<PAGE>
MFS(R) HIGH INCOME FUND
(A SERIES OF MFS SERIES TRUST III)
SUPPLEMENT TO BE AFFIXED TO THE CURRENT
PROSPECTUS FOR DISTRIBUTION IN INDIANA
The Fund invests primarily in securities (commonly known as "junk bonds") which
are ordinarily in the lower rating categories of recognized rating agencies or
are unrated and generally involve greater volatility of price and risk of loss
of principal and interest income than securities in the higher rating
categories. An investment in shares of the Fund should not be considered to
constitute a complete investment program and investors should carefully assess
the risks associated with an investment in this Fund.
THE DATE OF THIS SUPPLEMENT IS JUNE 1, 1994.
MHI-16IN-6/94/6.8M
<PAGE>
MFS(R) HIGH INCOME FUND
(A SERIES OF MFS SERIES TRUST III)
SUPPLEMENT TO BE AFFIXED TO THE CURRENT
PROSPECTUS FOR DISTRIBUTION IN WASHINGTON
The Fund invests primarily in securities (commonly known as "junk bonds") which
are ordinarily in the lower rating categories of recognized rating agencies or
are unrated and generally involve greater volatility of price and risk of loss
of principal and interest income than securities in the higher rating
categories. An investment in shares of the Fund should not be considered to
constitute a complete investment program and investors should carefully assess
the risks associated with an investment in this Fund.
THE DATE OF THIS SUPPLEMENT IS JUNE 1, 1994.
MHI-16WA-6/94/6.8M
<PAGE>
MFS(R) HIGH INCOME FUND
SUPPLEMENT TO THE CURRENT PROSPECTUS
The third sentence under the caption "Management of the Fund - Investment
Adviser" beginning on page 13 of the Prospectus has been deleted and replaced in
its entirety by the following sentence: Robert J. Manning, a Senior Vice
President of the Adviser, has become the Fund's portfolio manager. Mr. Manning
has been employed by the Adviser since 1984.
THE DATE OF THIS SUPPLEMENT IS JULY 11, 1994.
MHI-16-7/94/86M
<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
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>
<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) or 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>
MFS(R) MANAGED SECTORS FUND MFS(R) GROWTH OPPORTUNITIES FUND
MFS(R) EMERGING GROWTH FUND MFS(R) HIGH INCOME FUND
MFS(R) CAPITAL GROWTH FUND MFS(R) MUNICIPAL BOND FUND
MFS(R) GOLD & NATURAL RESOURCES FUND MFS(R) RESEARCH FUND
MFS(R) WORLD TOTAL RETURN FUND MFS(R) VALUE FUND
MFS(R) WORLD EQUITY FUND MFS(R) BOND FUND
MFS(R) UTILITIES FUND MFS(R) LIMITED MATURITY FUND
MFS(R) STRATEGIC INCOME FUND MFS(R) MUNICIPAL LIMITED MATURITY FUND
MFS(R) MUNICIPAL INCOME FUND MFS(R) MUNICIPAL SERIES TRUST
SUPPLEMENT TO BE AFFIXED TO THE CURRENT PROSPECTUS FOR DISTRIBUTION IN OHIO
Prospective Ohio investors should note the following:
a) This Prospectus must be delivered to the investor prior to consummation of
the sale;
b) The Fund may invest up to 50% of its assets in restricted securities,
including Rule 144A securities which have been deemed to be liquid by the Board
of Trustees.
THE DATE OF THIS SUPPLEMENT IS FEBRUARY 1,1995.
MFS-160H-2/95/19.5M
<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
June 1, 1994
Class A Shares of Beneficial Interest
MFS(R) HIGH INCOME FUND Class B Shares of Beneficial Interest
(A Member of the MFS Family of Funds(R)) Class C Shares of Beneficial Interest
Page
1. The Fund .............................................................. 2
2. Expense Summary ....................................................... 2
3. Condensed Financial Information ....................................... 4
4. Investment Objective and Policies ..................................... 4
5. Management of the Fund ................................................ 13
6. Information Concerning Shares of the Fund ............................. 14
Purchases ......................................................... 14
Exchanges ......................................................... 19
Redemptions and Repurchases ....................................... 20
Distribution Plans ................................................ 22
Distributions ..................................................... 23
Tax Status ........................................................ 24
Net Asset Value ................................................... 24
Description of Shares, Voting Rights and Liabilities .............. 24
Performance Information ........................................... 25
7. Shareholder Services .................................................. 25
Appendix A ............................................................ 28
Appendix B ............................................................ 30
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 HIGH INCOME FUND 500 Boylston Street, Boston, Massachusetts 02116 (617)
954-5000
The investment objective of MFS High Income Fund (the "Fund") is to seek high
current income by investing primarily in a professionally managed diversified
portfolio of fixed income securities, some of which may involve equity features
(see "Investment Objective and Policies"). The Fund is a diversified series of
MFS Series Trust III (the "Trust"), an open-end investment company. The minimum
initial investment is generally $1,000 per account (see "Purchases").
-----------------------------
Securities offering the high current income sought by the Fund (commonly known
as "junk bonds") are ordinarily in the lower rating categories of recognized
rating agencies or are unrated and generally involve greater volatility of price
and risk of principal and income than securities in the higher rating
categories. Accordingly, an investment in the Fund may not be appropriate for
all investors.
-----------------------------
The investment adviser and distributor for the Fund 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 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 27 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.
1. THE FUND
MFS High Income Fund (the "Fund") is a diversified series of MFS Series Trust
III (the "Trust"), 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. Shares of the Fund are continuously sold to
the public and the Fund then uses the proceeds to buy securities (primarily
bonds and other fixed income instruments) for its portfolio. Three classes of
shares of the Fund currently 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) and subject to a Distribution Plan providing for a distribution fee and
a service fee. Class B shares are offered at net asset value without a sales
charge but subject to a CDSC and a Distribution Plan providing for a
distribution fee and a service fee which are greater than the Class A
distribution fee and service fee. Class B shares will convert to Class A shares
approximately eight years after purchase. Class C shares are offered at net
asset value without a sales charge or a CDSC but are subject to a Distribution
Plan providing for an annual distribution and service fee which are equal to the
Class B annual distribution fee and service fee. Class C shares do not convert
to any other class of shares of the Fund.
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 portfolio from day to day in
accordance with the Fund's investment objective and policies. The selection of
investments and the way they are managed depend on the conditions and trends in
the economy and the financial marketplaces. The Trust also offers to buy back
(redeem) shares of the Fund from Fund shareholders at any time at their net
asset value, less any applicable CDSC.
2. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
CLASS A CLASS B CLASS C
------- ------- -------
Maximum Initial Sales Charge Imposed on
Purchases of Fund Shares (as a
percentage of offering price) 4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales
Charge (as a percentage of original
purchase price or redemption
proceeds, as applicable) ............ See Below(1) 4.00% 0.00%
ANNUAL OPERATING EXPENSES OF THE FUND
(AS A PERCENTAGE OF AVERAGE NET ASSETS):(2)
Management Fees 0.45% 0.45% 0.45%
Rule 12b-1 Fees 0.21%(3) 1.00%(4) 1.00%(4)
Other Expenses 0.34% 0.42%(5) 0.35%(5)
---- ---- ----
Total Operating Expenses 1.00% 1.87% 1.80%
(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" below).
(2) Percentages are based on expenses incurred during the fiscal year ended
January 31, 1994. For Class B shares, which were initially offered on
September 27, 1993, percentages are based on Class A fees and expenses
adjusted for Class B specific expenses incurred during such partial fiscal
year. For Class C shares, which were initially offered on January 3, 1994,
percentages are based on Class A fees and expenses adjusted for Class C
specific expenses incurred during such partial fiscal year.
(3) The Fund has adopted a Distribution Plan for its Class A shares in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act") which provides that it will pay distribution/
service fees aggregating up to (but not necessarily all of) 0.35% per annum
of the average daily net assets attributable to the Class A shares (see
"Distribution Plans"). Currently, 0.10% of the distribution/service fee is
being waived. After a substantial period of time, distribution expenses paid
under this Plan, together with the initial sales charge, may total more than
the maximum sales charge that would have been permissible if imposed
entirely as an initial sales charge.
(4) The Fund has adopted a Distribution Plan for its Class B and its Class C
shares in accordance with Rule 12b-1 under 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 under the Class B Distribution Plan and the Class C shares
under the Class C Distribution Plan (see "Distribution Plans"). After a
substantial period of time, distribution expenses paid under these Plans,
together with any CDSC payable upon redemption of Class B shares, may total
more than the maximum sales charge that would have been permissible if
imposed entirely as an initial sales charge.
(5) 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" which has been estimated for Class B and Class C shares.
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 CLASS C
- ------ ------- ------- -------
(1)
1 year $ 57 $ 59 $ 19 $ 18
3 years 78 89 59 57
5 years 100 121 101 97
10 years 164 196(2) 196(2) 212
(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 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 Plans".
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 Deloitte & Touche, independent certified public
accountants, as experts in accounting and auditing.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
CLASS A, CLASS B AND CLASS C SHARES
YEAR ENDED JANUARY 31,
---------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ----
CLASS A
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of period $ 5.11 $ 4.89 $ 3.71 $ 4.85 $ 6.04 $ 6.17 $ 7.11 $ 7.14
------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations -
Net investment income<F5> $ 0.40 $ 0.51 $ 0.56 $ 0.65 $ 0.69 $ 0.76 $ 0.77 $ 0.93
Net realized and unrealized gain (loss) on
investments 0.48 0.24 1.21 (1.08) (1.13) (0.09) (0.83) 0.07
------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations $ 0.88 $ 0.75 $ 1.77 $(0.43) $(0.44) $ 0.67 $(0.06) $ 1.00
Less distributions declared to shareholders -
From net investment income $(0.42) $(0.51) $(0.56) $(0.71) $(0.75) $(0.75) $(0.87) $(0.93)
In excess of net investment income (0.07) -- -- -- -- -- -- --
From paid-in capital<F1> -- (0.02) (0.03) -- -- -- -- --
From net realized gains -- -- -- -- -- (0.05) (0.01) (0.10)
------ ------ ------ ------ ------ ------ ------ ------
Total distributions declared to shareholders $ (0.49) $(0.53) $(0.59) $(0.71) $(0.75) $(0.80) $(0.88) $(1.03)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value - end of period $ 5.50 $ 5.11 $ 4.89 $ 3.71 $ 4.85 $ 6.04 $ 6.17 $ 7.11
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
TOTAL RETURN<F4> 18.13% 16.36% 49.64% (10.99)% (9.18)% 10.68% (1.94)% 14.03%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses<F5> 1.00% 1.03% 1.10% 1.05% 0.87% 0.87% 0.75% 0.71%
Net investment income<F5> 8.22% 10.21% 11.59% 14.97% 12.17% 12.44% 11.49% 12.49%
PORTFOLIO TURNOVER 68% 75% 28% 24% 25% 34% 28% 46%
NET ASSETS AT END OF PERIOD (000,000 OMITTED) $ 645 $ 585 $ 556 $ 380 $ 574 $ 880 $1,001 $1,232
<CAPTION>
1986 1985 1994 1994
----------------- -------------------
CLASS A CLASS B<F2> CLASS C<F3>
----------------- -------------------
<S> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of period $ 6.84 $ 7.90 $ 5.27 $ 5.41
------ ------ ------ ------
Income from investment operations -
Net investment income<F5> $ 0.87 $ 0.97 $ 0.15 $ --
Net realized and unrealized gain (loss) on
investments 0.37 (0.63) 0.22 0.09
------ ------ ------ ------
Total from investment operations $ 1.24 $ 0.34 $ 0.37 $ 0.09
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.94) $(0.91) $(0.13) $ --<F7>
In excess of net investment income -- -- (0.01) --<F7>
From paid-in capital<F1> -- -- -- --
From net realized gains -- (0.49) -- --
------ ------ ------ ------
Total distributions declared to shareholders $(0.94) $(1.40) $(0.14) $ --
------ ------ ------ ------
Net asset value - end of period $7.14 $ 6.84 $ 5.50 $ 5.50
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN<F4> 18.34% 4.59% 20.29%<F6> 28.07%<F6>
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses <F5> 0.80% 0.87% 1.79%<F6> 1.36%<F6>
Net investment income<F5> 12.47% 14.36% 6.94%<F6> 5.92%<F6>
PORTFOLIO TURNOVER 49% 79% 68% 68%
NET ASSETS AT END OF PERIOD (000,000 OMITTED) $ 581 $ 407 $ 371 $ 1
<FN>
- -------------
<F1>For the years ended January 31, 1990 and 1989, Class A per share
distributions from paid-in capital were $0.004 and $0.0006, respectively.
<F2>For the period from the commencement of offering of Class B shares,
September 27, 1993, to January 31, 1994.
<F3>For the period from the commencement of offering of Class C shares, January
3, 1994, to January 31, 1994.
<F4>These results do not include the applicable sales charge for Class A shares
(except for the reinvestment of dividends prior to March 1, 1991). If the
charge had been included, the results would have been lower.
<F5>The distributor did not impose its distribution fee for Class A shares
amounting to $255,234 for the year ended January 31, 1994. If this fee had
been incurred by the Fund, the Class A net investment income per share,
ratio of expenses to average net assets and net investment income to average
net assets would have been $0.40, 1.04% and 8.18%, respectively.
<F6>Annualized.
<F7>For the period ended January 31, 1994, Class C per share distributions from
net investment income and in excess of net investment income were $0.004 and
$0.001, respectively.
</FN>
</TABLE>
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The investment objective of the Fund is to seek high
current income by investing primarily in a professionally managed diversified
portfolio of fixed income securities, some of which may involve equity features.
Capital growth, if any, is a consideration incidental to the objective of the
Fund of high current income. Any investment involves risk and there can be no
assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES -- Fixed income securities offering the high current income
sought by the Fund normally include those fixed income securities which offer a
current yield above that generally available on debt 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). However, since available yields and yield differentials vary over
time, no specific level of income or yield differential can ever be assured. The
dividends paid by the Fund will increase or decrease in relation to the income
received by the Fund from its investments, which would in any case be reduced by
the expenses of the Fund before such income is distributed to its shareholders.
For a description of these rating categories, see Appendix A to this Prospectus
and for a chart indicating the composition of the Fund's portfolio for its
fiscal year ended January 31, 1994, with the debt securities rated by Standard &
Poor's separated into rating categories, see Appendix B to this Prospectus (see
"Investment Objective and Policies -- Risk Factors of Lower Rated Securities"
below for a description of the risks involved in investing in these lower rated
fixed income securities).
Fixed income securities include preferred and preference stocks and all types of
debt obligations of both domestic and foreign issuers, such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates
(including interests in trusts or other entities representing such obligations),
conditional sales contracts, commercial paper and obligations issued or
guaranteed by the U.S. Government, any foreign government or any of their
respective political subdivisions, agencies or instrumentalities (including
obligations, such as repurchase agreements, secured by such instruments).
Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest and may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participations based on revenues, sales or profits; or the
purchase of common stock in a unit transaction (where corporate debt securities
and common stock are offered as a unit). Under normal market conditions, not
more than 25% of the value of the total assets of the Fund will be invested in
equity securities, including common stocks, warrants and rights.
Fixed income securities that the Fund may invest in also include zero coupon
bonds, deferred interest bonds and bonds on which the interest is payable in
kind ("PIK bonds"). Zero coupon and deferred interest bonds are debt obligations
which are issued at a significant discount from face value. The discount
approximates the total amount of interest the bonds will accrue and compound
over the period until maturity or the first interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
While zero coupon bonds do not require the periodic payment of interest,
deferred interest bonds provide for a period of delay before the regular payment
of interest begins. PIK bonds are debt obligations which provide that the issuer
thereof may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value due to changes in
interest rates than debt obligations which make regular payments of interest.
The Fund will accrue income on such investments for tax and accounting purposes,
as required, which is distributable to shareholders and which, because no cash
is received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Fund's distribution obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: The
Fund may invest a portion of its assets in collateralized mortgage obligations
("CMOs"), which are debt obligations collateralized by mortgage loans or
mortgage pass-through securities (such collateral collectively hereinafter
referred to as "Mortgage Assets"). The Fund may also invest a portion of its
assets in multiclass pass-through securities which are equity interests in a
trust composed of Mortgage Assets. Unless the context indicates otherwise, all
references herein to CMOs include multiclass pass-through securities. Payments
of principal of and interest on the Mortgage Assets, and any reinvested income
thereon, provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities. In CMOs, a series of
bonds or certificates are usually issued in multiple classes with different
maturities. Each class of CMOs, often referred to as a "tranch", is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier then their stated maturities or final
distribution dates, resulting in a loss of all or a part of the premium, if any
has been paid. The Fund may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. PAC
Bonds generally require payments of a specified amount of principal on each
payment date. PAC Bonds are always parallel pay CMOs with the required principal
payment on such securities having the highest priority after interest has been
paid to all classes. For a further description of CMOs, see the Statement of
Additional Information.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its assets
in stripped mortgage-backed securities, which are derivative securities usually
structured with two classes that receive different proportions of the interest
and principal distributions from an underlying pool of Mortgage Assets. For a
further discussion of stripped mortgage-backed securities and the risks related
to transactions therein, see the Statement of Additional Information.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
Stock on deposit with a custodian bank as collateral. Although ADRs are issued
by a U.S. depository, they are subject to many of the risks of foreign
securities such as changes in exchange rates and more limited information about
foreign issuers.
FOREIGN SECURITIES: The Fund may invest up to 50% (and expects generally to
invest between 5% and 20%) of its total assets in foreign securities (not
including American Depositary Receipts). Investing in securities of foreign
issuers generally involves risks not ordinarily associated with investing in
securities of domestic issuers. These include changes in currency rates,
exchange control regulations, governmental administration or economic or
monetary policy (in the United States or abroad) or circumstances in dealings
between nations. Costs may be incurred in connection with conversions between
various currencies. Special considerations may also include more limited
information about foreign issuers, higher brokerage costs, different accounting
standards and thinner trading markets. Foreign securities markets may also be
less liquid, more volatile and less subject to government supervision than in
the United States. Investments in foreign countries could be affected by other
factors including expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations and could be subject to
extended settlement periods. The Fund may hold foreign currency received in
connection with investments in foreign securities when, in the judgment of the
Adviser, it would be beneficial to convert such currency into U.S. dollars at a
later date, based on anticipated changes in the relevant exchange rate. The Fund
may also hold foreign currency in anticipation of purchasing foreign securities.
The Fund may invest in foreign securities without limitation and has authority
to invest up to 25% of its total assets in securities issued or guaranteed by
foreign governments or their agencies or instrumentalities. However, the Fund
has made commitments to regulatory authorities to limit its investments in
securities issued by any single foreign government to 5% of its total assets and
to continue to maintain its status as a diversified company under the Investment
Company Act of 1940, as amended (the "1940 Act"). See the Statement of
Additional Information for further discussion of foreign securities and the
holding of foreign currency, as well as the associated risks.
The Fund may invest up to 40% of the value of its total assets in each of the
electric utility and telephone industries, but will not invest more than 25% in
either of those industries unless yields available for four consecutive weeks in
the four highest rating categories on new issue bonds in such industry (issue
size of $50 million or more) have averaged in excess of 105% of yields of new
issue long-term industrial bonds similarly rated (issue size of $50 million or
more) and, in the opinion of the Adviser, the relative return available from the
electric utility or telephone industry and the relative risk, marketability,
quality and availability of securities of such industry justifies such an
investment.
During periods of unusual market conditions when the Adviser believes that
investing for defensive purposes is appropriate, part or all of the assets of
the Fund may be invested in cash (including foreign currency) or short-term
money market instruments including, but not limited to, 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.
When and if available, fixed income securities may be purchased at a discount
from face value. However, the Fund does not intend to hold such securities to
maturity for the purpose of achieving potential capital gains, unless current
yields on these securities remain attractive. From time to time the Fund may
purchase securities not paying interest at the time acquired if, in the opinion
of the Adviser, such securities have the potential for future income or capital
appreciation.
RISK FACTORS OF LOWER RATED SECURITIES: Securities offering the high current
income sought by the Fund are ordinarily in the lower rating categories of
recognized rating agencies (that is, ratings of Baa or lower by Moody's
Investors Service, Inc. ("Moody's") or BBB or lower by Standard & Poor's Ratings
Group ("S&P")) or are unrated and, as described below, generally involve greater
volatility of price and risk of principal and income than securites in the
higher rating categories. Accordingly, an investment in shares of the Fund
should not constitute a complete investment program and may not be appropriate
for all investors. The Fund, however, seeks to reduce risk through
diversification, credit analysis and attention to current developments and
trends in both the economy and financial markets. In addition, investments in
foreign securities may serve to provide further diversification.
The Fund may invest in fixed income securities rated Baa by Moody's or BBB by
S&P (and comparable unrated securities). These securities, while normally
exhibiting adequate protection parameters, have speculative characteristics and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than in the case of
higher grade fixed income securities.
The Fund may also invest in fixed income securities rated Ba or lower by Moody's
or BB or lower by S&P (and comparable unrated securities) (commonly known as
"junk bonds"). No minimum rating standard is required by the Fund. These
securities are considered speculative and, while generally providing greater
income than investments in higher rated securities, will involve greater risk of
principal and income (including the possibility of default or bankruptcy of the
issuers of such securities) and may involve greater volatility of price
(especially during periods of economic uncertainty or change) than securities in
the higher rating categories and because yields vary over time, no specific
level of income can ever be assured. These lower rated high yielding fixed
income securities generally tend to be affected by economic changes (and the
outlook for economic growth), short-term corporate and industry developments and
the market's perception of their credit quality (especially during times of
adverse publicity) to a greater extent than higher rated securities, which react
primarily to fluctuations in the general level of interest rates (although these
lower rated securities are also affected by changes in interest rates as
described below). In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of default by
the issuers of these securities and may do so in the future, especially in the
case of highly leveraged issuers. During certain periods, the higher yields on
the Fund's lower rated high yielding fixed income securities are paid primarily
because of the increased risk of loss of principal and income, arising from such
factors as the heightened possibility of default or bankruptcy of the issuers of
such securities. Due to the fixed income payments of these securities, the Fund
may continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Fund's yield despite the actual loss of principal. The prices for these
securities may be affected by legislative and regulatory developments. For
example, new federal rules require that savings and loan associations gradually
reduce their holdings of high-yield securities. An effect of such legislation
may be to depress the prices of outstanding lower rated high yielding fixed
income securities. The market for these lower rated fixed income securities may
be less liquid than the market for investment grade fixed income securities.
Furthermore, the liquidity of these lower rated securities may be affected by
the market's perception of their credit quality. Therefore, the Adviser's
judgment may at times play a greater role in valuing these securities than in
the case of investment grade fixed income securities, and it also may be more
difficult during times of certain adverse market conditions to sell these lower
rated securities to meet redemption requests or to respond to changes in the
market.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Fund's policy to rely exclusively on ratings issued by
these rating agencies, but rather to supplement such ratings with the Adviser's
own independent and ongoing review of credit quality. 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 primarily investing in higher
quality fixed income securities.
Since shares of the Fund represent an investment in securities with fluctuating
market prices, shareholders should understand that the value of shares of the
Fund will vary as the aggregate value of the portfolio securities of the Fund
increases or decreases. However, changes in the value of securities subsequent
to their acquisition will not affect cash income or yield to maturity to the
Fund.
The net asset value of the shares of an open-end investment company, such as the
Fund, which invests primarily in fixed income 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.
The Fund seeks to maximize the return on its portfolio by taking advantage of
market developments, yield disparities and variations in the creditworthiness of
issuers. This may result in increases or decreases in the current income of the
Fund available for distribution to its shareholders and in the holding by the
Fund of debt securities which sell at moderate to substantial premiums or
discounts from face value. Moreover, if the Fund's expectations of changes in
interest rates or its evaluation of the normal yield relationship between two
securities proves to be incorrect, the income, net asset value and potential
capital gain of the Fund may be decreased or its potential capital loss may be
increased.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage pass-through
securities. Mortgage pass-through securities are securities representing
interests in "pools" of mortgage loans. Monthly payments of interest and
principal by the individual borrowers on mortgages are passed through to the
holders of the securities (net of fees paid to the issuer or guarantor of the
securities) as the mortgages in the underlying mortgage pools are paid off.
The average lives of mortgage pass-throughs are variable when issued because
their average lives depend on prepayment rates. The average life of these
securities is likely to be substantially shorter than their stated final
maturity as a result of unscheduled principal prepayment. Prepayments on
underlying mortgages result in a loss of anticipated interest, and all or part
of a premium if any has been paid, and the actual yield (or total return) to
the Fund may be different than the quoted yield on the securities. Mortgage
prepayments generally increase with falling interest rates and decrease with
rising interest rates. Like other fixed income securities, when interest rates
rise the value of a mortgage pass-through security generally will decline;
however, when interest rates are declining, the value of mortgage pass-through
securities with prepayment features may not increase as much as that of other
fixed income securities.
SWAPS AND RELATED TRANSACTIONS: The Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements. Swaps involve the
exchange by the Fund with another party of cash payments based upon different
interest rate indexes, currencies, and other prices or rates, such as the value
of mortgage prepayment rates. For example, in the typical interest rate swap,
the Fund might exchange a sequence of cash payments based on a floating rate
index for cash payments based on a fixed rate.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap.
The sale of an interest rate floor obligates the seller to make payments to the
extent that a specified interest rate falls below an agreed-upon level. A collar
arrangement combines elements of buying a cap and selling a floor.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks different from those associated with ordinary portfolio
transactions. See the Statement of Additional Information for further
information on, and the risks involved in, these activities.
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.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities. Such loans will usually be made to member firms
(and subsidiaries thereof) of the New York Stock Exchange and to member banks of
the Federal Reserve System, and would be required to be secured continuously by
collateral in cash, cash equivalents or U.S. Treasury securities maintained on a
current basis at an amount at least equal to the market value of the securities
loaned. If the Adviser determines to make securities loans, it is intended that
the value of the securities loaned would not exceed 30% of the value of the
total assets of the Fund.
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 or 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.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities for delivery in the future (generally
within 30 days) and simultaneously contracts to repurchase substantially similar
(same type, coupon and maturity) securities on a specified future date. The Fund
will only enter into covered rolls. A "covered roll" is a specific type of
dollar roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction.
"WHEN-ISSUED" SECURITIES: The Fund may purchase some securities on a "when-
issued" or on a "forward delivery" basis, which means that the securities will
be delivered to the Fund at a future date usually beyond customary settlement
time. The commitment to purchase a security for which payment will be made on a
future date may be deemed a separate security. The Fund does not pay for the
securities until received, and does not start earning interest on the securities
until the contractual settlement date. In order to invest its assets
immediately, while awaiting delivery of securities purchased on such bases, the
Fund will normally invest in short-term securities that offer same-day
settlement and earnings.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card or automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. See the Statement of Additional
Information for further information on these securities.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933 ("1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a continuing
review of the trading markets for a specific Rule 144A security, whether such
security is illiquid and thus subject to a Fund's limitation on investing not
more than 15% of its net assets in illiquid investments, or liquid and thus not
subject to such limitation. The Board of Trustees has adopted guidelines and
delegated to MFS the daily function of determining and monitoring the liquidity
of Rule 144A securities. The Board, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Board will carefully
monitor the Fund's investments in Rule 144A securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in a Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing Rule 144A securities held in the
Fund's portfolio. Subject to the Fund's 15% limitation on investments in
illiquid investments, the Fund may also invest in restricted securities that may
not be sold under Rule 144A, which presents certain risks. As a result, the Fund
might not be able to sell these securities when the Adviser wishes to do so, or
might have to sell them at less than fair value. In addition, market quotations
are less readily available. Therefore, judgment may at times play a greater role
in valuing these securities than in the case of unrestricted securities.
OPTIONS: The Fund may write (sell) "covered" put and call options on domestic
and foreign 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 give the holder the right to sell the
underlying security 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, short-term
money market instruments and high quality debt securities 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 may write and purchase options on securities not only for hedging
purposes, but also for the purpose of increasing its return. Options on
securities that are written or purchased by the Fund will be traded on U.S. and
foreign exchanges and over-the-counter.
The Fund may also enter into options on the yield "spread" or yield differential
between two fixed income securities, a transaction referred to as a "yield
curve" option, for hedging and non-hedging purposes. In contrast to other types
of options, a yield curve option is based on the difference between the yields
of designated fixed income securities rather than the actual prices of the
individual securities. Yield curve options written by the Fund will be "covered"
but could involve additional risks, as discussed in the Statement of Additional
Information.
The staff of the Securities and Exchange Commission (the "SEC") has taken the
position that purchased over-the-counter options and assets used to cover
written over-the-counter options are illiquid and, therefore, together with
other illiquid securities held by the Fund, cannot exceed a certain percentage
of the Fund's assets (the "SEC illiquidity ceiling"). Although the Adviser
disagrees with this position, the Adviser intends to limit the Fund's writing of
over-the-counter options in accordance with the following procedure. Except as
provided below, the Fund intends to write over-the-counter options only with
primary U.S. Government securities dealers recognized as such by the Federal
Reserve Bank of New York. Also, the contracts which the Fund has in place with
such primary dealers provide that the Fund has the absolute right to repurchase
an option it writes at any time at a price which represents the fair market
value, as determined in good faith through negotiation between the parties, but
which in no event will exceed a price determined pursuant to a formula in the
contract. Although the specific formula may vary between contracts with
different primary dealers, the formula generally is based on a multiple of the
premium received by the Fund for writing the option, plus the amount, if any, of
the option's intrinsic value (i.e., the amount that the option is in-the-money).
The formula may also include a factor to account for the difference between the
price of the security and the strike price of the option if the option is
written out-of-the-money. The Fund will treat all or a portion of the formula
price as illiquid for purposes of the SEC illiquidity ceiling. The Fund may also
write over-the-counter options with non-primary dealers, including foreign
dealers, and will treat the assets used to cover these options as illiquid for
purposes of the SEC illiquidity ceiling.
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. The Fund may also
purchase and sell Futures Contracts and Options on Futures Contracts for
non-hedging purposes, subject to applicable law, which involves greater risk and
could 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 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, on Futures Contracts or on foreign currencies, 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. and foreign exchanges.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts ("Forward Contracts") to attempt to minimize the risk to the Fund from
adverse changes in the relationship between the U.S. dollar and foreign
currencies. A Forward Contract is an obligation to purchase or sell a specific
currency for an agreed price at a future date which is individually negotiated
and privately traded by currency traders and their customers. The Fund may enter
into a Forward Contract, for example, when it enters into a contract for the
purchase or sale of a security denominated in a foreign currency in order to
"lock in" the U.S. dollar price of the security. Additionally, for example, when
the Fund believes that a foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a Forward Contract to sell an amount
of that foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. Conversely, when the
Fund believes that the U.S. dollar may suffer a substantial decline against a
foreign currency, it may enter into a Forward Contract to buy that foreign
currency for a fixed dollar amount. The Fund may also enter into a Forward
Contract on one Currency in order to hedge against risk of loss arising from
fluctuations in the value of a second currency (referred to as a "Cross-hedge")
if, in the judgment of the Adviser, a reasonable degree of correlation can be
expected between movements in the values of the two currencies. The Fund has
established procedures consistent with the General Statement of Policy of the
SEC concerning such purchases. Since that policy currently recommends that an
amount of the Fund's assets equal to the amount of the purchase be held aside or
segregated to be used to pay for the commitment, the Fund will always have cash,
high quality debt securities or cash equivalents available sufficient to cover
any commitments under these contracts or to limit any potential risk. The
segregated account will be marked to market on a daily basis. The Fund may also
be required to, or may elect to, receive delivery of foreign currencies
underlying Forward Contracts, which may involve certain risks. The Fund has
established procedures consistent with statements of the SEC and its staff
regarding the use of Forward Contracts by registered investment companies, which
requires use of segregated assets or "cover" in connection with the purchase and
sale of such contracts. See "Investment Objective and Policies -- Additional
Risk Factors" below. The Fund has established procedures consistent with
statements of the SEC and its staff regarding the use of Forward Contracts by
registered investment companies, which requires the use of segregated assets or
"cover" in connection with the purchase and sale of such contracts.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
options on foreign currencies for the purpose of protecting against declines in
the dollar value of foreign portfolio securities and against increases in the
dollar cost of foreign securities to be acquired. As in the case of other kinds
of options, however, the writing of an option on foreign currency will
constitute only a partial hedge, up to the amount of the premium received, and
the Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to the Fund's position, it may forfeit the entire amount of the premium plus
related transaction costs. Options on foreign currencies written or purchased by
the Fund will be traded on U.S. and foreign exchanges and over-the-counter. The
Fund may also be required to, or may elect to, receive delivery of foreign
currency underlying options on foreign currencies, which may involve certain
risks. See "Investment Objective and Policies -- Additional Risk Factors" below.
ADDITIONAL RISK FACTORS: Although the Fund will enter into certain transactions
in options, Futures Contracts, Options on Futures Contracts, Forward Contracts
and options on foreign currencies 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 option
transactions and Futures Contracts and Options on Futures Contracts for other
than hedging purposes, 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,
Options on Futures Contracts, Forward Contracts and options on foreign
currencies, 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.
As a result of its investments in foreign securities, the Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated
which creates a currency exchange rate risk. The Fund may also choose to, or be
required to, receive delivery of the foreign currencies underlying Forward
Contracts and options on foreign currencies it has entered into. Under certain
circumstances, such as where the Adviser believes that the applicable exchange
rate is unfavorable at the time the currencies are received or the Adviser
anticipates, for any other reason, that the exchange rate will improve, the Fund
may hold such currencies for an indefinite period of time. While the holding of
currencies will permit the Fund to take advantage of favorable movements in the
applicable exchange rate, such strategy also exposes the Fund to risk of loss if
exchange rates move in a direction adverse to the Fund's position. Such losses
could reduce any profits or increase any losses sustained by the Fund from the
sale or redemption of securities and could reduce the dollar value of interest
or dividend payments received.
Transactions in options may be entered into by the Fund on United States
exchanges regulated by the SEC, in the over-the-counter market and on foreign
exchanges, while Forward Contracts may be entered into only in the over-the-
counter market. Futures Contracts and Options on Futures Contracts may be
entered into on United States exchanges regulated by the CFTC and on foreign
exchanges. In addition, the securities underlying options and Futures Contracts
traded by the Fund may include foreign as well as domestic securities. Investing
in foreign securities and trading in foreign markets involve considerations and
possible risks not typically associated with investing in domestic securities or
entering into transactions on domestic exchanges. The value of foreign
securities investments will be affected by changes in currency rates or exchange
control regulations, changes in governmental administration or economic or
monetary policy (in this country or abroad) or changed circumstances in dealings
between nations. Costs may be incurred in connection with conversions between
various currencies. Moreover, foreign issuers are not subject to accounting,
auditing and financial reporting standards and requirements comparable to those
of domestic issuers. Securities and other instruments issued or traded in
foreign countries may be less liquid and more volatile than those issued or
traded in the United States and foreign brokerage commissions are generally
higher than in the United States. Foreign securities and foreign markets may be
less subject to governmental supervision than in the United States, and foreign
exchanges may impose different exercise and settlement procedures. Investments
in foreign countries could be affected by other factors not present in the
United States, including expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations and could be subject to
extended settlement periods. Over-the-counter transactions also involve certain
risks which may not be present in exchange-traded transactions.
PORTFOLIO TRADING: The primary consideration in placing portfolio security
transactions is execution at the most favorable prices. 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 Transactions and Brokerage Commissions" in the
Statement of Additional Information.
The policies described above are not fundamental and may be changed without
shareholder approval, as may the investment objective of the Fund.
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 and which may not be changed without
shareholder approval. See the "Investment Restrictions" in the Statement of
Additional Information. 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. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the Fund pursuant to an Investment Advisory
Agreement, dated May 20, 1982 (the "Advisory Agreement"). MFS provides the Fund
with overall investment advisory and administrative services, as well as general
office facilities. Joan S. Batchelder, a Senior Vice President of the Adviser,
has been the Fund's portfolio manager since 1983. Ms. Batchelder has been
employed by the Adviser since 1983. Subject to such policies as the Trustees may
determine, the Adviser makes investment decisions for the Fund. For these
services and facilities, MFS receives a management fee, computed and paid
monthly, on the basis of a formula based upon a percentage of the average daily
net assets of the Fund plus a percentage of its gross income (i.e., income other
than gains from the sale of securities or gains received from futures contracts)
in each case on an annualized basis for the then-current fiscal year of the
Fund. The applicable percentages are reduced as assets and income reach the
following levels:
<PAGE>
ANNUAL RATE OF MANAGEMENT FEE ANNUAL RATE OF MANAGEMENT FEE
BASED ON AVERAGE DAILY NET ASSETS BASED ON GROSS INCOME
--------------------------------- -----------------------------
0.220% of the first $200 million 3.00% of the first $22 million
0.187% of average daily net assets 2.55% of gross income in excess of
in excess of $200 million $22 million
For the Fund's fiscal year ended January 31, 1994, MFS earned management fees
under the Advisory Agreement of $3,284,878 (of which $1,457,532 was based on
average daily net assets and $1,827,346 on gross income), equivalent to 0.45% of
the Fund's average daily net assets.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R) 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 Variable
Insurance Trust, MFS Institutional Trust, MFS Union Standard Trust, MFS/Sun Life
Series Trust, Sun Growth Variable Annuity Fund, Inc. 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 $19.6 billion of assets in fixed income funds and fixed income
portfolios of its MFS Asset Management Group. 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, Arnold D. Scott, John R. Gardner and John D. McNeil. Mr. Brodkin is the
Chairman, Mr. Shames is the President and Mr. Scott is the Secretary and a
Senior Executive Vice President of MFS. Messrs. McNeil and 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 directly
to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is also 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, Stephen E. Cavan, Linda J. Hoard, James O. Yost and James R. Bordewick,
Jr., all of whom are officers of MFS, are officers of the Trust.
DISTRIBUTOR -- 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, dividend
disbursing agency and certain other services for the Fund.
6. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
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. Non-securities dealer financial institutions will receive
transaction fees that are the same as commission fees to dealers. Securities
dealers and financial institutions may also charge their customers fees relating
to investments in the Fund.
The Fund offers three 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:
SALES CHARGE* AS
PERCENTAGE OF DEALER
-------------------------- ALLOWANCE AS A
NET AMOUNT PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OFFERING PRICE
Less than $100,000 4.75% 4.99% 4.00%
$100,000 but less than $250,000 4.00 4.17 3.20
$250,000 but less than $500,000 2.95 3.04 2.25
$500,000 but less than $1,000,000 2.20 2.25 1.70
$1,000,000 or more None** None** See Below**
* Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above.
** A CDSC may apply in certain circumstances. FSI (on behalf of the Fund) will
also pay a commission on purchases of $1 million or more.
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% of 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 a plan; (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 which it intends to apply for the benefit of the Fund.
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. 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. In addition, FSI, on behalf of the Fund and pursuant to the Fund's
Class A Distribution Plan, 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 commissions to be paid during that period with respect
to such account.
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 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 persons 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, pension,
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 of the Fund may also 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. Insurance company separate accounts may purchase Class A
shares of the Fund at their net asset value. 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. In
addition, Class A shares of the Fund 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. 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 through certain broker-dealers
and other financial institutions which have entered into an agreement with FSI,
which includes a requirement that such shares be sold for the benefit of clients
participating in a "wrap account" or a similar program under which such clients
pay a fee to such broker-dealer or other financial institution.
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 determined 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 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 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"). Furthermore, Class A shares of
the Fund may be sold at net asset value through the automatic reinvestment of
distributions 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 7012. The CDSC on Class B shares will
be waived in the case of distributions from a retirement plan qualified under
Sections 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 loan from the plan
(repayments of loans, 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 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 redemption by (i) officers
of the Fund, (ii) any of the subsidiary companies of Sun Life, (iii) eligible
Directors, officers, employees, retired 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 or other financial
institution which has a sales agreement with FSI, by certain family members of
any such employee or representative and their spouses or by 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. 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.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge or a CDSC. Class C shares do not convert to any other class of
shares of the Fund. The maximum investment in Class C shares that may be made is
$5,000,000 per transaction.
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Code if the retirement plan
and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan
or another similar 401(a) or 403(b) recordkeeping program made available by MFS
Service Center, Inc.
GENERAL: Except as described below, the minimum initial investment is $1,000 per
account and the minimum additional investment is $50 per account. Accounts being
established for monthly automatic investments and under payroll savings programs
and tax-deferred retirement programs (other than IRAs) involving the submission
of investments by means of group remittal statements are subject to a $50
minimum on initial and additional investments per account. The minimum initial
investment for IRAs is $250 per account and the minimum additional investment is
$50 per account. Accounts being established for participation in the Automatic
Exchange Plan are subject to a $50 minimum on initial and additional investments
per account. There are also other limited exceptions to these minimums for
certain tax-deferred retirement programs. Any minimums may be changed at any
time at the discretion of FSI. The Fund reserves the right to cease offering its
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.
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 recordkeeping
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 of the Fund's
shares 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 Family of 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, Class B and Class C 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 at net asset value, (if available for sale). In addition, Class
C shares may be exchanged for shares of the MFS Money Market Fund 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 requirements 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). Since the net asset value of shares of the account fluctuate,
redemptions or repurchases, which are taxable transactions, are likely to result
in gains or losses to the shareholder. When a shareholder withdraws an amount
from his account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except for shares purchased or received in exchange
for shares purchased by check (including certified checks or cashier's checks).
Payment of redemption proceeds may be delayed for 15 days from the purchase date
in an effort to assure that such check has 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 letter of instruction, together with his share
certificates (if any were issued), all in "good order" for transfer. "Good
order" generally means that the stock power, written request for redemption,
letter of instruction or certificate must be endorsed by the record owner(s)
exactly as the shares are registered and the signature(s) must be guaranteed in
the manner set forth below under the caption "Signature Guarantee." In addition,
in some cases "good order" will require the furnishing of additional documents.
The Shareholder Servicing Agent may make certain de minimis exceptions to the
above requirements for redemption. Within seven days after receipt of a
redemption request 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 described above and the amount of any income tax required to be
withheld, except during any period in which the right of redemption is suspended
or date of payment is postponed because the Exchange is closed or trading on
such Exchange is restricted or to the extent otherwise permitted by the 1940 Act
if an emergency exists (see "Tax Status").
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.
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
received a distribution in kind, the shareholder could incur brokerage or
transaction charges when 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 being established for monthly automatic investments and certain payroll
savings programs, Automatic Exchange Plan accounts and tax-deferred retirement
plans, for which there is a lower minimum investment requirement. See
"Purchases". 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 in Class A or Class B shares
("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 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 PLANS
The Trustees have adopted separate distribution plans for Class A, Class B and
Class C 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 plans would benefit the Fund and its shareholders.
CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan provides that the
Fund will pay FSI a distribution/service fee aggregating up to (but not
necessarily all of) 0.35% of the average daily net assets attributable to Class
A shares annually in order that FSI may pay expenses on behalf of the Fund
related to the distribution and servicing of Class A shares. The expenses to be
paid by FSI on behalf of the Fund include a service fee to securities dealers
which enter into a sales agreement with FSI of up to 0.25% of the Fund's average
daily net assets attributable to Class A shares that are owned by investors for
whom such securities dealer is the holder or dealer of record. This fee is
intended to be partial consideration for all personal services and/or account
maintenance services rendered by the dealer with respect to Class A shares. FSI
may from time to time reduce the amount of the service fee for shares sold prior
to a certain date. Currently, the service fee paid to dealers is reduced to
0.15% for shares purchased prior to March 1, 1991. FSI may also retain a
distribution fee of 0.10% of the Fund's average daily net assets attributable to
Class A shares as partial consideration for services performed and expenses
incurred in the performance of FSI's obligations under its distribution
agreement with the Fund. FSI, however, is currently waiving this 0.10%
distribution fee and will not accept payment of this fee unless it first obtains
the approval of the Board of Trustees. In addition, to the extent that the
aggregate of the foregoing fees does not exceed 0.35% per annum of the average
daily net assets of the Fund attributable to Class A shares, the Fund is
permitted to pay other distribution-related expenses, including commissions to
dealers and payments to wholesalers employed by FSI for sales at or above a
certain dollar level. Fees payable under the Class A Distribution Plan are
charged to, and therefore reduce, income allocated to Class A shares. Service
fees may be reduced for a securities dealer that is the holder or dealer of
record for an investor who owns shares of the Fund having a net asset value at
or above a certain dollar level. Dealers may from time to time be required to
meet certain criteria in order to receive service fees. FSI or its affiliates
are entitled to retain all service fees payable under the Class A 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. Certain banks and other financial institutions that have agency
agreements with FSI will receive service fees that are the same as service fees
to dealers.
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 will 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 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. The Class B Distribution
Plan also provides that FSI will receive all CDSCs attributable to Class B
shares (see "Redemptions and Repurchases" above), which do not reduce the
distribution fee. FSI will pay commissions to dealers of 3.75% of the purchase
price of Class B 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
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.
CLASS C DISTRIBUTION PLAN. The Class C Distribution Plan provides that the
Fund will pay FSI a distribution fee of up to 0.75% per annum of the Fund's
average daily net assets attributable to Class C shares and will pay FSI a
service fee of up to 0.25% per annum of the Fund's average daily net assets
attributable to Class C shares (which FSI in turn pays to securities dealers
which enter into a sales agreement with FSI at a rate of up to 0.25% per annum
of the Fund's daily net assets attributable to Class C shares owned by investors
for whom that securities dealer is the holder or dealer of record). The
distribution/service fees attributable to Class C shares are designed to permit
an investor to purchase such shares through a broker-dealer without the
assessment of an initial sales charge or a CDSC while allowing FSI to compensate
broker-dealers in connection with the sale of such shares. The service fee is
intended to be additional consideration for all personal services and/or account
maintenance services rendered with respect to Class C shares. FSI or its
affiliates are entitled to retain all service fees payable under the Class C
Distribution Plan with respect to accounts for which there is no dealer of
record 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 C Distribution Plan
is to compensate FSI for its distribution services to the Fund. Distribution
payments under the Plan will be used by FSI to pay securities dealers a
distribution fee in an amount equal on an annual basis to 0.75% of the Fund's
average daily net assets attributable to Class C shares owned by investors for
whom that securities dealer is the holder or dealer of record. (Therefore, the
total amount of distribution/service fees paid to a dealer on an annual basis is
1.00% of the Fund's average daily net assets attributable to Class C shares
owned by investors for whom the securities dealer is the holder or dealer of
record.) FSI also pays expenses of printing prospectuses and reports used for
sales purposes, expenses with respect to the preparation and printing of sales
literature and other distribution related expenses, including, without
limitation, the compensation of personnel and all costs of travel, office
expense and equipment. Since FSl'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. Certain
banks and other financial institutions that have agency agreements with FSI will
receive agency transaction and service fees that are the same as distribution
fees and service fees to dealers. Fees payable under the Class C Distribution
Plan are charged to, and therefore reduce, income allocated to Class C shares.
DISTRIBUTIONS
The Fund intends to declare daily and pay to its shareholders substantially all
of its net investment income as dividends on a monthly basis. Dividends
generally are distributed on the first business day of the following month. In
addition, the Fund will 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. All distributions not paid in cash will be
reinvested in shares of the class in which the distribution is paid. See "Tax
Status" and "Shareholder Services -- Distribution Options" below. Distributions
paid by the Fund with respect to Class A shares will generally be greater than
those paid with respect to Class B and Class C shares because expenses
attributable to Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, 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
any entity level federal income or excise taxes, although foreign-source income
received by the Fund may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on dividends and capital gain distributions from the Fund
whether paid in cash or additional shares. A statement setting forth the federal
income status of all dividends and distributions for that year, including any
portion taxable as ordinary income, any portion taxable as long- term capital
gains, the portion, if any, representing a return of capital (which is generally
free of current 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.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and certain 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 withholding of 31%
of 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 adviser 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 the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the 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 valuations furnished by a pricing service or at their 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 that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of two series of the Trust, has three classes of shares, entitled
Class A, Class B and Class C 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 shares of that particular series. Shareholders are entitled to one vote
for each share held and shares of each series would be entitled to vote
separately to approve investment advisory agreements or changes in investment
restrictions, but shares of all series would vote together in the election of
Trustees and selection of accountants. Additionally, each class of shares of a
series will vote separately on any material increases in the fees under its
Distribution Plan or on any other matter that affects solely its class of
shares, but will otherwise vote together with all other classes of shares of the
series on all other matters. The Trust does not intend to hold annual
shareholder meetings. The Declaration of Trust provides that a Trustee may be
removed from office in certain instances (see "Description of Shares, Voting
Rights and Liabilities" in the 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 any liabilities of that class.
Shares have no pre-emptive or conversion rights (except as set forth above in
"Purchases -- Conversion of Class B Shares"). Shares are fully paid and
non-assessable. Should the Fund be liquidated, the shareholders of each class
would be entitled to share pro rata in its net assets attributable to that class
available for distribution to shareholders. Shares will remain on deposit with
the Shareholder Servicing Agent and certificates will not be issued except in
connection with pledges and assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance (e.g., fidelity bonding and errors and omissions insurance) existed
and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote fund
rankings in the relevant fund category from various sources, such as the Lipper
Analytical Services, Inc. and Wiesenberger Investment Companies Service. Yield
quotations will be 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 will reflect the average annual
percentage change over stated periods in the value of an investment in each
class of shares of the Fund made at the maximum public offering price of 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 of the Fund are
based on historical performance and are not intended to indicate future
performance. Yield reflects only net portfolio income 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 quotations of
the Fund may from time to time be used in advertisements, shareholder reports or
other communications to shareholders. For a discussion of the manner in which
the Fund will calculate its yield, current distribution rate and total rate of
return, see the 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.
7. 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 information regarding
the tax status of all reportable dividends and distributions for that year (see
"Tax Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional
shares. This option will be assigned if no other option is specified.
-- Dividends (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) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Dividends and capital gains
distributions in amounts less than $10 will automatically be reinvested in
additional shares of the Fund. Any request to change a distribution option must
be received by the Shareholder Servicing Agent by the record date for a dividend
or distribution in order to be effective for that dividend or distribution. No
interest will accrue on amounts represented by uncashed distribution or
redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the 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 or Class C of the Fund or any of the classes of other MFS
Funds or MFS Fixed Fund (a bank collective investment fund) within a 13-month
period (or 36-month period 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 the Class A, Class B and
Class C shares of that shareholder in the MFS Funds or MFS Fixed Fund (a bank
collective investment fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the
same class of any other MFS Fund. Furthermore, distributions made by the Fund
may be automatically invested at net asset value (and without any applicable
CDSC) in shares of the same class of another MFS Fund, if shares of such Fund
are available for sale.
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 any 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 the same class of shares
of the other MFS Funds (and, in the case of Class C shares, for shares of MFS
Money Market Fund) under the Automatic Exchange Plan. The Automatic Exchange
Plan provides for automatic monthly or quarterly 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 or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, 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 purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in shares purchases in the case of Class A shares and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
-------------------------------------
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
Shares," shares of the Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans and
other corporate pension and profit-sharing plans. Investors should consult with
their tax advisers before establishing any of the tax-deferred retirement plans
described above.
The Fund's 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, including the purchase and
sale of Options, Futures Contracts, Options on Futures Contracts, Forward
Contracts and options on foreign currencies, (ii) Trustees, officers and
investment adviser, (iii) portfolio transactions and brokerage commissions, (iv)
the Fund's shares, including rights and liabilities of shareholders, (v) the
method used to calculate yield and total rate of return quotations of the Fund,
(vi) the Distribution Plans and (vii) 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
DESCRIPTION OF BOND RATINGS
The ratings of Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's
Ratings Group ("S&P") represent their opinions as to the quality of various debt
instruments. It should be emphasized, however, that ratings are not absolute
standards of quality. Consequently, debt instruments with the same maturity,
coupon and rating may have different yields while debt instruments of the same
maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than 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 other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that are
not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
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 differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC and C: Debt rated BB, B, CCC, CC and C is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
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.
<PAGE>
APPENDIX B
PORTFOLIO COMPOSITION CHART
FOR FISCAL YEAR ENDED JANUARY 31, 1994
SECURITY PERCENT OF NET ASSETS
-------- ---------------------
U.S. Government Securities+ ............................. 0%
Equity Securities ....................................... 8
Cash and Cash Equivalents ............................... 4
Debt -- Unrated by S&P .................................. 19
DEBT -- S&P RATING
BBB ............................................... 0
BB ................................................ 12
B ................................................. 49
CCC ............................................... 5
D ................................................. 3
----
100%
====
+ Obligations issued or guaranteed by the U.S. Government or its agencies,
authorities or instrumentalities.
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>
THE MFS FAMILY OF FUNDS(R) -- AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call the MFS Service Center
at 1-800-225-2606 any business day from 8 a.m. to 8 p.m. Eastern time. This
material should be read carefully before investing or sending money.
<TABLE>
<CAPTION>
<S> <C>
STOCK FUNDS BOND FUNDS
Massachusetts Investors Trust MFS(R) Bond Fund
Massachusetts Investors Growth Stock Fund MFS(R) Government Limited Maturity Fund
MFS(R) Capital Growth Fund MFS(R) Government Mortgage Fund
MFS(R) Emerging Growth Fund* MFS(R) Government Securities Fund
MFS(R) Gold & Natural Resources Fund MFS(R) High Income Fund
MFS(R) Growth Opportunities Fund MFS(R) Intermediate Income Fund
MFS(R) Managed Sectors Fund MFS(R) Limited Maturity Fund
MFS(R) OTC Fund MFS(R) Strategic Income Fund
MFS(R) Research Fund (formerly MFS(R) Income & Opportunity Fund)
MFS(R) Value Fund MFS(R) World Governments Fund
MFS(R) World Equity Fund TAX-FREE BOND FUNDS
MFS(R) World Growth Fund MFS(R) Municipal Bond Fund
STOCK AND BOND FUNDS MFS(R) Municipal High Income Fund*
MFS(R) Total Return Fund MFS(R) Municipal Income Fund
MFS(R) Utilities Fund MFS(R) Municipal Limited Maturity Fund
MFS(R) World Total Return Fund MFS(R) Municipal Series Trust (AL, AR, CA, FL,
GA, LA, MD, MA, MS, NY, NC, PA, SC, TN, TX,
VA, WA, WV)
MONEY MARKET FUNDS
MFS(R) Cash Reserve Fund
MFS(R) Government Money Market Fund
MFS(R) Money Market Fund
</TABLE>
<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
Deloitte & Touche
125 Summer Street, Boston, MA
02110
MFS(R) HIGH INCOME FUND
500 Boylston Street, Boston, MA 02116
MHI-1-6/94/150M 18/218/318
MFS(R)
HIGH
INCOME
FUND
PROSPECTUS
JUNE 1, 1994
