certain Municipal Bonds purchased at a market discount, and certain other short
term investments and of capital gains realized by the Fund, including gains
recognized from options and futures transactions, whether paid in cash or
reinvested in additional shares. Depending on the nature of the distribution and
the residence of the shareholder, certain Fund distributions may be subject to
state and local income taxes; shareholders should consult with their own tax
advisors in this regard.
A statement setting forth the federal income status of all dividends and
distributions for that year, including any portion taxable as ordinary income,
the portion exempted from federal income tax as "exempt-interest dividends," any
portion that is a tax preference item for purposes of the alternative minimum
tax, the portion taxable as long-term capital gains, the portion, if any,
representing a return of capital (which is generally free of taxes, but results
in a basis reduction), and the amount, if any, of federal income tax withheld
will be sent to each shareholder promptly after the end of such year.
Current federal tax law limits the types and volume of bonds qualifying for the
federal income tax exemption of interest and makes interest on certain
tax-exempt bonds and distributions by the Fund of such interest a tax preference
item for purposes of the individual and corporate alternative minimum tax. All
exempt-interest dividends may affect a corporate shareholder's alternative
minimum tax liability.
Interest on indebtedness incurred by shareholders to purchase or carry shares of
the Fund will not be deductible for federal income tax purposes. Exempt-
interest dividends are taken into account in calculating the amount of social
security and railroad retirement benefits that may be subject to federal income
tax. Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by certain private activity bonds
should consult their tax advisers before purchasing shares of the Fund.
"Substantial user" is defined generally as including a "non-exempt person" who
regularly uses in trade or business a part of a facility financed from the
proceeds of certain private activity bonds.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on any
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.,
regardless of whether a lower rate may be permitted under an applicable treaty.
The Fund is also required in certain circumstances to apply backup withholding
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the U.S.)
who does not furnish to the Fund certain information and certifications or who
is otherwise subject to backup withholding. However, backup withholding will not
be applied to payments which have been subject to 30% withholding.
Prospective investors should read the Fund's Account Application for additional
information regarding backup withholding of federal income tax and should
consult their own tax advisors as to the tax consequences to them of an
investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of shares of the Fund is determined
each day during which the Exchange is open for trading. This determination is
made once during each such day as of the close of regular trading on the
Exchange by deducting the amount of the liabilities attributable to the class
from the value of the 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 or other fair value, as
described in the Statement of Additional Information. The net asset value of
each class of shares is effective for orders received by the dealer prior to its
calculation and received by FSI prior to the close of business on that day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of two series of the Trust, has two classes of shares, entitled
Class A and Class B Shares of Beneficial Interest (without par value). The Trust
has reserved the right to create and issue additional classes and series of
shares, in which case each class of shares of a series would participate equally
in the earnings, dividends and assets attributable to that class of that
particular series. Shareholders are entitled to one vote for each share held and
shares of each series would be entitled to vote separately to approve investment
advisory agreements or changes in investment restrictions, but shares of all
series would vote together in the election of Trustees and ratification of
selection of accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under its Rule 12b-1 plan
or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters. The Trust does not intend to hold annual shareholder meetings.
The Declaration of Trust provides that a Trustee may be removed from office in
certain instances (see "Description of Shares, Voting Rights and Liabilities" in
the Statement of Additional Information).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as set
forth above in "Purchases Conversion of Class B Shares"). Shares of the Fund are
fully paid and non-assessable. Should the Fund be liquidated, shareholders of
each class would be 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 existed (e.g., fidelity bonding and errors and omission insurance) and
the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate,
tax-equivalent yield and total rate of return quotations for each class of
shares and may also quote fund rankings in the relevant fund category from
various sources, such as the Lipper Analytical Services, Inc. and Wiesenberger
Investment Companies Service. Any yield and tax-equivalent yield quotations are
based on the annualized net investment income per share allocated to each class
of the Fund over a 30-day period stated as a percent of the maximum public
offering price of that class on the last day of that period. Yield calculations
for Class B shares assume no CDSC is paid. The current distribution rate for
each class is generally based upon the total amount of dividends per share paid
by the Fund to shareholders of that class during the past twelve months and is
computed by dividing the amount of such dividends by the maximum public offering
price of that class at the end of such period. Current distribution rate
calculations for Class B shares assume no CDSC is paid. The current distribution
rate differs from the yield calculation because it may include distributions to
shareholders from sources other than dividends and interest, such as premium
income from option writing, short-term capital gains, and return of invested
capital, and is calculated over a different period of time. Total rate of return
quotations reflect the average annual percentage change over stated periods in
the value of an investment in each class of shares of the Fund made at the
maximum public offering price of the shares of that class with all distributions
reinvested and which, if quoted for periods of six years or less, will give
effect to the imposition of the CDSC assessed upon redemptions of the Fund's
Class B shares. Such total rate of return quotations may be accompanied by
quotations which do not reflect the reduction in value of the initial investment
due to the sales charge or the deduction of a CDSC, and which will thus be
higher. All performance quotations are based on historical performance and are
not intended to indicate future performance. Yield and tax-equivalent yield
reflect only net portfolio income allocable to a class as of a stated time and
current distribution rate reflects only the rate of distributions paid by the
Fund over a stated period of time while total rate of return reflects all
components of investment return over a stated period of time. The Fund's
quotations may from time to time be used in advertisements, shareholder reports
or other communications to shareholders. For a discussion of the manner in which
the Fund will calculate its yield, current distribution rate, tax-equivalent
yield and total rate of return, see the Statement of Additional Information. 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.
8. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund should contact the Shareholder Servicing
Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year each shareholder will receive income tax information
regarding the tax status of all reportable dividends and distributions for that
year.
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional
shares. This option will be assigned if no other option is specified.
-- Dividends (including short-term capital gains) in cash; long-term
capital gain distributions reinvested in additional shares.
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) of dividends and capital gain
distributions will be made in additional full and fractional shares of the same
class of shares of the Fund at the net asset value in effect at the close of
business on the record date. Dividends and capital gains distributions in
amounts less than $10 will automatically be reinvested in additional shares of
the Fund. Any request for an option change must be received by the Shareholder
Servicing Agent by the record date for a dividend or distribution in order to be
effective for that dividend or distribution. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the Statement of Additional Information) anticipates purchasing
$100,000 or more of Class A shares of the Fund alone or in combination with
shares of Class B of the Fund or any of the classes of other MFS Funds or MFS
Fixed Fund (a bank collective investment fund) within a 13-month period (or
36-month period for purchases of $1 million or more), the shareholder may obtain
such shares of the Fund at the same reduced sales charge as though the total
quantity were invested in one lump sum, subject to escrow agreements and the
appointment of an attorney for redemptions from the escrow amount if the
intended purchases are not completed, by completing the Letter of Intent section
of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of all classes of shares of
that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of distributions of dividends and capital gains 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 any
other MFS Fund, if shares of such Fund are available for sale (without any
applicable CDSC).
SYSTEMATIC WITHDRAWAL PLAN: A shareholder (except a $3 Million Shareholder)
may direct the Shareholder Servicing Agent to send him (or anyone he designates)
regular periodic payments, as designated on the Account Application and based
upon the value of his account. Each payment under a Systematic Withdrawal Plan
(a "SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B shares in any year pursuant to a SWP will not
be subject to a CDSC and generally are limited to 10% of the value of the
account at the time of the establishment of the SWP. The CDSC will not be waived
in the case of SWP redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or investment
dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for shares of the same class of
shares of the other MFS Funds under the Automatic Exchange Plan. The Automatic
Exchange Plan provides for automatic transfers of funds from the shareholder's
account in an MFS Fund for investment in the same class of shares of other MFS
Funds selected by the shareholder. Under the Automatic Exchange Plan, transfers
of at least $50 each may be made to up to four different funds. A shareholder
should consider the objectives and policies of a fund and review its prospectus
before electing to transfer money into such fund through the Automatic Exchange
Plan. No transaction fee is imposed in connection with transfer transactions
under the Automatic Exchange Plan. However, transfers of shares of MFS Money
Market Fund, MFS Government Money Market Fund and Class A shares of MFS Cash
Reserve Fund will be subject to any applicable sales charge. For federal and
(generally) state income tax purposes, a transfer is treated as a sale of the
shares transferred and, therefore, could result in a capital gain or loss to the
shareholder making the transfer. See the Statement of Additional Information for
further information concerning the Automatic Exchange Plan. Investors should
consult their tax advisers for information regarding the potential capital gain
and loss consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchase through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases.
The Statement of Additional Information, dated June 1, 1994, contains more
detailed information about the Trust and the Fund including information related
to (i) investment policies and restrictions, (ii) the Trustees, officers and
investment adviser, (iii) portfolio transactions and brokerage commissions, (iv)
the method used to calculate yield, tax-equivalent yield and total rate of
return quotations of the Fund, (v) the Distribution Plan 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
TAXABLE EQUIVALENT YIELD TABLE
(UNDER FEDERAL INCOME TAX LAW AND RATES FOR 1994)
The table below shows the approximate taxable bond yields which are
equivalent to tax-exempt bond yields from 3% to 8% under federal income tax laws
that apply to 1994. (Such yields may differ under the laws applicable to
subsequent years.) Separate calculations, showing the applicable taxable income
brackets, are provided for investors who file joint returns and for those
investors who file individual returns.
<TABLE>
<CAPTION>
SINGLE RETURN JOINT RETURN
------------- ------------ INCOME TAX-EXEMPT YIELD
(TAXABLE INCOME)<F1> TAX ---------------------------------------------------------
BRACKET 3% 4% 5% 6% 7% 8%
------------------------------ ------- ---------------------------------------------------------
1994 1994 EQUIVALENT TAXABLE YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-$ 22,750 $ 0-$ 38,000 15.00% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 22,751-$ 55,100 $ 38,001-$ 91,850 28.00 4.17 5.56 6.94 8.33 9.72 11.11
$ 55,101-$115,000 $ 91,851-$140,000 31.00 4.35 5.80 7.25 8.70 10.14 11.59
$115,000-$250,000 $140,001-$250,000 36.00 4.69 6.25 7.81 9.38 10.94 12.50
$250,000 & Over $250,000 & Over 39.60 4.97 6.62 8.28 9.93 11.59 13.25
<FN>
<F1> Net amount subject to Federal income tax after deductions and exemptions.
</TABLE>
APPENDIX B
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as bridges, highways, housing, hospitals, mass transportation, schools,
streets and water and sewer works. Other public purposes for which Municipal
Bonds may be issued include refunding outstanding obligations, obtaining funds
for general operating expenses, and obtaining funds to loan to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to obtain
funds to provide privately-operated housing facilities, sports facilities,
convention or trade show facilities, airport, mass transit, port or parking
facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity or sewage or solid waste disposal.
Such obligations are included within the term Municipal Bonds if the interest
paid thereon qualifies as exempt from federal income taxes. Other types of
industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Bonds, although the current
federal tax laws place substantial limitations on the size of such issues.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its good faith, credit and taxing power for the payment of
principal and interest. The payment of such bonds may be dependent upon an
appropriation by the issuer's legislative body. The characteristics and
enforcement of general obligation bonds vary according to the law applicable to
the particular issuer. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Industrial
development bonds which are Municipal Bonds are in most cases revenue bonds and
do not generally constitute the pledge of the credit of the issuer of such
bonds. Municipal Bonds also include participations in municipal leases. These
are undivided interests in a portion of an obligation in the form of a lease or
installment purchase which is issued by state and local governments to acquire
equipment and facilities. Municipal leases frequently have special risks not
normally associated with general obligation or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title to the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt-issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
provide that the governmental issuer has no obligation to make future payments
under the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Although the
obligations will be secured by the leased equipment or facilities, the
disposition of the underlying property in the event of non-appropriation or
foreclosure might, in some cases, prove difficult. In light of these concerns,
the staff of the SEC has advised investment companies to adopt and follow
procedures for determining whether municipal lease securities purchased are
liquid and for monitoring the liquidity of municipal lease securities held in
such company's portfolio. The Board of Trustees has adopted such procedures and
has delegated to the Adviser the authority to make determinations on the
liquidity of municipal lease securities in accordance with the procedures. The
procedures require that the Adviser use a number of factors in calculating the
liquidity of a municipal lease security, including, the frequency of trades and
quotes for the security, the number of dealers willing to purchase or sell the
security and the number of other potential purchasers, the willingness of
dealers to undertake to make a market in the security, the nature of the
marketplace in which the security trades, the credit quality of the security and
other factors which the Adviser may deem relevant. There are, of course,
variations in the security of Municipal Bonds, both within a particular
classification and between classifications, depending on numerous factors.
The yields on Municipal Bonds are dependent on a variety of factors, including
general money market conditions, supply and demand and general conditions of the
Municipal Bond market, size of a particular offering, the maturity of the
obligation and rating of the issue.
DESCRIPTION OF MUNICIPAL BOND RATINGS
The ratings of Moody's and S&P represent their opinions as to the quality of
various debt instruments.
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
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime 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.
CON. (...): Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These are bonds
secured by (a) earnings of projects under construction, (b) earnings of projects
unseasoned in operation experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
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 that are not rated as
a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating catgegory is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CC: The rating "CC" is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
C: The rating "C" is typically applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating "CI" is reserved for income bonds on which no interest is being
paid.
D: Bonds rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payment is 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.
NR: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeble future
developments, short-term debt of these issuers is generally rated "F-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds wih higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in immiment default in payment of interest or principal.
PLUS (+) MINUS (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR Indicates that Fitch does not rate the specific issue.
CONDITIONAL A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
SUSPENDED A rating is suspended when Fitch deems the amount of information
available from the issuer to be indadequate for rating purposes.
WITHDRAWN A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of an occurrence
that is likely to result in a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for potential downgrade, or "Evolving", where ratings may be raised
or lowered. FitchAlert is relatively short-term, and should be resolved within
12 months.
APPENDIX C
PORTFOLIO COMPOSITION CHART
FOR FISCAL YEAR ENDED JANUARY 31, 1994
PERCENT OF
SECURITY NET ASSETS
- -------- ----------
Cash and Cash Equivalents ...................... 3%
Debt -- Unrated by S&P ......................... 51
DEBT -- S&P RATING
AAA ...................................... 15
AA ...................................... 7
A ...................................... 10
BBB ...................................... 9
BB ....................................... 4
B ........................................ 1
---
100%
===
The chart above indicates the composition of the Fund's portfolio for the
Fund's fiscal year ended January 31, 1994, with the debt securities rated by S&P
separated into the indicated categories. The percentages were calculated by
averaging the monthly dollar weighted average of the Fund's net assets invested
in each category. The chart does not necessarily indicate what the composition
of the Fund's portfolio will be in subsequent fiscal years. Rather, the Fund's
investment objective, policies and restrictions indicate the extent to which the
Fund may purchase securities in the various categories.
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Financial Services, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT ACCOUNTANTS
Ernst & Young
200 Clarendon Street, Boston, MA 02116
MFS(R) MUNICIPAL
HIGH INCOME FUND
500 Boylston Street, Boston, Mass. 02116
MMH-1-6/94/118M 25/225
MFS(R)
MUNICIPAL
HIGH INCOME
FUND
PROSPECTUS
June 1, 1994
