<PAGE>
As filed with the Securities and Exchange Commission on May 29, 1997
1933 Act File No. 2-60491
1940 Act File No. 811-2794
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 24
AND
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 26
MFS SERIES TRUST III
(Exact name of Registrant as Specified in Charter)
500 Boylston Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (617) 954-5000
Stephen E. Cavan, Massachusetts Financial Services Company
500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
|_| immediately upon filing pursuant to paragraph (b)
|X| on May 31, 1997 pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|_| on [date] pursuant to paragraph (a)(i)
|_| 75 days after filing pursuant to paragraph (a)(ii)
|_| on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2, the Registrant has registered an indefinite number of
its Shares of Beneficial Interest (without par value), under the Securities Act
of 1933. The Registrant filed a Rule 24f-2 Notice with respect to its fiscal
year ended January 31, 1997 on March 26, 1997.
================================================================================
<PAGE>
MFS SERIES TRUST III
MFS HIGH INCOME FUND
MFS MUNICIPAL HIGH INCOME FUND
CROSS REFERENCE SHEET
(Pursuant to Rule 404 showing location in Prospectus and/or Statement of
Additional Information of the responses to the Items in Parts A and B of Form
N-1A)
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
1 (a), (b) Front Cover Page *
2 (a) Expense Summary *
(b), (c) * *
3 (a) Condensed Financial *
Information
(b) * *
(c) Information Concerning *
Shares of the Fund -
Performance Information
(d) Condensed Financial *
Information
4 (a) The Fund; Investment *
Objective and Policies
(b), (c) Investment Objective and *
Policies
5 (a) The Fund; Management of the *
Fund - Investment Adviser
(b) Front Cover Page; Management *
of the Fund - Investment
Adviser; Back Cover Page
(c) Management of the Fund - *
Investment Adviser
(d) Management of the Fund - *
Administrator
(e) Management of the Fund - *
Shareholder Servicing
Agent; Back Cover Page
(f) Expense Summary; Condensed *
Financial Information
(g) Information Concerning Shares *
of the Fund - Purchases
(h) * *
5A (a), (b), (c) ** **
6 (a) Information Concerning Shares *
of the Fund -Description of
Shares, Voting Rights and
Liabilities; Information
Concerning Shares of the
Fund - Redemptions and
Repurchases; Information
Concerning Shares of the
Fund - Purchases; Information
Concerning Shares of the
Fund - Exchanges
(b), (c), (d) * *
(e) Shareholder Services *
(f) Information Concerning Shares *
of the Fund - Distributions;
Shareholder Services -
Distribution Options
(g) Information Concerning Shares *
of the Fund - Tax Status;
Information Concerning Shares
of the Fund - Distributions
(h) * *
7 (a) Front Cover Page; Management *
of the Fund - Distributor; Back
Cover Page
(b) Information Concerning Shares *
of the Fund - Purchases; Net
Asset Value
(c) Information Concerning Shares *
of the Fund - Purchases;
Information Concerning Shares
of the Fund - Exchanges;
Shareholder Services
(d) Front Cover Page; Information *
Concerning Shares of the
Fund - Purchases
(e) Information Concerning Shares *
of the Fund - Distribution Plan;
Expense Summary
(f) Information Concerning Shares *
of the Fund - Distribution Plan
(g) Expense Summary; Information *
Concerning Shares of the Fund -
Purchases; Information
Concerning Shares of the Fund -
Exchanges; Information
Concerning Shares of the Fund -
Redemptions and Repurchases;
Information Concerning Shares
of the Fund - Distribution Plan;
Information Concerning Shares
of the Fund - Distributions;
Information Concerning Shares
of the Fund - Performance
Information; Shareholder Services
8 (a) Information Concerning *
Shares of the Fund - Redemptions
and Repurchases; Information
Concerning Shares of the
Fund - Purchases
(b), (c), (d) Information Concerning Shares *
of the Fund - Redemptions and
Repurchases
9 * *
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
10 (a), (b) * Front Cover Page
11 * Front Cover Page
12 * Definitions
13 (a), (b), (c) * Investment Objective,
Policies and
Restrictions
(d) * *
14 (a), (b) * Management of the
Fund - Trustees and
Officers
(c) * Management of the
Fund - Trustees and
Officers; Trustee
Compensation Table
15 (a) * *
(b), (c) * Management of the
Fund - Trustees and
Officers
16 (a) Management of the Fund - Management of the
Investment Adviser Fund - Investment
Adviser; Management
of the Fund -
Trustees and Officers
(b) Management of the Fund - Management of the
Investment Adviser Fund - Investment
Adviser
(c) * *
(d) * Management of the
Fund - Investment
Adviser;
Administrator
(e) * Portfolio Transactions
and Brokerage
Commissions
(f) Information Concerning of Distribution Plan
the Fund - Distribution Plan
(g) * *
(h) * Management of the
Fund - Custodian;
Independent Auditors
and Financial
Statements; Back
Cover Page
(i) * Management of the
Fund - Shareholder
Servicing Agent
17 (a), (b), (c), * Portfolio Transactions
(d), (e) and Brokerage
Commissions
18 (a) Information Concerning Shares Description of Shares,
of the Fund - Description of Voting Rights and
Shares, Voting Rights and Liabilities
Liabilities
(b) * *
19 (a) Information Concerning Shares Shareholder Services
of the Fund - Purchases;
Shareholder Services
(b) Information Concerning Shares Management of the
of the Fund - Net Asset Fund - Distributor;
Value; Information Concerning Determination of Net
Shares of the Fund - Asset Value and
Purchases Performance - Net
Asset Value
(c) * *
20 * Tax Status
21 (a), (b) * Management of the
Fund - Distributor;
Distribution Plan
(c) * *
22 (a) * *
(b) * Determination of Net
Asset Value and
Performance;
Performance
Information
23 * Independent Auditors
and Financial
Statements
- ---------------------
* Not Applicable
** Contained in Annual Report
<PAGE>
MFS HIGH INCOME FUND
SUPPLEMENT TO THE JUNE 1, 1997 PROSPECTUS AND
STATEMENT OF ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED JUNE 1, 1997,
AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES: CLASS I
-------
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price) ................... None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as
applicable) ................................................ None
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ................................................ 0.46%
Rule 12b-1 Fees ................................................ None
Other Expenses(1)(2) ........................................... 0.275%
------
Total Operating Expenses........................................ 0.735%
------
- --------------
(1) "Other Expenses" is based on Class A expenses incurred during the fiscal
year ended January 31, 1997.
(2) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
PERIOD CLASS I
-------
1 year........................................ $ 8
3 years....................................... 23
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
<PAGE>
CONDENSED FINANCIAL INFORMATION
The following information has been audited and should be read in
conjunction with the financial statements included in the Fund's Annual Report
to Shareholders which are incorporated by reference into the SAI in reliance
upon the report of the Fund's independent auditors, given upon their authority
as experts in accounting and auditing. The Fund's independent auditors are
Deloitte & Touche LLP.
FINANCIAL HIGHLIGHTS - CLASS I SHARES
1997***
-------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 5.34
-------
Income from investment operations -
Net investment income $ 0.04
Net realized and unrealized gain
on investments and foreign currency transactions 0.01
-------
Total from investment operations $ 0.05
-------
Less distributions declared to shareholders -
From net investment income $ (0.04)
In excess of net investment income --
-------
Total distributions declared to shareholders $ (0.04)
--------
Net asset value - end of period $ 5.35
-------
Total return 0.91%++
Ratios (to average net assets)/
Supplemental data:
Expenses## 0.59%+
Net investment income 8.70%+
Portfolio turnover 87%
Net assets, end of period
(000,000 omitted) $ 3
- --------------------------
*** For the period from the commencement of offering of Class I shares, January
1, 1997 to January 31, 1997.
+ Annualized ++ Not annualized
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD;
(iii) any retirement plan, endowment or foundation which (a) purchases shares
directly through MFD (rather than through a third party broker or dealer
or other financial intermediary); (b) has, at the time of purchase of
Class I shares, aggregate assets of at least $100 million; and (c) invests
at least $10 million in Class I shares of the Fund either alone or in
combination with investments in Class I shares of other MFS funds
distributed by MFD (additional investments may be made in any amount);
provided that MFD may accept purchases from smaller plans, endowments or
foundations or in smaller amounts if it believes, in its sole discretion,
that such entity's aggregate assets will equal or exceed $100 million, or
that such entity will make additional investments which will cause its
total investment to equal or exceed $10 million, within a reasonable
period of time; and
(iv) bank trust departments which initially invest, on behalf of their trust
clients, at least $100,000 in Class I shares of the Fund (additional
investments may be made in any amount); provided that MFD may accept
smaller initial purchases if it believes, in its sole discretion, that the
bank trust department will make additional investments, on behalf of its
trust clients, which will cause its total investment to equal or exceed
$100,000 within a reasonable period of time.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 4.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") upon redemption of 1.00% during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans), and
are subject to an annual distribution fee and service fee up to a maximum of
0.35% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption of 1.00% during the first year and an annual distribution
fee and service fee up to a maximum of 1.00% per annum. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class C and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
THE DATE OF THIS SUPPLEMENT IS JUNE 1, 1997
<PAGE>
PROSPECTUS -- June 1, 1997
Class A Shares of Beneficial Interest
Class B Shares of Beneficial Interest
MFS(R) HIGH INCOME FUND Class C Shares of Beneficial Interest
(A Member of the MFS Family of Funds(R))
- -------------------------------------------------------------------------------
Page
1. Expense Summary .............................................. 2
2. The Fund .................................................... 3
3. Condensed Financial Information .............................. 4
4. Investment Objective and Policies ............................ 6
5. Investment Techniques ........................................ 7
6. Additional Risk Factors ...................................... 13
7. Management of the Fund ...................................... 16
8. Information Concerning Shares of the Fund ................... 18
Purchases ................................................ 18
Exchanges ................................................ 23
Redemptions and Repurchases .............................. 24
Distribution Plan ........................................ 26
Distributions ............................................ 27
Tax Status ............................................... 27
Net Asset Value .......................................... 28
Description of Shares, Voting Rights and Liabilities ..... 28
Performance Information .................................. 29
9. Shareholder Services ......................................... 29
Appendix A ................................................... A-1
Appendix B ................................................... B-1
Appendix C ................................................... C-1
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 "Information Concerning
Shares of the Fund -- Purchases").
------------------------
THE FUND MAY INVEST UP TO 100% OF ITS NET ASSETS IN LOWER-RATED BONDS, COMMONLY
KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING DEFAULT RISKS, THAN
THOSE FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER
THESE RISKS BEFORE INVESTING (SEE "ADDITIONAL RISK FACTORS -- LOWER-RATED FIXED
INCOME SECURITIES").
------------------------
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Trust and
the Fund that a prospective investor ought to know before investing. The Trust,
on behalf of the Fund, has filed with the Securities and Exchange Commission a
Statement of Additional Information dated June 1, 1997, as amended or
supplemented from time to time (the "SAI"), which contains more detailed
information about the Trust and the Fund. The SAI is incorporated into this
Prospectus by reference. See page 31 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number). The SEC maintains an Internet World Wide Web site that
contains the SAI, materials that are incorporated by reference into this
Prospectus and the SAI, and other information regarding the Fund. This
Prospectus is available on the Adviser's Internet World Wide Web site at
http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
<TABLE>
<CAPTION>
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price) .................. 4.75 % 0.00 % 0.00 %
Maximum Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as
applicable) ................................................. See Below(1) 4.00 % 1.00 %
ANNUAL OPERATING EXPENSES OF THE FUND
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ............................................... 0.46 % 0.46 % 0.46 %
Rule 12b-1 Fees ............................................... 0.30 %(2) 1.00 %(3) 1.00 %(3)
Other Expenses(4) ............................................. 0.275% 0.275% 0.275%
---- ---- ----
Total Operating Expenses ...................................... 1.035% 1.735% 1.735%
</TABLE>
- ------------
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a contingent deferred
sales charge (a "CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such
purchases. See "Information Concerning Shares of the Fund -- Purchases"
below.
(2) The Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to the Class A
shares. The Fund is currently paying distribution fees in the amount of
0.05%. Payment of the remaining portion of the 0.10% per annum distribution
fee equal to 0.05% per annum will commence on such date as the Trustees of
the Trust may determine. Assets attributable to Class A shares sold prior to
March 1, 1991 are subject to a reduced service fee of 0.15% per annum.
Distribution expenses paid under the Plan, together with the initial sales
charge, may cause long-term shareholders to pay more than the maximum sales
charge that would have been permissible if imposed entirely as an initial
sales charge. See "Information Concerning Shares of the Fund -- Distribution
Plan" below.
(3) The Fund's Distribution Plan provides that it will pay distribution/ service
fees aggregating up to (but not necessarily all of) 1.00% per annum of the
average daily net assets attributable to the Class B shares and Class C
shares, respectively. Distribution expenses paid under the Plan, with
respect to Class B or Class C shares, together with any CDSC payable upon
redemption of Class B and Class C shares, may cause long-term shareholders
to pay more than the maximum sales charge that would have been permissible
if imposed entirely as an initial sales charge. See "Information Concerning
Shares of the Fund -- Distribution Plan" below.
(4) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B CLASS C
- ------ ------- ------------------- -------
<S> <C> <C> <C> <C> <C>
(1) (1)
1 year ......................................... $ 58 $ 58 $ 18 $ 28 $ 18
3 years ........................................ 79 85 55 55 55
5 years ........................................ 102 114 94 94 94
10 years ........................................ 168 186(2) 186(2) 205 205
</TABLE>
- ------------
(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 Plan".
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
2. THE FUND
The Fund is a diversified series of the Trust, an open-end management investment
company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts in 1977. The Trust presently consists of two
series, each of which represents a portfolio with separate investment objectives
and policies. Shares of the Fund are continuously sold to the public and the
Fund then uses the proceeds to buy securities (primarily bonds and other fixed
income instruments) for its portfolio. Three classes of shares of the Fund
currently are offered for sale to the general public. Class A shares are offered
at net asset value plus an initial sales charge up to a maximum of 4.75% of the
offering price (or a CDSC upon redemption of 1.00% during the first year in the
case of certain purchases of $1 million or more and certain purchases by
retirement plans) and are subject to an annual distribution fee and service fee
up to a maximum of 0.35% per annum. Class B shares are offered at net asset
value without an initial sales charge but are subject to a CDSC upon redemption
(declining from 4.00% during the first year to 0% after six years) and an annual
distribution fee and a service fee up to a maximum of 1.00% per annum. Class B
shares will convert to Class A shares approximately eight years after purchase.
Class C shares are offered at net asset value without an initial sales charge
but are subject to a CDSC upon redemption of 1.00% during the first year and an
annual distribution fee and service fee up to a maximum of 1.00% per annum.
Class C shares do not convert to any other class of shares of the Fund. In
addition, the Fund offers an additional class of shares, Class I shares,
exclusively to certain institutional investors. Class I shares are made
available by means of a separate Prospectus Supplement provided to institutional
investors eligible to purchase Class I shares and are offered at net asset value
without an initial sales charge or CDSC upon redemption and without an annual
distribution and service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. 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. A majority of the Trustees are not affiliated
with the Adviser. The selection of investments and the way they are managed
depend on the conditions and trends in the economy and the financial
marketplaces. The Fund also offers to buy back (redeem) its shares from its
shareholders at any time at their net asset value, less any applicable CDSC.
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with financial statements
included in the Fund's Annual Report to shareholders which are incorporated by
reference into the SAI in reliance upon the report of the Fund's independent
auditors, given upon their authority as experts in accounting and auditing. The
Fund's independent auditors are Deloitte & Touche LLP.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C> <C> <C>
Net asset value -- beginning of
period .......................... $ 5.24 $ 4.84 $ 5.50 $ 5.11 $ 4.89 $ 3.71
------- ------- ------- ------- ------- -------
Income (loss) from investment operations# --
Net investment income ........... $ 0.47 $ 0.45 $ 0.44 $ 0.40 $ 0.51 $ 0.56
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions .. 0.10 0.39 (0.66) 0.48 0.24 1.21
------- ------- ------- ------- ------- -------
Total from investment
operations .................. $ 0.57 $ 0.84 $ (0.22) $ 0.88 $ 0.75 $ 1.77
------- ------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income ...... $ (0.46) $ (0.44) $ (0.43) $ (0.42) $ (0.51) $ (0.56)
From net realized gain on
investments and foreign currency
transactions ................... -- -- (0.01) (0.07) -- --
From paid-in capital ............ -- -- -- -- (0.02) (0.03)
------- ------- ------- ------- ------- -------
Total distributions declared to
shareholders ................. $ (0.46) $ (0.44) $ (0.44) $ (0.49) $ (0.53) $ (0.59)
------- ------- ------- ------- ------- -------
Net asset value -- end of period .. $ 5.35 $ 5.24 $ 4.84 $ 5.50 $ 5.11 $ 4.89
======= ======= ======= ======= ======= =======
Total return(+) ................... 11.52% 17.97% (3.95)% 18.13% 16.36% 49.64%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ...................... 1.02% 1.00% 0.99% 1.00% 1.03% 1.10%
Net investment income ........... 8.92% 8.83% 8.65% 8.22% 10.21% 11.59%
PORTFOLIO TURNOVER ................ 87% 59% 59% 68% 75% 28%
NET ASSETS AT END OF PERIOD
(000,000 OMITTED) ................ $ 672 $ 620 $ 524 $ 645 $ 585 $ 556
</TABLE>
- ----------
(++)Total returns for Class A shares do not include the applicable sales
charge (except for reinvestment of dividends prior to March 1, 1991).
If the charge had been included, the results would have been lower.
#Per share data for the period subsequent to January 31, 1994 is based
on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
<PAGE>
FINANCIAL HIGHLIGHTS - continued
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------------------------------------
1991 1990 1989 1988
- ----------------------------------------------------------------------------------------------------------
CLASS A
- ----------------------------------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C>
Net asset value -- beginning of period ........... $ 4.85 $ 6.04 $ 6.17 $ 7.11
------- ------- ------- -------
Income (loss) from investment operations# --
Net investment income .......................... $ 0.65 $ 0.69 $ 0.76 $ 0.77
Net realized and unrealized gain (loss) on
investments and foreign currency transactions . (1.08) (1.13) (0.09) (0.83)
------- ------- ------- -------
Total from investment operations ............. $ (0.43) $ (0.44) $ 0.67 $ (0.06)
------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income ..................... $ (0.71) $ (0.75) $ (0.75) $ (0.87)
From net realized gain on investments and
foreign currency transactions ................. -- -- (0.05) (0.01)
From paid-in capital ........................... -- -- -- ** -- *
------- ------- ------- -------
Total distributions declared to shareholders . $ (0.71) $ (0.75) $ (0.80) $ (0.88)
------- ------- ------- -------
Net asset value -- end of period ................. $ 3.71 $ 4.85 $ 6.04 $ 6.17
======= ======= ======= =======
Total return(+) .................................. (10.99)% (9.18)% 10.68% (1.94)%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ....................................... 1.05% 0.87% 0.87% 0.75%
Net investment income .......................... 14.97% 12.17% 12.44% 11.49%
PORTFOLIO TURNOVER ............................... 24% 25% 34% 28%
NET ASSETS AT END OF PERIOD (000,000 OMITTED) .... $ 380 $ 574 $ 880 $ 1,001
</TABLE>
- ----------
(++)Total returns for Class A shares do not include the applicable sales
charge (except for reinvestment of dividends prior to March 1, 1991).
If the charge had been included, the results would have been lower.
#Per share data for the period subsequent to January 31, 1994 is based on
average shares outstanding.
*Includes a per share distribution from paid-in capital of $0.0006.
**Includes a per share distribution from paid-in capital of $0.0004.
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994* 1997 1996 1995 1994**
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS B CLASS C
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value --
beginning of period .... $ 5.24 $ 4.84 $ 5.50 $ 5.27 $ 5.25 $ 4.85 $ 5.50 $ 5.41
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from investment operations# --
Net investment income .. $ 0.43 $ 0.41 $ 0.39 $ 0.15 $ 0.43 $ 0.41 $ 0.41 $ --
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions .......... 0.10 0.39 (0.65) 0.22 0.11 0.39 (0.66) 0.09
------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ......... $ 0.53 $ 0.80 $(0.26) $ 0.37 $ 0.54 $ 0.80 $(0.25) $ 0.09
------ ------ ------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment
income ............... $(0.42) $(0.40) $(0.39) $(0.13) $(0.43) $(0.40) $(0.39) $ --
In excess of net
investment income .... -- -- (0.01) (0.01) -- -- (0.01) --
------ ------ ------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders ........ $(0.42) $(0.40) $(0.40) $(0.14) $(0.43) $(0.40) $(0.40) $ --
------ ------ ------ ------ ------ ------ ------ ------
Net asset value -- end of
period ................. $ 5.35 $ 5.24 $ 4.84 $ 5.50 $ 5.36 $ 5.25 $ 4.85 $ 5.50
====== ====== ====== ====== ====== ====== ====== ======
Total return ............. 10.66% 16.98% (4.77)% 20.29%+ 10.71% 17.03% (4.51)% 20.94%+
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ............. 1.79% 1.85% 1.85% 1.79%+ 1.72% 1.77% 1.79% 1.36%+
Net investment income .. 8.13% 7.99% 7.79% 6.94%+ 8.16% 8.02% 8.01% 5.92%+
PORTFOLIO TURNOVER ....... 87% 59% 59% 68% 87% 59% 59% 68%
NET ASSETS AT END OF
PERIOD (000,000 OMITTED) $ 301 $ 283 $ 286 $ 371 $ 28 $ 16 $ 3 $ 1
</TABLE>
- ----------
*For the period from the commencement of offering of Class B shares,
September 27, 1993 to January 31, 1994.
**For the period from the commencement of offering of Class C shares, January 3,
1994 to January 31, 1994.
+Annualized.
#Per share data for the periods subsequent to January 31, 1994 is
based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
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). The Fund may invest up to 100% of its net assets in such securities.
For a description of these rating categories, see Appendix B to this Prospectus,
and Appendix C for a chart showing the Fund's holdings of fixed income
securities broken down by rating category for its fiscal year ended January 31,
1997 (see "Additional Risk Factors -- Lower-Rated Fixed Income Securities"
below.) 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.
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.
Consistent with its investment objective and policies described above, the Fund
may also invest up to 50% (and generally expects to invest between 0% and 20%)
of its total assets in foreign securities which are not traded on a U.S.
Exchange. The Fund has authority to invest up to 25% of its total assets in
securities issued or guaranteed by foreign governments or their agencies or
instrumentalities. See "Additional Risk Factors -- Foreign Securities" below.
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 1940 Act.
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.
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.
5. INVESTMENT TECHNIQUES
Consistent with the Fund's investment objective and policies, the Fund may
engage in the following investment techniques, many of which are described more
fully in the SAI. See "Investment Objective, Policies and Restrictions" in the
SAI.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Fund may invest in
zero coupon bonds, deferred interest bonds and bonds on which the interest is
payable in kind ("PIK bonds".) Zero coupon and deferred interest bonds are debt
obligations which are issued at a significant discount from face value. The
discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity or the first interest payment date at a
rate of interest reflecting the market rate of the security at the time of
issuance. While zero coupon bonds do not require the periodic payment of
interest, deferred interest bonds provide for a period of delay before the
regular payment of interest begins. PIK bonds are debt obligations which provide
that the issuer 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.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its assets
in stripped mortgage-backed securities ("SMBS"), 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 description of SMBS and the risks related to transactions therein,
see the SAI.
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.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. Because ADRs trade on
United States securities exchanges, the Adviser does not treat them as foreign
securities. However, they are subject to many of the risks of foreign securities
such as changes in exchange rates and more limited information about foreign
issuers.
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low- to
middle-income economy according to the International Bank for Reconstruction and
Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets. The
Adviser determines whether an issuer's principal activities are located in an
emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source of
its revenues and assets. The issuer's principal activities generally are deemed
to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies, authorities
or instrumentalities; (b) the issuer is organized under the laws of, and
maintains a principal office in, that country; (c) the issuer has its principal
securities trading market in that country; (d) the issuer derives 50% or more of
its total revenues from goods sold or services performed in that country; or (e)
the issuer has 50% or more of its assets in that country.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Panama, the
Philippines, Poland, Uruguay and Venezuela. Brady Bonds have been issued only
recently, and for that reason do not have a long payment history. Brady Bonds
may be collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate bonds or floating-rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to different
types of investments, the Fund may enter into interest rate swaps, currency
swaps and other types of available swap agreements, such as caps, collars and
floors. Swaps involve the exchange by the Fund with another party of cash
payments based upon different interest rate 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.
Payments made by both parties to a swap transaction are based on a notional
principal amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swap agreements could be used to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agreed to exchange
payments in dollars for payments in a foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease the Fund's exposure to
U.S. interest rates and increase its exposure to foreign currency and interest
rates. Caps and floors have an effect similar to buying or writing options.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of the Fund's investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed or no
investment of cash. As a result, swaps generally involve leverage, which serves
to magnify the extent of any gains or losses. In additiion, swaps can be highly
volatile and may have a considerable impact on the Fund's performance. Swap
agreements are subject to risks related to the counterparty's ability to
perform, and may decline in value if the counterparty's creditworthiness
deteriorates. The Fund may also suffer losses if it is unable to terminate
outstanding swap agreements or reduce its exposure through offsetting
transactions.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the SAI on the risks involved in these activities.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize risk.
LENDING OF 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 (the "Exchange") and
to member banks of the Federal Reserve System, and would be required to be
secured continuously by collateral in cash, U.S. Treasury securities or an
irrevocable letter of credit maintained on a current basis at an amount at least
equal to the market value of the securities loaned. 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.
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.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices or other
financial indicators. Most indexed securities are short to intermediate term
fixed-income securities whose values at maturity (i.e., principal value) or
interest rates rise or fall according to changes in the value of one or more
specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their principal value or interest rates may increase
or decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or to
one or more options on the underlying instrument. Indexed securities may be more
volatile than the underlying instrument itself and could involve the loss of all
or a portion of the principal amount of the instrument.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card or automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. See the SAI for further
information on these securities.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933 ("1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). A determination is made, based upon a continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to a Fund's limitation on investing not more than
15% of its net assets in illiquid investments. The Board of Trustees has adopted
guidelines and delegated to MFS the daily function of determining and monitoring
the liquidity of Rule 144A securities. The Board, however, retains oversight,
focusing on factors, such as valuation, liquidity and availability of
information. Investing in Rule 144A securities could have the effect of
decreasing the level of liquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing Rule 144A
securities held in the Fund's portfolio. Subject to the Fund's 15% limitation on
investments in illiquid investments, the Fund may also invest in restricted
securities that may not be sold under Rule 144A, which presents certain risks.
As a result, the Fund might not be able to sell these securities when the
Adviser wishes to do so, or might have to sell them at less than fair value. In
addition, market quotations are less readily available. Therefore, judgment may
at times play a greater role in valuing these securities than in the case of
unrestricted securities.
OPTIONS ON SECURITIES: 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 liquid assets 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, which involves
greater risk. 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 SAI.
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 Commodity Futures
Trading Commission (the "CFTC") require that the Fund enter into transactions in
Futures Contracts and Options on Futures Contracts only (i) for bona fide
hedging purposes (as defined in CFTC regulations), or (ii) for non-hedging
purposes, provided that the aggregate initial margin and premiums on such
non-hedging positions does not exceed 5% of the liquidation value of the Fund's
assets. In addition, the Fund must comply with the requirements of various state
securities laws in connection with such transactions.
The Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
options on securities, 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 maintain
liquid assets 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 Additional Risk Factors -- Options, Futures Contracts and Forward
Contracts" below.
6. ADDITIONAL RISK FACTORS
The following discussion of additional risk factors supplements the risk factors
described above. Additional information concerning risk factors can be found
under the caption "Investment Objective, Policies and Restrictions" in the SAI.
FIXED INCOME SECURITIES: Because 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.
LOWER-RATED FIXED INCOME 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 Services ("S&P"),
Fitch Investors Service, Inc. ("Fitch") or Duff & Phelps Credit Rating Co.
("Duff & Phelps")) 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, Fitch or Duff & Phelps (and comparable unrated securities). These
securities, while normally exhibiting adequate protection parameters, have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade fixed income securities.
The Fund may also invest in fixed income securities rated Ba or lower by Moody's
or BB or lower by S&P, Fitch or Duff & Phelps (and comparable unrated
securities) (commonly known as "junk bonds"). 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. 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.
FOREIGN SECURITIES: Investing in securities of foreign issuers generally
involves risks not ordinarily associated with investing in securities of
domestic issuers. These include changes in currency rates, exchange control
regulations, 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 jdgment 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.
EMERGING MARKET SECURITIES: The risks of investing in foreign securities may be
intensified in the case of investments in emerging markets. Securities of many
issuers in emerging markets may be less liquid and more volatile than securities
of comparable domestic issuers. Emerging markets also have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of the
Fund is uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result in losses to the Fund due to
subsequent declines in value of the portfolio security, a decrease in the level
of liquidity in the Fund's portfolio, or if the Fund has entered into a contract
to sell the security, in possible liability to the purchaser. Certain markets
may require payment for securities before delivery, and in such markets the Fund
bears the risk that the securities will not be delivered and that the Fund's
payments will not be returned. Securities prices in emerging markets can be
significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
of assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be predominantly
based on only a few industries, may be highly vulnerable to changes in local or
global trade conditions, and may suffer from extreme and volatile debt burdens
or inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of substantial holdings difficult
or impossible at times. Securities of issuers located in countries with emerging
markets may have limited marketability and may be subject to more abrupt or
erratic price movements.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation of capital, as well as by the application to the Fund of any
restrictions on investments.
Investment in certain emerging market debt obligations may be restricted or
controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Fund.
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: 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 SAI
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.
SHORT-TERM INVESTMENTS FOR TEMPORARY DEFENSIVE PURPOSES: During periods of
unusual market conditions when the Adviser believes that investing for temporary
defensive purposes is appropriate, or in order to meet anticipated redemption
requests, 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.
PORTFOLIO TRADING: The primary consideration in placing portfolio security
transactions is execution at the most favorable prices. Consistent with the
foregoing primary consideration, the Conduct Rules of the National Association
of Securities Dealers, Inc. (the "NASD") and such other policies as the Trustees
may determine, the Adviser may consider sales of shares of the Fund and of the
other investment company clients of MFD as a factor in the selection of
broker-dealers to execute the portfolio transactions of the Fund. From time to
time, the Adviser may direct certain portfolio transactions to broker-dealer
firms which, in turn, have agreed to pay a portion of the Fund's operating
expenses (e.g., fees charged by the custodian of the Fund's assets). For a
further discussion of portfolio trading, see "Portfolio Transactions and
Brokerage Commissions" in the SAI.
The policies described above are not fundamental and may be changed without
shareholder approval, as may the investment objective of the Fund. The SAI
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 be changed without shareholder approval unless indicated otherwise.
See the "Investment Restrictions" in the SAI. 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.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement, dated May 20, 1987, as amended (the "Advisory Agreement").
Under the Advisory Agreement, the Adviser provides the Fund with overall
investment advisory services. Robert J. Manning, a Senior Vice President of the
Adviser, has been the Fund's portfolio manager since June, 1994. Mr. Manning has
been employed as a portfolio manager by the Adviser since 1984. 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:
<TABLE>
<CAPTION>
ANNUAL RATE OF MANAGEMENT FEE ANNUAL RATE OF MANAGEMENT FEE
BASED ON AVERAGE DAILY NET ASSETS BASED ON GROSS INCOME
--------------------------------- -----------------------------
<S> <C>
0.220% of the first $200 million 3.00% of the first $22 million
0.187% of average daily net assets in excess of $200 million 2.55% of gross income in excess of $22 million
</TABLE>
For the Fund's fiscal year ended January 31, 1997, MFS received management fees
under the Advisory Agreement of $4,238,339 (equivalent to 0.46% 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, and seven variable accounts, each of which is a registered
investment company established by Sun Life Assurance Company of Canada (U.S.)
("Sun Life of Canada (U.S.)") in connection with the sale of various
fixed/variable annuity contracts. MFS and its wholly owned subsidiary, MFS
Institutional Advisors, Inc., provide investment advice to substantial private
clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $55.5 billion on behalf of approximately 2.4 million investor
accounts as of April 30, 1997. As of such date, the MFS organization managed
approximately $20.5 billion of assets in fixed income funds and fixed income
portfolios of MFS Institutional Advisors, Inc. MFS is a subsidiary of Sun Life
of Canada (U.S.) which in turn is a wholly owned subsidiary of Sun Life
Assurance Company of Canada ("Sun Life"). The Directors of MFS are A. Keith
Brodkin, Jeffrey L. Shames, Arnold D. Scott, Donald A. Stewart 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 Stewart are the Chairman and the President, respectively, of Sun Life. Sun
Life, a mutual life insurance company, is one of the largest international life
insurance companies and has been operating in the United States since 1895,
establishing a headquarters office here in 1973. The executive officers of MFS
report 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, Robert J.
Manning, Bernard Scozzafava, James T. Swanson, W. Thomas London, Stephen E.
Cavan, James O. Yost, Ellen Moynihan and James R. Bordewick, Jr., all of whom
are officers of MFS, are officers of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign & Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG), the oldest publicly
listed bank in Germany, founded in 1835. As part of this alliance, the portfolio
managers and investment analysts of MFS and Foreign & Colonial will share their
views on a variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other portfolio
management matters. MFS has access to the extensive international equity
investment expertise of Foreign & Colonial, and Foreign & Colonial has access to
the extensive U.S. equity investment expertise of MFS. MFS and Foreign &
Colonial each have investment personnel working in each other's offices in
Boston and London, respectively.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
ADMINISTRATOR -- MFS provides the Fund with certain administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997.
Under this Agreement, MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services. As a
partial reimbursement for the cost of providing these services, the Fund pays
MFS an administrative fee up to 0.015% per annum of the Fund's average daily net
assets, provided that the administrative fee is not assessed on Fund assets that
exceed $3 billion.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
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.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, B and C shares of the Fund may be purchased at the public offering
price through any dealer and other financial institutions ("dealers") having a
selling agreement with MFD. Dealers may also charge their customers fees
relating to investments in the Fund.
This Prospectus offers Class A, B and C shares to the general public which bear
sales charges and distribution fees in different forms and amounts, as described
below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE* AS
PERCENTAGE OF:
-------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
- ------------------ -------------- ---------- -----------------
<S> <C> <C> <C>
Less than $100,000 ............................. 4.75% 4.99% 4.00%
$100,000 but less than $250,000 ................ 4.00 4.17 3.20
$250,000 but less than $500,000 ................ 2.95 3.04 2.25
$500,000 but less than $1,000,000 .............. 2.20 2.25 1.70
$1,000,000 or more ............................. None** None** See Below**
</TABLE>
- ------------
*Because of rounding in the calculation of offering price, actual sales charges
may be more or less than those calculated using the percentages above.
**A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge). In
the following four circumstances, Class A shares are offered at net asset value
without an initial sales charge but subject to a CDSC, equal to 1% of the lesser
of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if, prior to July 1, 1996: (a) the Plan had established an
account with the Shareholder Servicing Agent and (b) the sponsoring
organization had demonstrated to the satisfaction of MFD that either
(i) the employer had at least 25 employees or (ii) the aggregate
purchases by the retirement plan of Class A shares of the MFS Funds
would be in an amount of at least $250,000 within a reasonable period
of time, as determined by MFD in its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes
an account with the Shareholder Servicing Agent on or after July 1,
1996; and (c) the aggregate purchases by the retirement plan of Class
A shares of the MFS Funds will be in an aggregate amount of at least
$500,000 within a reasonable period of time, as determined by MFD in
its sole discretion; and
(iv) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the
time of purchase, a market value of $500,000 or more invested in shares
of any class or classes of the MFS Funds. THE RETIREMENT PLAN WILL
QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING
ORGANIZATION INFORMS THE SHAREHOLDER SERVICING AGENT PRIOR TO THE
PURCHASES THAT THE PLAN HAS A MARKET VALUE OF $500,000 OR MORE INVESTED
IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS. THE SHAREHOLDER
SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER
SUCH A PLAN QUALIFIES UNDER THIS CATEGORY.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
COMMISSION PAID
BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
--------------- --------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemptions of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus. In addition to these circumstances,
the CDSC imposed upon the redemption of Class A shares is waived with respect to
shares held by certain retirement plans qualified under Section 401(a) or 403(b)
of the Internal Revenue Code of 1986, as amended (the "Code"), and subject to
ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe
to the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to the Shareholder Servicing Agent that
the retirement plan has, at the time of certification or will have
pursuant to a purchase order placed with the certification, a market
value of $500,000 or more invested in shares of any class or classes of
the MFS Funds and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated or partially terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or consolidated
with, any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but are subject to a CDSC upon redemption 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%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Distribution Plan. As discussed
above, such retirement plans are eligible to purchase Class A shares of the Fund
at net asset value without an initial sales charge but subject to a 1% CDSC if
the plan has, at the time of purchase, a market value of $500,000 or more
invested in shares of any class or classes of the MFS Funds. IN THIS EVENT, THE
PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption
of Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain
outstanding for approximately eight years will convert to Class A shares of the
Fund. Shares purchased through the reinvestment of distributions paid in respect
of Class B shares will be treated as Class B shares for purposes of the payment
of the distribution and service fees under the Fund's Distribution Plan. See
"Distribution Plan" below. However, for purposes of conversion to Class A
shares, all shares in a shareholder's account that were purchased through the
reinvestment of dividends and distributions paid in respect of Class B shares
(and which have not converted to Class A shares as provided in the following
sentence) will be held in a separate sub-account. Each time any Class B shares
in the shareholder's account (other than those in the sub-account) convert to
Class A shares, a portion of the Class B shares then in the sub-account will
also convert to Class A shares. The portion will be determined by the ratio that
the shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares bears to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC upon redemption of 1.00% during the first
year. Class C shares do not convert to any other class of shares of the Fund.
The maximum investment in Class C shares that may be made is up to $1,000,000
per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below
for further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Fund's Distribution Plan by
the Fund to MFD for the first year after purchase (see "Distribution Plan"
below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Internal Revenue Code of 1986,
as amended (the "Code"), if the retirement plan and/or the sponsoring
organization subscribe to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping program made available by the Shareholder Servicing Agent.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class C shares is waived. These circumstances are described in
Appendix A to this Prospectus.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other than
IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and the
minimum additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares at any time.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserves the
right to reject or restrict any specific purchase or exchange request. In the
event that the Fund or MFD rejects an exchange request, neither the redemption
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individudals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase or exchange requests by market
timers. In the event that any individual or entity is determined either by the
Fund or MFD, in its sole discretion, to be a market timer, with respect to any
calendar year, the Fund and/or MFD will reject all exchange requests into the
Fund during the remainder of that calendar year. Other funds in the MFS Family
of Funds may have different and/or more restrictive policies with respect to
market timers than the Fund. These policies are disclosed in the prospectuses of
these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect
to sales of Class A, Class B and Class C shares. In addition, from time to time,
MFD may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of all of
the Class B and/or Class C shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD, at
its expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of the Fund. Such
concessions provided by MFD may include financial assistance to dealers in
connection with preapproved conferences or seminars, sales or training programs
for invited registered representatives, payment for travel expenses, including
lodging, incurred by registered representatives for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS Funds, and/or other dealer-sponsored events. From time to time, MFD
may make expense reimbursements for special training of a dealer's registered
representatives in group meetings or to help pay the expenses of sales contests.
Other concessions may be offered to the extent not prohibited by state laws or
any self-regulatory agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal charitable
contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting,
selling or distributing securities. Although the scope of the prohibition has
not been clearly defined, MFD believes that such Act should not preclude banks
from entering into agency agreements with MFD. If, however, a bank were
prohibited from so acting, the Trustees would consider what actions, if any,
would be necessary to continue to provide efficient and effective shareholder
services in respect of Shareholders who invested in the Fund through a
national bank. It is not expected that shareholders would suffer any adverse
financial consequence as a result of these occurrences. In addition, state
securities laws on this issue may differ from the interpretation of federal
law expressed herein and banks and financial institutions may be required to
register as broker-dealers pursuant to state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale). Shares of one class
may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING MFS MONEY MARKET FUNDS): No initial sales
charges or CDSC will be imposed in connection with an exchange from shares of an
MFS Fund to shares of any other MFS Fund, except with respect to exchanges from
an MFS money market fund to another MFS Fund which is not an MFS money market
fund (discussed below). With respect to an exchange involving shares subject to
a CDSC, the CDSC will be unaffected by the exchange and the holding period for
purposes of calculating the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth in this
paragraph above.
GENERAL: A shareholder should read the prospectus of the other MFS Fund into
which an exchange is made and consider the differences in objectives, policies
and restrictions before making any exchange. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received for
an established account by the Shareholder Servicing Agent in proper form (i.e.,
if in writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in the case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by the
Shareholder Servicing Agent) or all the shares in the account. If an Exchange
Request is received by the Shareholder Servicing Agent on any business day prior
to the close of regular trading on the New York Stock Exchange (generally, 4:00
p.m., Eastern time) (the "Exchange"), the exchange will occur on that day if all
the requirements set forth above have been complied with at that time and
subject to the Fund's right to reject purchase orders. No more than five
exchanges may be made in any one Exchange Request by telephone. Additional
information concerning this exchange privilege and prospectuses for any of the
other MFS Funds may be obtained from dealers or the Shareholder Servicing Agent.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares exchanged and, therefore, an exchange could result in a
gain or loss to the shareholder making the exchange. Exchanges by telephone are
automatically available to most non-retirement plan accounts and certain
retirement plan accounts. For further information regarding exchanges by
telephone, see "Redemptions by Telephone." The exchange privilege (or any aspect
of it) may be changed or discontinued and is subject to certain limitations,
including certain restrictions on purchases by market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent
will not be responsible for any losses resulting from unauthorized telephone
transactions if it follows reasonable procedures designed to verify the identity
of the caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B and Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of: (i) with
respect to Class A and Class C shares, 12 months (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares); or (ii)
with respect to Class B shares, six years. Purchases of Class A shares made
during a calendar month, regardless of when during the month the investment
occurred, will age one month on the last day of the month and each subsequent
month. Class B shares purchased on or after January 1, 1993 and Class C share
purchases will be aggregated on a calendar month basis -- all transactions made
during a calendar month, regardless of when during the month they have occurred,
will age one year at the close of business on the last day of such month in the
following calendar year and each subsequent year. For Class B shares of the Fund
purchased prior to January 1, 1993, transactions will be aggregated on a
calendar year basis -- all transactions made during a calendar year, regardless
of when during the year they have occurred, will age one year at the close of
business on December 31 of that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore, at
the time of redemption of a particular class, (i) any Free Amount is not subject
to the CDSC and (ii) the amount of the redemption equal to the then-current
value of Reinvested Shares is not subject to the CDSC, but (iii) any amount of
the redemption in excess of the aggregate of the then-current value of
Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will first
be applied against the amount of Direct Purchases which will result in any such
charge being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days of
the redemption pursuant to the Reinstatement Privilege. If the shares credited
for any CDSC paid are then redeemed within six years of the initial purchase in
the case of Class B shares or within 12 months of the initial purchase for Class
C Shares and certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to all
limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund solely
in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions, either totally or partially, by a distribution
in-kind of securities (instead of cash) from the Fund's portfolio. The
securities distributed in such a distribution would be valued at the same amount
as that assigned to them in calculating the net asset value for the shares being
sold. If a shareholder received a distribution in-kind, the shareholder could
incur brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions or exchanges, except in the case
of accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment." Shareholders will be notified that
the value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Distribution Plan would benefit the Fund and its
shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are common to each class of shares, as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, Class B
or Class C shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date. Service
fees may be reduced for a dealer that is the holder or dealer of record for an
investor who owns shares of the Fund having an aggregate net asset value at or
above a certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates are
entitled to retain all service fees payable under the Distribution Plan for
which there is no dealer of record or for which qualification standards have not
been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD
a distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each class
of shares. While the amount of compensation received by MFD in the form of
distribution fees during any year may be more or less than the expense incurred
by MFD under its distribution agreement with the Fund, the Fund is not liable to
MFD for any losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged
to, and therefore reduce, income allocated to shares of the Designated Class.
The provisions of the Distribution Plan relating to operating policies as well
as initial approval, renewal, amendment and termination are substantially
identical as they relate to each class of shares covered by the Distribution
Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered pursuant to an initial
sales charge, a substantial portion of which is paid to or retained by the
dealer making the sale (the remainder of which is paid to MFD). See "Purchases
- -- Class A Shares" above. In addition to the initial sales charge, the dealer
also generally receives the ongoing 0.25% per annum service fee, as discussed
above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.10% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission to dealers with respect to purchases
of $1 million or more and purchases by certain retirement plans of Class A
shares which are sold at net asset value but which are subject to a 1% CDSC for
one year after purchase). See "Purchases -- Class A Shares" above. In addition,
to the extent that the aggregate service and distribution fees paid under the
Distribution Plan do not exceed 0.35% per annum of the average daily net assets
of the Fund attributable to Class A shares, the Fund is permitted to pay such
distribution-related expenses or other distribution- related expenses.
CLASS B SHARES. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC. See "Purchases -- Class B
Shares" above. MFD will advance to dealers the first year service fee described
above at a rate equal to 0.25% of the purchase price of such shares and, as
compensation therefore, MFD may retain the service fee paid by the Fund with
respect to such shares for the first year after purchase. Dealers will become
eligible to receive the ongoing 0.25% per annum service fee with respect to such
shares commencing in the thirteenth month following purchase.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES. Class C shares are offered at net asset value without an
initial sales charge but are subject to a CDSC. See "Purchases -- Class C
shares" above. MFD will pay a commission to dealers of 1.00% of the purchase
price of Class C shares purchased through dealers at the time of purchase. In
compensation for this 1.00% commission paid by MFD to dealers, MFD will retain
the 1.00% per annum Class C distribution and service fees paid by the Fund with
respect to such shares for the first year after purchase, and dealers will
become eligible to receive from MFD the ongoing 1.00% per annum distribution and
service fees paid by the Fund to MFD with respect to such shares commencing in
the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Distribution Plan equal, on an annual basis, to 0.75% of
the Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A, Class B and
Class C distribution and service fees for its current fiscal year are 0.30%,
1.00% and 1.00% per annum, respectively. The Fund is currently paying
distribution fees of 0.05% under the Distribution Plan for Class A shares.
Payment of the remaining portion of the 0.10% per annum distribution fee equal
to 0.05% per annum for Class A shares will commence on such date as the Trustees
of the Trust may determine. Assets attributable to Class A shares sold prior to
March 1, 1991 are subject to a service fee of 0.15% per annum.
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 Internal Revenue Code
of 1986, as amended (the "Code"). Because the Fund intends to distribute all of
its net investment income and net realized capital gains to its shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Fund will be required to pay any federal income or excise taxes,
although the Fund's foreign-source income may be subject to foreign withholding
taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on dividends and capital gain distributions they receive
from the Fund whether the distribution is paid in cash or reinvested in
additional shares. The Fund expects that none of its distributions will be
eligible for the dividends received deduction for corporations. Shortly after
the end of each calendar year, each shareholder will be sent a statement setting
forth the federal income tax status of all dividends and distributions for that
year, including the portion taxable as ordinary income, the portion taxable as
long-term capital gain, the portion, if any, representing a return of capital
(which is free of current taxes, but results in a basis reduction), and the
amount, if any, of federal income tax withheld.
Fund distributions of net capital gains or net short-term capital gains will
reduce the Fund's net asset value per share. Shareholders who buy shares shortly
before the Fund makes such a distribution may thus pay the full price for the
shares and then effectively receive a portion of the purchase price back as a
taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and that are
made to persons who are neither citizens nor residents of the U.S., regardless
of whether a lower rate may be permitted under an applicable treaty. The Fund is
also required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the U.S.)
who does not furnish to the Fund certain information and certifications or who
is otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
Prospective investors should read the Fund's Account Application for additional
information regarding backup withholding of federal income tax and should
consult their own tax advisers as to the tax consequences to them of an
investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of 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 SAI. The net asset value of each class of shares is
effective for orders received in "good order" by the dealer prior to its
calculation and received by MFD, prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of two series of the Trust, has three classes of shares which it
offers to the general public, entitled Class A, Class B and Class C Shares of
Beneficial Interest (without par value). The Fund also has a class of shares
which it offers exclusively to institutional investors, entitled Class I shares.
The Trust has reserved the right to create and issue additional classes and
series of shares, in which case each class of shares of a series would
participate equally in the earnings, dividends and assets attributable to that
class of shares of that particular series. Shareholders are entitled to one vote
for each share held and shares of each series would be entitled to vote
separately to approve investment advisory agreements or changes in investment
restrictions, but shares of all series would vote together in the election of
Trustees and selection of accountants. Additionally, each class of shares of a
series will vote separately on any material increases in the fees under the
Distribution Plan or on any other matter that affects solely its class of
shares, but will otherwise vote together with all other classes of shares of the
series on all other matters. The Trust does not intend to hold annual
shareholder meetings. The Declaration of Trust provides that a Trustee may be
removed from office in certain instances (see "Description of Shares, Voting
Rights and Liabilities" in the SAI).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to 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 Securities Corporation 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 and Class C 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 and Class C
shares assume no CDSC is paid. The current distribution rate differs from the
yield calculation because it may include distributions to shareholders from
sources other than dividends and interest, such as premium income from option
writing, short-term capital gains, and return of invested capital, and 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 will give effect to the imposition of any applicable CDSC assessed upon
redemptions of the Fund's Class B and Class C shares. Such total rate of return
quotations may be accompanied by quotations which do not reflect the reduction
in value of the initial investment due to the sales charge or the deduction of a
CDSC, and which will thus be higher. The Fund offers multiple classes of shares
which were initially offered for sale to the public on different dates. The
calculation of total rate of return for a class of shares which initially was
offered for sale to the public subsequent to another class of shares of the Fund
is based both on (i) the performance of the Fund's newer class from the date it
initially was offered for sale to the public and (ii) the performance of the
Fund's oldest class from the date it initially was offered for sale to the
public up to the date that the newer class initially was offered for sale to the
public. See the SAI for further information on the calculation of total rate of
return for share classes initially offered for sale to the public on different
dates.
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 SAI. For further information
about the Fund's performance for the fiscal year ended January 31, 1997, please
see the Fund's Annual Report. A copy of the Annual Report may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number). In addition to information provided in shareholder
reports, the Fund may, in its discretion, from time to time, make a list of all
or a portion of its holdings available to investors upon request.
9. 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 in cash; capital gain distributions (except as provided below)
reinvested in additional shares.
-- Dividends and capital gain distributions in cash.
With respect to the second option, the Fund may from time to time make
distributions from short-term capital gains on a monthly basis, and to the
extent such gains are distributed monthly, they shall be paid in cash; any
remaining short-term capital gains not so distributed shall be reinvested in
additional shares. 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. If a shareholder has elected to
receive dividends and/or capital gain distributions in cash, and the postal or
other delivery service is unable to deliver checks to the shareholder's address
of record, or the shareholder does not respond to mailings from the Shareholder
Servicing Agent with regard to uncashed distribution checks, such shareholder's
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares. Any request to change a
distribution option must be received by the Shareholder Servicing Agent by the
record date for a dividend or distribution in order to be effective for that
dividend or distribution. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS: For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $100,000 or more of Class A shares
of the Fund alone or in combination with Class B or Class C shares 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 Class A, Class B and Class C
shares of that shareholder in the MFS Funds or MFS Fixed 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 may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments
based upon the value of his account. Each payment under a Systematic Withdrawal
Plan (a "SWP") must be at least $100, except in certain limited circumstances.
The aggregate withdrawals of Class B and Class C shares in any year pursuant to
a SWP will not be subject to 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 through a
shareholder's checking account on any day of the month. If the shareholder does
not specify a date, the investment will automatically occur on the first
business day of the month. Required forms are available from the Shareholder
Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund, may exchange their shares for the same class of shares
of the other MFS Funds (and, in the case of Class C shares, for shares of MFS
Money Market Fund) under the Automatic Exchange Plan. The Automatic Exchange
Plan provides for automatic monthly or quarterly exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder if such fund is available for
sale. Under the Automatic Exchange Plan, exchanges of at least $50 each may be
made to up to six different funds. A shareholder should consider the objectives
and policies of a fund and review its prospectus before electing to exchange
money into such fund through the Automatic Exchange Plan. No transaction fee is
imposed in connection with exchange transactions under the Automatic Exchange
Plan. However, exchanges of shares of MFS Money Market Fund, MFS Government
Money Market Fund or Class A shares of MFS Cash Reserve Fund will be subject to
any applicable sales charge. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, could result in a capital gain or loss to the shareholder making the
exchange. See the SAI for further information concerning the Automatic Exchange
Plan. Investors should consult their tax advisers for information regarding the
potential capital gain and loss consequences of transactions under the Automatic
Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales 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 SAI, dated June 1, 1997, as amended or supplemented from time to
time, contains more detailed information about the Trust and the Fund,
including, but not limited to, information related to (i) investment objective,
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 Plan 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
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the contingent
deferred sales charge ("CDSC") for Class A shares is waived (Section II), and
the CDSC for Class B and Class C shares is waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, is waived:
1. DIVIDEND REINVESTMENT
* Shares acquired through dividend or capital gain reinvestment; and
* Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Family of Funds
("MFS Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
* Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
* Officers, eligible directors, employees (including retired employees)
and agents of Massachusetts Financial Services Company ("MFS"), Sun
Life Assurance Company of Canada ("Sun Life") or any of their
subsidiary companies;
* Trustees and retired trustees of any investment company for which
MFS Fund Distributors, Inc. ("MFD") serves as distributor;
* Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
* Employees or registered representatives of dealers and other financial
institutions ("dealers") which have a sales agreement with MFD;
* Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the shares;
and
* Institutional Clients of MFS or MFS Asset Institutional Advisors,
Inc. ("MFSI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
* Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
* Death or disability of the IRA owner.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
* Death, disability or retirement of 401(a) or ESP Plan participant;
* Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
* Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
* Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the 401(a) or
ESP Plan);
* Tax-free return of excess 401(a) or ESP Plan contributions;
* To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes
to the MFS FUNDamental 401(k) or ESP Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent; and
* Distributions from a 401(a) or ESP Plan that has invested its assets
in one or more of the MFS Funds for more than 10 years from the later
to occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP
Plan first invests its assets in one or more of the MFS Funds. The
sales charges will be waived in the case of a redemption of all of the
401(a) or ESP Plan's shares in all MFS Funds (i.e., all the assets of
the 401(a) or ESP Plan invested in the MFS Funds are withdrawn),
unless immediately prior to the redemption, the aggregate amount
invested by the 401(a) or ESP Plan in shares of the MFS Funds
(excluding the reinvestment of distributions) during the prior four
years equals 50% or more of the total value of the 401(a) of ESP
Plan's assets in the MFS Funds, in which case the sales charges will
not be waived.
SECTION 403(b) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
* Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
* To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been
redeemed; and
* From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants of such Plan, provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the contingent deferred sales charge imposed on certain
redemptions of Class A shares are waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
* Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or
managed by MFD or its affiliates if: (i) the investment is made
through a dealer and appropriate documentation is submitted to MFD;
(ii) the redeemed shares were subject to an initial sales charge or
deferred sales charge (whether or not actually imposed); (iii) the
redemption occurred no more than 90 days prior to the purchase of
Class A shares; and (iv) the MFS Fund, MFD or its affiliates have not
agreed with such company or its affiliates, formally or informally, to
waive sales charges on Class A shares or provide any other incentive
with respect to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
* Shares acquired by investments through certain dealers which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account or a similar program under which
such clients pay a fee to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
* Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
* Shares acquired by retirement plans whose third party administrators,
or dealers have entered into an administrative services agreement with
MFD or one of its affiliates to perform certain administrative
services, subject to certain operational and minimum size requirements
specified from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
* Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
Shares redeemed on account of distributions made under the following
circumstances:
IRA'S
* Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
* Tax-free returns of excess IRA contributions.
401(a) PLANS
* Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
* Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a Plan.
ESP PLANS AND SRO PLANS
* Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares
is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
* Systematic Withdrawal Plan redemptions with respect to up to 10% per
year of the account value at the time of establishment.
2. DEATH OF OWNER
* Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
* Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made
under the following circumstances:
IRA'S, 401(a) PLANS, ESP PLANS AND SRO PLANS
* Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under
applicable Internal Revenue Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
* Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
* Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
DESCRIPTION OF BOND RATINGS
The ratings of Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Ratings Services ("S&P"), Fitch Investors Service, Inc. ("Fitch") and Duff &
Phelps Credit Rating Co. 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 risk appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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 SERVICES
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.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions, however, are more likely to
have adverse impact on these bonds, and therefor impair timely payment. The
likelihood that the ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
PLUS (+) MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
SUSPENDED: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN: A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is unlikely to result in a rating change and the likely
direction of such change. These are designated as "Positive," indicating a
potential upgrade, "Negative," for potential downgrade, or "Evolving," where
ratings may be raised or lowered. FitchAlert is relatively short-term, and
should be resolved within 12 months.
DUFF & PHELPS CREDIT RATING CO.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "D-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business, and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within a rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR: Indicates that Duff & Phelps does not rate the specific issue.
DUFF & PHELPS SHORT-TERM RATINGS
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3: Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
<PAGE>
APPENDIX C
PORTFOLIO COMPOSITION CHART
MFS HIGH INCOME FUND
FOR FISCAL YEAR ENDED JANUARY 31, 1997
The table below shows the percentages of the Fund's assets at January 31,
1997 invested in securities assigned to the various rating categories by S&P,
Moody's (provided only for securities not rated by S&P), Fitch (provided only
for securities not rated by S&P or Moody's) and Duff & Phelps (provided only for
securities not rated by S&P, Moody's or Fitch) and in unrated securities
determined by MFS to be of comparable quality. For a split rated bond, the S&P
rating is used, and when an S&P rating is unavailable, secondary sources are
selected in the following order: Moody's, Duff & Phelps, and Fitch.
<TABLE>
<CAPTION>
UNRATED
SECURITIES OF
COMPILED COMPARABLE
RATING RATINGS QUALITY TOTAL
- ------ ------- ------- -----
<S> <C> <C> <C>
AAA/Aaa ........................................................ -- -- --
AA/Aa .......................................................... -- -- --
A/A ............................................................ -- -- --
BBB/Baa ........................................................ 0.36% -- 0.36%
BB/Ba .......................................................... 15.89% -- 15.89%
B/B ............................................................ 61.76% 4.05% 65.81%
CCC/Caa ........................................................ 6.44% .08% 6.52%
CC/Ca .......................................................... -- -- --
C/C ............................................................ -- -- --
Default ........................................................ 1.03% -- 1.03%
----- ---- -----
TOTAL .......................................................... 85.48% 4.13% 89.61%
===== ==== =====
</TABLE>
The chart does not necessarily indicate what the composition of the Fund's
portfolio will be in subsequent years. Rather, the Fund's investment objective,
policies and restrictions indicate the extent to which the Fund may purchase
securities in the various categories.
<PAGE>
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche llp
125 Summer Street
Boston, MA 02110
[Logo]
MFS(R) HIGH INCOME FUND
PROSPECTUS
June 1, 1997
[Logo]
MFS(R) HIGH INCOME FUND
500 Boylston Street
Boston, MA 02116
MHI-1-6/97/145M 18/218/318
<PAGE>
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
MFS(R) HIGH INCOME FUND STATEMENT OF
ADDITIONAL INFORMATION
(A Member of the MFS Family of Funds(R)) June 1, 1997
- -------------------------------------------------------------------------------
Page
1. Definitions ...................................................... 2
2. Investment Objective, Policies and Restrictions .................. 2
3. Management of the Fund ........................................... 12
Trustees ...................................................... 12
Officers ...................................................... 13
Trustee Compensation Table .................................... 13
Investment Adviser ............................................ 14
Administrator ................................................. 14
Custodian ..................................................... 14
Shareholder Servicing Agent ................................... 15
Distributor ................................................... 15
4. Portfolio Transactions and Brokerage Commissions ................. 16
5. Shareholder Services ............................................. 16
Investment and Withdrawal Programs ............................ 16
Exchange Privilege ............................................ 18
Tax-Deferred Retirement Plans ................................. 19
6. Tax Status ....................................................... 19
7. Description of Shares, Voting Rights and Liabilities ............. 20
8. Determination of Net Asset Value and Performance ................. 21
9. Distribution Plan ................................................ 23
10. Independent Auditors and Financial Statements .................... 24
Appendix A -- Performance Information ............................ A-1
MFS HIGH INCOME FUND
A Series of MFS Series Trust III
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information as amended or supplemented from time to
time (the "SAI"), sets forth information which may be of interest to investors
but which is not necessarily included in the Fund's Prospectus dated June 1,
1997. This SAI should be read in conjunction with the Prospectus, a copy of
which may be obtained without charge by contacting the Shareholder Servicing
Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
1. DEFINITIONS
"Fund" -- MFS High Income Fund, a series of
MFS Series Trust III (the "Trust"),
a Massachusetts business trust. The
Trust was known as "Massachusetts
Financial High Income Trust", until
its name was changed on August 20,
1993.
"MFS" or the "Adviser" -- Massachusetts Financial Services
Company, a Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc., a
Delaware corporation.
"Prospectus" -- The Prospectus of the Fund, dated
June 1, 1997, as amended or
supplemented from time to time.
2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE. The Fund's investment objective 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 high current
income. There can be no assurance that the Fund will achieve its investment
objective.
INVESTMENT POLICIES. The fixed income and other securities in which the Fund may
invest and the risks associated with such investments are described in the
Fund's Prospectus. The following policies are not fundamental and may be changed
without shareholder approval as may the Fund's investment objective.
RESTRICTED SECURITIES: The Fund may invest in restricted securities of companies
which the Adviser believes have significant growth potential. These securities
are subject to legal or contractual restrictions on resale. Consequently, there
is no public trading market for these securities and market quotations are not
readily available. 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. The Fund may not invest more than 15% of its net assets in
restricted securities (as described in the Fund's investment restrictions)
(restricted securities the Board of Trustees has determined are liquid are not
included in this amount). See "Investment Objective, Policies and Restrictions
- -- Investment Restrictions."
The Fund will not (a) invest more than 5% of its assets, taken at market value,
in warrants not acquired in a unit transaction or (b) invest more than 15% of
its assets, taken at market value, in securities for which there are no readily
available market quotations.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and other
direct claims against a borrower. In purchasing loans, the Fund acquires some or
all of the interest of a bank or other lending institution in a loan to a
corporate borrower. Many such loans are secured, although some may be unsecured.
Such loans may be in default at the time of purchase. Loans that are fully
secured offer the Fund more protection than an unsecured loan in the event of
non-payment of scheduled interest or principal. However, there is no assurance
that the liquidation of collateral from a secured loan would satisfy the
corporate borrower's obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which the
Fund would assume all of the rights of the lending institution in a loan, or as
an assignment, pursuant to which the Fund would purchase an assignment of a
portion of a lender's interest in a loan either directly from the lender or
through an intermediary. The Fund may also purchase trade or other claims
against companies, which generally represent money owed by the company to a
supplier of goods or services. These claims may also be purchased at a time when
the company is in default.
Certain of the 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. These commitments may have the
effect of requiring the Fund to increase its investment in a company at a time
when the Fund might not otherwise decide to do so (including at a time when the
company's financial condition makes it unlikely that such amounts will be
repaid). The Fund will always have liquid assets sufficient to cover any
commitments or to limit any potential risk.
The Fund's ability to receive payments of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. In selecting the loans and other direct investments
which the Fund will purchase, the Adviser will rely upon its (and not that of
the original lending institution's) own credit analysis of the borrower. As the
Fund may be required to rely upon another lending institution to collect and
pass on to the Fund amounts payable with respect to the loan and to enforce the
Fund's rights under the loan, an insolvency, bankruptcy or reorganization of the
lending institution may delay or prevent the Fund from receiving such amounts.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Investments in
such loans may involve additional risks to the Fund. For example, if a loan is
foreclosed, the Fund could become part owner of any collateral, and would bear
the costs and liabilities associated with owning and disposing of the
collateral. In addition, it is conceivable that under emerging legal theories of
lender liability, the Fund could be held liable as a co-lender. It is unclear
whether loans and other forms of direct indebtedness offer securities law
protections against fraud and misrepresentation. In the absence of definitive
regulatory guidance, the Fund relies on the Adviser's research in an attempt to
avoid situations where fraud or misrepresentation could adversely affect the
Fund. In addition, loan participations and other direct investments may not be
in the form of securities or may be subject to restrictions on transfer, and
only limited opportunities may exist to resell such instruments. As a result,
the Fund may be unable to sell such investments at an opportune time or may have
to resell them at less than fair market value. To the extent that the Adviser
determines that any such investments are illiquid, the Fund will include them in
the investment limitations described below.
"WHEN-ISSUED" SECURITIES: When the Fund commits to purchase a security on a
"when-issued" or "forward delivery" basis, it will set up procedures consistent
with policies promulgated by the Securities and Exchange Commission (the "SEC")
concerning such purchases. Since that policy currently recommends that an amount
of the Fund's assets equal to the amount of the purchase be held aside or
segregated to be used to pay for the commitment, the Fund will always have
liquid assets sufficient to cover any commitments or to limit any potential
risk. However, although the Fund does not intend to make such purchases for
speculative purposes and intends to adhere to policies promulgated by the SEC,
purchases of securities on such bases may involve more risk than other types of
purchases. For example, the Fund may have to sell assets which have been set
aside in order to meet redemptions. Also, if the Fund determines it necessary to
sell the "when-issued" or "forward delivery" securities before delivery, it may
incur a loss because of market fluctuations since the time the commitment to
purchase such securities was made.
FOREIGN SECURITIES: As discussed in the Prospectus, investing in foreign
securities generally represents a greater degree of risk than investing in
domestic securities, due to possible exchange rate fluctuations, less publicly
available information, more volatile markets, less securities regulation, less
favorable tax provisions, war or expropriation. As a result of its investments
in foreign securities, the Fund may receive interest or dividend payments, or
the proceeds of the sale or redemption of such securities, in the foreign
currencies in which such securities are denominated. Under certain
circumstances, such as where the Adviser believes that the applicable exchange
rate is unfavorable at the time the currencies are received or the Adviser
anticipates, for any other reason, that the exchange rate will improve, the Fund
may hold such currencies for an indefinite period of time. While the holding of
currencies will permit the Fund to take advantage of favorable movements in the
applicable exchange rate, such strategy also exposes the Fund to risk of loss if
exchange rates move in a direction adverse to the Fund's position. Such losses
could reduce any profits or increase any losses sustained by the Fund from the
sale or redemption of securities and could reduce the dollar value of interest
or dividend payments received. The Fund may also hold foreign currency in
anticipation of purchasing foreign securities.
AMERICAN DEPOSITARY RECEIPTS: American Depositary Receipts ("ADRs") are
certificates issued by a U.S. depository (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. ADRs may be sponsored or unsponsored. A sponsored
ADR is issued by a depository which has an exclusive relationship with the
issuer of the underlying security. An unsponsored ADR may be issued by any
number of U.S. depositories. Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities. The
depository of an unsponsored ADR, on the other hand, is under no obligation to
distribute shareholder communications received from the issuer of the deposited
securities or to pass through voting rights to ADR holders in respect of the
deposited securities. The Fund may invest in either type of ADR. Although the
U.S. investor holds a substitute receipt of ownership rather than direct stock
certificates, the use of the depository receipts in the United States can reduce
costs and delays as well as potential currency exchange and other difficulties.
The Fund may purchase securities in local markets and direct delivery of these
ordinary shares to the local depository of an ADR agent bank in the foreign
country. Simultaneously, the ADR agents create a certificate which settles at
the Fund's custodian in five days. The Fund may also execute trades on the U.S.
markets using existing ADRs. A foreign issuer of the security underlying an ADR
is generally not subject to the same reporting requirements in the United States
as a domestic issuer. Accordingly the information available to a U.S. investor
will be limited to the information the foreign issuer is required to disclose in
its own country and the market value of an ADR may not reflect undisclosed
material information concerning the issuer of the underlying security. ADRs may
also be subject to exchange rate risks if the underlying foreign securities are
denominated in foreign currency.
MORTGAGE PASS-THROUGH SECURITIES. The Fund may invest in mortgage pass-through
securities as described in the Prospectus. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. Some mortgage pass-through securities (such as securities
issued by the Government National Mortgage Association ("GNMA"), are described
as "modified pass-through." These securities entitle the holder to receive all
interests and principal payments owed on the mortgages in the mortgage pool, net
of certain fees, at the scheduled payment dates regardless of whether the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities is the
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of Federal Housing Administration-insured or Veteran's Administration
("VA")-guaranteed mortgages. These guarantees, however, do not apply to the
market value or yield of mortgage pass-through securities. GNMA securities are
often purchased at a premium over the maturity value of the underlying
mortgages. This premium is not guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by the full
faith and credit of the U.S. Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional residential mortgages (i.e.,
mortgages not insured or guaranteed by any governmental agency) from a list of
approved seller/services which include state and federally-chartered savings and
loan associations, mutual savings banks, commercial banks, credit unions and
mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment by FNMA of principal and interest.
FHLMC was created by Congress in 1970 as a corporate instrumentality of the U.S.
Government for the purpose of increasing the availability of mortgage credit for
residential housing. FHLMC issues Participation Certificates ("PCs") which
represent interest in conventional mortgages (i.e., not federally insured or
guaranteed) from FHLMC's national portfolio. FHLMC guarantees timely payment of
interest and ultimate collection of principal regardless of the status of the
underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of mortgage loans. Such issuers may also be the originators
and/or servicers of the underlying mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However, timely
payment of interest and principal of mortgage loans in these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Fund may also buy mortgage-related securities without
insurance or guarantees.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: The
Fund may invest a portion of its assets in collateralized mortgage obligations
or "CMOs", which are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by
certificates issued by GNMA, FNMA or FHLMC, but also may be collateralized by
whole loans or private 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 reinvestment income thereon, provide the funds to pay debt
service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the United States government or by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing. The issuer of a series of CMOS may elect to be treated as a Real
Estate Mortgage Investment Conduit (a "REMIC").
In a CMO, 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 than their stated
maturities or final distribution dates, resulting in a loss of all or a part of
the premium if any has been paid. Interest is paid or accrues on all classes of
the CMOs on a monthly, quarterly or semiannual basis. The principal of and
interest on the Mortgage Assets may be allocated among the several classes of a
series of a CMO in innumerable ways. In a common structure, payments of
principal, including any principal prepayments, on the Mortgage Assets are
applied to the classes of the series of a CMO in the order of their respective
stated maturities or final distribution dates, so that no payment of principal
will be made on any class of CMOs until all other classes having an earlier
stated maturity or final distribution date have been paid in full. Certain CMOs
may be stripped (securities which provide only the principal or interest factor
of the underlying security). See "Stripped Mortgage-Backed Securities" below for
a discussion of the risks of investing in these stripped securities and of
investing in classes consisting primarily of interest payments or principal
payments.
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. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must be
retired by its stated maturity date or final distribution date, but may be
retired earlier. 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.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its assets
in stripped mortgage-backed securities ("SMBS") which are derivative multiclass
mortgage securities issued by agencies or instrumentalities of the United States
government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks and
investment banks.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of Mortgage Assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the Mortgage Assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest (the interest-only or "IO"
Class) while the other class will receive all of the principal (the
principal-only or "PO" Class). The yield to maturity on an IO is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying Mortgage Assets, and a rapid rate of principal payments may
have a material adverse effect on such security's yield to maturity. If the
underlying Mortgage Assets experience greater than anticipated prepayments of
principal, the Fund may fail to fully recoup its initial investment in these
securities. The market value of the class consisting primarily or entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. Because SMBS were only recently introduced, established trading
markets for these securities have not yet developed, although the securities are
traded among institutional investors and investment banking firms.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, precious metals
or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity (i.e., principal value) or coupon rate is determined by reference to a
specific instrument or statistic. Gold-indexed securities, for example,
typically provide for a maturity value that depends on the price of gold,
resulting in a security whose price tends to rise and fall together with gold
prices. Currency-indexed securities typically are short-term to intermediate-
term debt securities whose maturity values or interest rates are determined by
reference to the values of one or more specified foreign currencies, and may
offer higher yields than U.S. dollar-denominated securities of equivalent
issuers. Currency-indexed securities may be positively or negatively indexed;
that is, their maturity value may increase when the specified currency value
increases, resulting in a security that performs similarly to a foreign-
denominated instrument, or their maturity value may decline when foreign
currencies increase, resulting in a security whose price characteristics are
similar to a put on the underlying currency. Currency-indexed securities may
also have prices that depend on the values of a number of different foreign
currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
SWAPS AND RELATED TRANSACTIONS: The Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap ageements may increase or decrease the Fund's
exposure to long or short-term interest rates (in the U.S. or abroad), foreign
currency values, mortgage securities, corporate borrowing rates, or other
factors such as securities prices or inflation rates. Swap agreements can take
many different forms and are known by a variety of names. The Fund is not
limited to any particular form or variety of swap agreement if MFS determines it
is consistent with the Fund's investment objective and policies.
The Fund will maintain cash or appropriate liquid assets with its custodian to
cover its current obligations under swap transactions. If the Fund enters into a
swap agreement on a net basis (i.e., the two payment streams are netted out,
with the Fund receiving or paying, as the case may be, only the net amount of
the two payments), the Fund will maintain cash or liquid assets with its
custodian with a daily value at least equal to the excess, if any, of the Fund's
accrued obligations under the swap agreement over the accrued amount the Fund is
entitled to receive under the agreement. If the Fund enters into a swap
agreement on other than a net basis, it will maintain liquid assets with a value
equal to the full amount of the Fund's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If MFS
is incorrect in its forecasts of such factors, the investment performance of the
Fund would be less than what it would have been if these investment techniques
had not been used. If a swap agreement calls for payments by the Fund, the Fund
must be prepared to make such payments when due. In addition, if the
counterparty's creditworthiness declined, the value of the swap agreement would
be likely to decline, potentially resulting in losses. If the counterparty
defaults, the Fund's risk of loss consists of the net amount of payments that
the Fund is contractually entitled to receive. The Fund anticipates that it will
be able to eliminate or reduce its exposure under these arrangements by
assignment or other disposition or by entering into an offsetting agreement with
the same or another counterparty.
OPTIONS: The Fund may write covered put and call options and purchase put and
call options on domestic and foreign fixed income securities that are traded on
U.S. and foreign securities exchanges and over-the-counter. Call options written
by the Fund give the holder the right to buy the underlying securities from the
Fund at a fixed exercise price; put options written by the Fund give the holder
the right to sell the underlying security to the Fund at a fixed exercise price.
A call option written by the Fund is "covered" if the Fund owns the underlying
security covered by the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Fund in liquid assets, in a segregated account with its custodian. A put
option written by the Fund is "covered" if the Fund maintains liquid assets in a
segregated account with its custodian, or else holds a put on the same security
and in the same principal amount as the put written where the exercise price of
the put held is equal to or greater than the exercise price of the put written.
Put and call options written by the Fund may also be covered in such other
manner as may be in accordance with the requirements of the exchange on which,
or the counter party with which, the option is traded and applicable laws and
regulations. The writer of an option may have no control over when the
underlying securities must be sold, in the case of a call option, or purchased,
in the case of a put option, since with regard to certain options, the writer
may be assigned an exercise notice at any time prior to the termination of the
obligation.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by liquid assets. Such transactions permit
the Fund to generate additional premium income, which will partially offset
declines in the value of portfolio securities or increases in the cost of
securities to be acquired. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to, or concurrent with, the sale of the
security.
The Fund will realize a profit from a closing transaction if the premium paid in
connection with the closing of an option is less than the premium received from
writing the option or if the premium received in connection with the closing of
an option purchased is more than the premium paid for the original purchase.
Conversely, the Fund will suffer a loss if the premium paid or received in
connection with a closing transaction is more or less, respectively, than the
premium received or paid in establishing the option position. Because increases
in the market price of a call option will generally reflect increases in the
market price of the underlying security, any loss resulting from the closing out
of a call option would likely be offset in whole or in part by appreciation of
the underlying security owned by the Fund.
An option position may be closed out only where there exists a secondary market
for an option of the same series. If a secondary market does not exist, it might
not be possible to effect closing transactions in particular options with the
result that the Fund would have to exercise the options in order to realize any
profit. If the Fund is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise. Reasons for
the absence of a liquid secondary market include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by a national securities exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation (the "OCC") may not at all times be adequate to handle
current trading volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the OCC as a result of trades on that exchange would continue to
be exercisable in accordance with their terms.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at-the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. If the call options are exercised in such
transactions, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Fund's purchase price of the security and the exercise price. If the options are
not exercised and the price of the underlying security declines, the amount of
such decline will be offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options may be used by the
Fund in the same market environments that call options are used in equivalent
buy-and-write transactions.
The Fund may write combinations of put and call options on the same security, a
practice known as a "straddle." By writing a straddle, the Fund undertakes a
simultaneous obligation to sell and purchase the same security in the event that
one of the options is exercised. If the price of the security subsequently rises
sufficiently above the exercise price to cover the amount of the premium and
transaction costs, the call will likely be exercised and the Fund will be
required to sell the underlying security at a below market price. This loss may
be offset, however, in whole or in part, by the premiums received on the writing
of the two options. Conversely, if the price of the security declines by a
sufficient amount, the put will likely be exercised. The writing of straddles
will likely be effective, therefore, only where the price of a security remains
stable and neither the call nor the put is exercised. In an instance where one
of the options is exercised, the loss on the purchase or sale of the underlying
security may exceed the amount of the premiums received.
The Fund may purchase put options to hedge against a decline in the value of its
portfolio. By using put options in this way, the Fund will reduce any profit it
might otherwise have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the price of
domestic or foreign securities that the Fund anticipates purchasing in the
future. The premium paid for the 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 rises sufficiently, the option
may expire worthless to the Fund.
YIELD CURVE OPTIONS: 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. 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 prices of the individual securities,
and is usually settled through cash payments. Accordingly, a yield curve option
is profitable to the holder if this differential widens (in the case of a call)
or narrows (in the case of a put), regardless of whether the yields of the
underlying securities increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. Specifically, the Fund may purchase or write such options for
hedging purposes. For example, the Fund may purchase a call option on the yield
spread between two securities if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. The Fund may also purchase or write
yield curve options for other than hedging purposes if, in the judgment of the
Adviser, the Fund will be able to profit from movements in the spread between
the yields of the underlying fixed income securities. The trading of yield curve
options is subject to all of the risks associated with the trading of other
types of options. In addition, however, such options present risk of loss even
if the yield of one of the underlying securities remains constant, if the yield
spread moves in a direction or to an extent which was not anticipated. Yield
curve options written by the Fund will be covered. A call (or put) option
written by the Fund is covered if the Fund holds another call (or put) option on
the yield spread between the same two securities and maintains in a segregated
account with its liquid assets sufficient to cover the Fund's net liability
under the two options. Therefore, the Fund's liability for such a covered option
is generally limited to the difference between the amount of the Fund's
liability under the option written by the Fund less the value of the option held
by the Fund. Yield curve options may also be covered in such other manner as may
be in accordance with the requirements of the counter party with which the
option is traded and applicable laws and regulations. Yield curve options are
traded over-the-counter and because they have been only recently introduced,
established trading markets for these securities have not yet developed. Because
these securities are traded over-the-counter, the SEC has taken the position
that yield curve options are illiquid and, therefore, cannot exceed the SEC
illiquidity ceiling. See "Investment Techniques -- Options on Securities" in the
Prospectus for a discussion of the policies the Adviser intends to follow to
limit the Fund's investment in these securities.
FUTURES CONTRACTS: The Fund may enter into contracts for the future delivery of
domestic or foreign fixed income securities or contracts based on municipal bond
or other financial indices including any index of domestic or foreign fixed
income securities, as such contracts become available for trading ("Futures
Contracts"). Such transactions may be entered into for hedging purposes and for
non-hedging purposes, subject to applicable law. A "sale" of a Futures Contract
means a contractual obligation to deliver the securities called for by the
contract at a specified price in a fixed delivery month or, in the case of a
Futures Contract on an index of securities, to make or receive a cash
settlement. A "purchase" of a Futures Contract means a contractual obligation to
acquire the securities called for by the contract at a specified price in a
fixed delivery month or, in the case of a Futures Contract on an index of
securities, to make or receive a cash settlement. U.S. Futures Contracts have
been designed by exchanges which have been designated as "contract markets" by
the Commodity Futures Trading Commission (the "CFTC"), and must be executed
through a futures commission merchant, or brokerage firm, which is a member of
the relevant contract market. Existing contract markets include the Chicago
Board of Trade and the International Monetary Market of the Chicago Mercantile
Exchange. Futures Contracts are traded on these markets, and, through their
clearing corporations, the exchanges guarantee performance of the contracts as
between the clearing members of the exchange. Futures Contracts purchased or
sold by the Fund are also traded on foreign exchanges which are not regulated by
the CFTC.
At the same time a Futures Contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit"). The initial deposit
varies but may be as low as 5% or less of the value of the contract. Daily
thereafter, the Futures Contract is valued and the Fund may be required to pay
or receive additional payment of "variation margin" based on changes in the
value of the contract.
At the time of delivery of securities pursuant to a Futures Contract based on
fixed income securities, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest rate from that
specified in the contract. In some (but not many) cases, securities called for
by a Futures Contract may not have been issued when the contract was written.
A Futures Contract based on an index of securities, such as a municipal bond
index Futures Contract, provides for a cash payment equal to the amount, if any,
by which the value of the index at maturity is above or below the value of the
index at the time the contract was entered into, times a fixed index
"multiplier". The index underlying such a Futures Contract is generally a broad
based index of securities designed to reflect movements in the relevant market
as a whole. The index assigns weighted values to the securities included in the
index and its composition is changed periodically.
Although Futures Contracts call for the actual delivery of securities or, in the
case of Futures Contracts based on an index, the making or acceptance of a cash
settlement at a specified future time, the contractual obligation is usually
fulfilled before such date by buying or selling, as the case may be, on a
commodities exchange, an identical Futures Contract calling for settlement in
the same month, subject to the availability of a liquid secondary market. The
Fund incurs brokerage fees when it purchases and sells Futures Contracts.
One purpose of the purchase or sale of a Futures Contract for hedging purposes,
in the case of a portfolio such as that of the Fund which holds or intends to
acquire long-term fixed income securities, is to attempt to protect the Fund
from fluctuations in interest rates without actually buying or selling long-term
fixed income securities. For example, if the Fund owns long-term bonds and
interest rates were expected to increase, the Fund might enter into Futures
Contracts for the sale of debt securities. Such a sale would have much the same
effect as selling an equivalent value of the long-term bonds in the portfolio of
the Fund by the Fund. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the Futures
Contracts would increase at approximately the same rate, thereby keeping the net
asset value of the Fund from declining as much as it otherwise would have. The
Fund could accomplish similar results by selling bonds with long maturities and
investing in bonds with short maturities when interest rates are expected to
increase. However, since the futures market is more liquid than the cash market,
the use of Futures Contracts as an investment technique allows the Fund to
maintain a hedging position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to attempt to hedge against anticipated purchases of
long-term bonds at higher prices. Since the fluctuations in the value of Futures
Contracts should be similar to that of long-term bonds, the Fund could take
advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the Futures
Contracts could be liquidated and the Fund could then buy long-term bonds on the
cash market. To the extent the Fund enters into Futures Contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Fund's obligations with respect to such Futures Contracts will consist of liquid
assets from its portfolio in an amount equal to the difference between the
fluctuating market value of such Futures Contracts and the aggregate value of
the initial deposit and variation margin payments made by the Fund with respect
to such Futures Contracts.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out Futures Contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still not
result in a successful transaction.
In addition, Futures Contracts entail risks. Although the Fund believes that use
of such contracts will benefit the Fund, if the Adviser's investment judgment
about the general direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any such contract.
For example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of bonds held in its
portfolio, and interest rates decrease instead, the Fund will lose part or all
of the benefit of the increased value of its bonds which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell bonds from
its portfolio to meet daily variation margin requirements. Such sales of bonds
may be, but will not necessarily be, at increased prices which reflect the
rising market. The Fund may have to sell securities at a time when it may be
disadvantageous to do so. The purchase and sale of Futures Contracts for
non-hedging purposes involves greater risk, and could result in losses which are
not offset by gains on other portfolio assets.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options on Futures
Contracts ("Options on Futures Contracts") for hedging purposes and for
non-hedging purposes subject to applicable laws. An Option on a Futures Contract
provides the holder with the right to enter into a "long" position in the
underlying Futures Contract in the case of a call option, or a "short" position
in the underlying Futures Contract in the case of a put option, at a fixed
exercise price up to a stated expiration date or, in the case of certain
options, on such date. Such Options on Futures Contracts will be traded on U.S.
contract markets regulated by the CFTC as well as on foreign exchanges.
Depending on the pricing of the option compared to either the price of the
Futures Contract upon which it is based or the price of the underlying debt
securities, it may or may not be less risky than ownership of the Futures
Contract or underlying debt securities. As with the purchase of Futures
Contracts, when the Fund is not fully invested it may purchase a call Option on
a Futures Contract to hedge against a market advance due to declining interest
rates.
The writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the securities which are deliverable upon exercise
of the Futures Contract. If the futures price at expiration of the option is
below the exercise price, the Fund will retain the full amount of the option
premium, less related transaction costs, which provides a partial hedge against
any decline that may have occurred in the Fund's portfolio holdings. The writing
of a put Option on a Futures Contract constitutes a partial hedge against
increasing prices of the securities which are deliverable upon exercise of the
Futures Contract. If the futures price at expiration of the option is higher
than the exercise price, the Fund will retain the full amount of the option
premium, less related transaction costs, which provides a partial hedge against
any increase in the price of securities which the Fund intends to purchase. If a
put or call option the Fund has written is exercised, the Fund will incur a loss
which will be reduced by the amount of the premium it receives, less related
transaction costs. Depending on the degree of correlation between changes in the
value of its portfolio securities and changes in the value of its futures
positions, the Fund's losses from existing Options on Futures Contracts may to
some extent be reduced or increased by changes in the value of portfolio
securities. The writer of an Option on a Futures Contract is subject to the
requirement of initial and variation margin payments. The Fund may cover the
writing of call Options on Futures Contracts through purchases of the underlying
Futures Contract or through ownership of the security or securities included in
the index underlying the Futures Contract. The Fund may also cover the writing
of call Options on Futures Contracts through the purchase of such Options,
provided that the exercise price of the call purchased (a) is equal to or less
than the exercise price of the call written or (b) is greater than the exercise
price of the call written if the difference is maintained by the Fund in liquid
assets in a segregated account with the Fund's custodian. The Fund will cover
the writing of put Options on Futures Contracts through sales of the underlying
Futures Contract or through segregation of liquid assets in an amount equal to
the value of the security or index underlying the Futures Contract. The Fund may
also cover the writing of put Options on Futures Contracts through the purchase
of such Options, provided that the exercise price of the put purchased is equal
to or greater than the exercise price of the put written. In addition, the Fund
may cover put and call Options on Futures Contracts in accordance with the
requirements of the exchange on which the option is traded and applicable laws
and regulations.
The purchase of a put Option on a Futures Contract is similar in some respects
to the purchase of protective put options on portfolio securities. The Fund will
purchase a put Option on a Futures Contract to hedge the Fund's portfolio
against the risk of rising interest rates.
The amount of risk the Fund assumes when it purchases an Option on a Futures
Contract is the premium paid for the option plus related transaction costs,
although in order to realize a profit it may be necessary to exercise the option
and close out the underlying Futures Contract. In addition to the correlation
risks discussed above, the purchase of an option also entails the risk that
changes in the value of the underlying Futures Contract will not be fully
reflected in the value of the option purchased. The writer of an option or a
futures contract is subject to all the risks of futures trading including the
requirement of initial and variation margin payments. The purchase and sale of
Options on Futures Contracts for non-hedging purposes involves greater risk, and
could result in losses which are not offset by gains of other portfolio assets.
FORWARD CONTRACTS: The Fund may enter into contractual obligations to purchase
or sell a specific quantity of a given foreign currency for a fixed exchange
rate at a future date ("Forward Contracts"). Forward Contracts are individually
negotiated and are traded through the "interbank currency market", an informal
network of banks and brokerage firms which operates around the clock and
throughout the world. Transactions in the interbank market may be executed only
through financial institutions acting as market- makers in the interbank market
or through brokers executing purchases and sales through such institutions.
Market-makers in the interbank market generally act as principals in taking the
opposite side of their customers' positions in Forward Contracts and ordinarily
charge a mark-up or commission which may be included in the cost of the
contract. In addition, market-makers may require their customers to deposit
collateral upon entering into a Forward Contract as security for the customer's
obligation to make or receive delivery of currency and to deposit additional
collateral if exchange rates move adversely to the customer's position. Such
deposits may function in a manner similar to the margining of Futures Contracts
described above.
Prior to the stated maturity date of a Forward Contract, it may be possible to
liquidate the transaction by entering into an offsetting contract. In order to
do so, however, a customer may be required to maintain both contracts as open
positions until maturity and to make or receive a settlement of the difference
owed to or from the market-maker or broker at that time.
Forward Contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for the Fund
than if it had not engaged in such contracts.
The Fund has established procedures consistent with Statements by the SEC and
its staff regarding the use of Forward Contracts by registered investment
companies, which require the use of segregated assets or "cover" in connection
with the purchase and sale of such contracts. In those instances in which the
Fund satisfies this requirement through segregation of assets, it will maintain,
in a segregated account, liquid assets, which will be marked to market on a
daily basis, in an amount equal to the value of its commitments under Forward
Contracts entered into by the Fund. The Fund may also enter into Forward
Contracts for "Cross-hedging" as noted in the Prospectus.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
Forward Contracts will be utilized. For example, a decline in the dollar value
of a foreign currency in which portfolio securities are denominated will reduce
the dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
portfolio securities, the Fund may purchase put options on the foreign currency.
If the value of the currency does decline, the Fund will have the right to sell
such currency for a fixed amount in dollars and will thereby offset, in whole or
in part, the adverse effect on its portfolio which otherwise would have
resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options which would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar value
of foreign-denominated securities due to adverse fluctuations in exchange rates,
it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised and the diminution in value of portfolio securities will be
offset by the amount of the premium received, less related transaction costs.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium, less related transaction costs. As in the
case of other types of options, however, the writing of a foreign currency
option will constitute only a partial hedge up to the amount of the premium,
less related transaction costs, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Fund
would be required to purchase or sell the underlying currency at a loss which
may not be offset by the amount of the premium. Through the writing of options
on foreign currencies, the Fund also may be required to forego all or a portion
of the benefits which might otherwise have been obtained from favorable
movements in exchange rates.
Options on foreign currencies written or purchased by the Fund will be traded
over-the-counter or on U.S. or foreign securities exchanges. All options written
on foreign currencies will be covered. A call option written on foreign
currencies by the Fund is "covered" if the Fund owns the underlying foreign
currency covered by the call or has an absolute and immediate right to acquire
that foreign currency without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other foreign currency held in its portfolio. A call
option is also covered if the Fund has a call on the same foreign currency and
in the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the difference is
maintained by the Fund in liquid assets in a segregated account with its
custodian. A put option written on foreign currencies by the Fund is "covered"
if the Fund maintains liquid assets in a segregated account with its custodian,
or else holds a put on the same foreign currency and in the same principal
amount as the put written where the exercise price of the put held is equal to
or greater than the exercise price of the put written. Options on foreign
currencies written by the Fund may also be covered in such other manner as may
be in accordance with the requirements of the exchange on which the option is
traded and applicable laws and regulations.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS, OPTIONS ON FUTURES
CONTRACTS, FORWARD CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES: Various
additional risks exist with respect to the trading of options, Futures Contracts
and Forward Contracts. For example, the Fund's ability effectively to hedge all
or a portion of its portfolio through transactions in such instruments will
depend on the degree to which price movements in the underlying index or
instrument correlate with price movements in the relevant portion of the Fund's
portfolio. The trading of futures and options entails the additional risk of
imperfect correlation between movements in the futures or option price and the
price of the underlying index or obligation, while the trading of options also
entails the risk of imperfect correlation between securities used to cover
options written and the securities underlying such options. The anticipated
spread between the prices may be distorted because of various factors, which are
set forth under "Investment Objective, Policies and Restrictions -- Futures
Contracts" above. When the Fund purchases or sells Futures Contracts based on an
index of securities, the securities comprising such index will not be the same
as the portfolio securities being hedged, thereby creating a risk that changes
in the value of the index will not correlate with changes in the value of such
portfolio securities.
The Fund's ability to engage in options and futures strategies will also depend
on the availability of liquid markets in such instruments. "Investment
Objective, Policies and Restrictions -- Options" sets forth certain reasons why
a liquid secondary market may not exist.
The liquidity of a secondary market in a Futures Contract or option thereon may
be adversely affected by "daily price fluctuation limits", established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limit. In addition,
the exchanges on which futures and options are traded may impose limitations
governing the maximum number of positions on the same side of the market and
involving the same underlying instrument which may be held by a single investor,
whether acting alone or in concert with others (regardless of whether such
contracts are held on the same or different exchanges or held or written in one
or more accounts or through one or more brokers).
Unlike transactions in Futures Contracts entered into by the Fund, options on
foreign currencies and Forward Contracts are not traded on contract markets
regulated by the CFTC or, with the exception of certain foreign currency
options, by the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange, subject to SEC regulation. Similarly, options on
securities may be traded over-the-counter. In an over-the-counter trading
environment, many of the protections afforded to exchange participants will not
be available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, the option writer and a trader of Forward Contracts could
lose amounts substantially in excess of their initial investments due to the
margin and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities and options traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all options on securities and on foreign currencies entered into on a national
securities exchange are cleared and guaranteed by the OCC, thereby reducing the
risk of counterparty default. Further, a liquid secondary market in options
traded on a national securities exchange may be more readily available than in
the over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in the
event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
In addition, options on securities, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies may be traded on
foreign exchanges. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or securities.
The value of such positions also could be adversely affected by (i) other
complex foreign, political and economic factors, (ii) lesser availability than
in the United States of data on which to make trading decisions, (iii) delays in
the Fund's ability to act upon economic events occuring in foreign markets
during non-business hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States and (v) lesser trading volume.
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 foreign currencies. The Fund may also be required to receive
delivery of the foreign currencies underlying options on foreign currencies or
Forward Contracts it has entered into. This could occur, for example, if an
option written by the Fund is exercised or the Fund is unable to close out a
Forward Contract it has entered into. In addition, the Fund may elect to take
delivery of such currencies. Under such circumstances, the Fund may promptly
convert the foreign currencies into dollars at the then current exchange rate.
Alternatively, the Fund may hold such currencies for an indefinite period of
time if the Adviser believes that the exchange rate at the time of delivery is
unfavorable or if, for any other reason, the Adviser anticipates favorable
movements in such rates.
While the holding of currencies will permit the Fund to take advantage of
favorable movements in the applicable exchange rate, it also exposes the Fund to
risk of loss if such rates move in a direction adverse to a Fund's position.
Such losses could also adversely affect the Fund's hedging strategies. Certain
tax requirements may limit the extent to which the Fund will be able to hold
currencies.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
sellers who are member firms (or a subsidiary thereof) of the New York Stock
Exchange or members of the Federal Reserve System, recognized primary U.S.
Government securities dealers or institutions which the Adviser has determined
to be of comparable creditworthiness. The securities that the Fund purchases and
holds through its agent are U.S. Government securities, the values of which are
equal to or greater than the repurchase price agreed to be paid by the seller.
The repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Fund together with the repurchase price
on repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities. Such loans will usually be made only to member
firms of the New York Stock Exchange (and subsidiaries thereof) and member banks
of the Federal Reserve System, and would be required to be secured continuously
by collateral in cash, U.S. Treasury securities, or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Fund would have the right to call a loan and
obtain the securities loaned at any time on customary industry settlement notice
(which will not usually exceed five days). For the duration of a loan, the Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive compensation from the
investment of cash collateral or a fee. The Fund would not, however, have the
right to vote any securities having voting rights during the existence of the
loan, but the Fund would call the loan in anticipation of an important vote to
be taken among holders of the securities or of the giving or withholding of
their consent on a material matter affecting the investment. As with other
extensions of credit there are risks of delay in recovery or even loss of rights
in the collateral should the borrower of the securities fail financially.
However, the loans would be made only to firms deemed by the Adviser to be of
good standing, and when, in the judgment of the Adviser, the consideration which
can be earned currently from securities loans of this type justifies the
attendant risk. If the Adviser determines to make securities loans, it is
intended that the value of the securities loaned would not exceed 30% of the
value of the Fund's total assets.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: As described in the Prospectus, the Fund
may enter into mortgage "dollar roll" transactions. The Fund records these
transactions as sale and purchase transactions, rather than as borrowing
transactions. During the roll period, the Fund foregoes principal and interest
paid on the mortgage-backed securities. The Fund is compensated for the lost
interest by the difference between the current sales price and the lower price
for the future purchase (often referred to as the "drop") as well as by the
interest earned on the cash proceeds of the initial sale. The Fund may also be
compensated by receipt of a commitment fee.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors to make payments on underlying assets, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The Fund
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an instrument in such a
security.
PORTFOLIO TRADING: The portfolio of the Fund will be fully managed by buying and
selling securities, as well as by holding selected securities to maturity. The
Fund will seek to maximize the return on its portfolio by taking advantage of
market developments, yield disparities and variations in the creditworthiness of
issuers. The portfolio management of the Fund may include use of the following
strategies:
(1) varying the maturity mix or quality profile of its portfolio as
warranted by overall market expectations;
(2) selling one type of debt security (e.g., industrial bonds) and buying
another (e.g., utility bonds) when disparities arise in their relative values
and prospects;
(3) changing from one debt security to a similar debt security when their
respective yields are distorted due to market factors; and
(4) changing from one debt security to a similar debt security based upon
credit analysis and fundamental research.
These strategies may result in increases or decreases in the current income of
the Fund available for distribution to its shareholders and in its holdings of
debt securities which sell at moderate to substantial premiums or discounts from
face value. 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 may be reduced
or its potential capital loss may be increased.
The Fund will engage in portfolio trading if it believes a transaction net of
costs (including custodian charges) will help in attaining its investment
objective. See "Portfolio Transactions and Brokerage Commissions."
To be eligible to be taxed under the provisions of the Internal Revenue Code
applicable to regulated investment companies, the Fund must, among other things,
limit its short-term trading so that less than 30% of its gross income is
derived from gains realized on the sale or other disposition of securities held
for less than three months. For this purpose, gross income includes all dividend
and interest income and gross realized capital gains, both short and long-term,
without offset for realized capital losses.
The investment objective and policies described above may be changed without
shareholder approval.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of its
shares (which, as used in this SAI, means the lesser of (i) more than 50% of the
outstanding shares of the Trust (or a series or class, as applicable), or (ii)
67% or more of the outstanding shares of the Trust (or a series or class, as
applicable) present at a meeting if holders of more than 50% of the outstanding
shares of the Trust (or a series or class, as applicable) are represented in
person or by proxy).
The Fund may not:
(1) Borrow amounts in excess of 10% of its gross assets, and then only as a
temporary measure for extraordinary or emergency purposes, or pledge, mortgage
or hypothecate its assets taken at market value to an extent greater than 15%
of its gross assets, in each case taken at the lower of cost or market value
and subject to a 300% asset coverage requirement (for the purpose of this
restriction, collateral arrangements with respect to options on fixed income
securities, Futures Contracts, Options on Futures Contracts, Forward Contracts
and options on foreign currencies and payments of initial and variation margin
in connection therewith are not considered a pledge of assets).
(2) Underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security.
(3) Invest more than 25% of the market value of its total assets in
securities of issuers in any one industry, except that up to 40% of the Fund's
total assets, taken at market value, may be invested in each of the electric
utility and telephone industries.
(4) Purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except Futures Contracts, Options on Futures Contracts, Forward Contracts and
options on foreign currencies) in the ordinary course of the business of the
Fund. The Fund reserves the freedom of action to hold and to sell real estate
acquired as a result of the ownership of securities.
(5) Make loans to other persons except through the lending of its portfolio
securities in accordance with, and to the extent permitted by, its investment
objective and policies and except through repurchase agreements. Not more than
10% of the Fund's assets will be invested in repurchase agreements maturing in
more than seven days. For these purposes the purchase of commercial paper or
of all or a portion of a private or public issue of debt securities shall not
be considered the making of a loan.
(6) Purchase the securities of any issuer if such purchase, at the time
thereof, would cause more than 5% of the total assets of the Fund taken at
market value to be invested in the securities of such issuer, other than
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, and provided further that up to 25% of the total assets of
the Fund may be invested in securities issued or guaranteed by any foreign
government, its agencies or instrumentalities.
(7) Purchase voting securities of any issuer if such purchase, at the time
thereof, would cause more than 10% of the outstanding voting securities of
such issuer to be held by the Fund; or purchase securities of any issuer if
such purchase at the time thereof would cause more than 10% of any class of
securities of such issuer to be held by the Fund. For this purpose all
indebtedness of an issuer shall be deemed a single class and all preferred
stock of an issuer shall be deemed a single class.
(8) Invest for the purpose of exercising control or management.
(9) Purchase securities issued by any registered investment company except
by purchase in the open market where no commission or profit to a sponsor or
dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open market,
is part of a plan of merger or consolidation; provided, however, that the Fund
shall not purchase the securities of any registered investment companies if
such purchase at the time thereof would cause more than 10% of the Fund's
total assets, taken at market value, to be invested in the securities of such
issuers; and provided, further, that the Fund shall not purchase securities
issued by any open-end investment company.
(10) Invest more than 5% of its assets in companies which, including
predecessors, have a record of less than three years' continuous operation.
(11) Purchase or retain in its portfolio any securities issued by an issuer
any of whose officers, directors, trustees or security holders is an officer
or Trustee of the Fund, or is a partner, officer, director or trustee of the
investment adviser of the Fund, if after the purchase of the securities of
such issuer by the Fund one or more of such persons owns beneficially more
than 1/2 of 1% of the shares or securities, or both, all taken at market
value, of such issuer, and such persons owning more than 1/ 2 of 1% of such
shares or securities together own beneficially more than 5% of such shares or
securities, or both, all taken at market value.
(12) Purchase any securities or evidences of interest therein on margin
except to make deposits on margin in connection with options on fixed income
securities, Futures Contracts, Options on Futures Contracts, Forward Contracts
and options on foreign currencies, and, except that the Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of securities and provided that this shall not prevent the purchase,
ownership, holding or sale of contracts for the future acquisition or delivery
of fixed income securities.
(13) Sell any security which the Fund does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to obtain
securities without payment of further consideration equivalent in kind and
amount to the securities sold and provided that if such right is conditional
the sale is made upon the same conditions.
(14) Purchase or sell any put or call options or any combination thereof,
provided that this shall not prevent the purchase, ownership, holding or sale
of warrants where the grantor of the warrants is the issuer of the underlying
securities or the writing, purchasing and selling of puts, calls or
combinations thereof with respect to securities, Futures Contracts and foreign
currencies.
As a matter of non-fundamental policy, the Fund may not invest in securities
(other than repurchase agreements) which are restricted as to disposition under
the federal securities laws (unless the Board of Trustees has determined that
such securities are liquid based upon trading markets for the specific
security), if more than 15% of the Fund's assets would be invested in such
securities.
These investment restrictions are adhered to at the time of purchase or
utilization of assets; a subsequent change in circumstances will not be
considered to result in a violation of policy.
3. MANAGEMENT OF THE FUND
The Board of Trustees provides broad supervision over the affairs of the Fund.
The Adviser is responsible for the investment management, and the officers of
the Fund are responsible for its operations. The Fund's Trustees and officers
are listed below, together with their principal occupations during the past five
years. (Their titles may have varied during that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President (born 8/4/35)
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY* (born 9/14/26)
Private investor; Massachusetts Financial Services Company, former Chairman
and Director (prior to September 30, 1991); Cambridge Bancorp, Director;
Cambridge Trust Company, Director
PETER G. HARWOOD (born 4/3/26)
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES (born 5/1/36)
Eastern Enterprises (diversified services company), Chairman and Chief
Executive Officer
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA (born 6/23/35)
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU (born 4/10/35)
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge,
Massachusetts
CHARLES W. SCHMIDT (born 3/18/28)
Private investor; OHM Corporation, Director; The Boston Company, Director;
Boston Safe Deposit and Trust Company, Director; Mohawk Paper Company,
Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, President and Director
ELAINE R. SMITH (born 4/25/46)
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (from August 1990 to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Director
Address: 10 Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
JOAN S. BATCHELDER,* Vice President (born 4/12/44)
Massachusetts Financial Services Company, Senior Vice President
CYNTHIA M. BROWN,* Vice President (born 6/27/57)
Massachusetts Financial Services Company, Senior Vice President
ROBERT J. MANNING,* Vice President (born 10/20/63)
Massachusetts Financial Services Company, Senior Vice President
BERNARD SCOZZAFAVA,* Vice President (born 1/28/61)
Massachusetts Financial Services Company, Vice President
JAMES T. SWANSON,* Vice President (born 6/12/49)
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September,
1996); Deloitte & Touche LLP, Senior Manager (until September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March, 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994)
- ----------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS
affiliates or with certain other funds of which MFS or a wholly owned
subsidiary is the investment adviser or distributor. Mr. Brodkin, the Chairman
of MFD, Messrs. Shames and Scott, Directors of MFD and Mr. Cavan, the
Secretary of MFD, hold similar positions with certain other MFS affiliates.
Mr. Bailey is a Director of Sun Life Assurance Company of Canada (U.S.) ("Sun
Life of Canada (U.S.)"), the corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey who
currently receive a fee of $2,500 per year plus $135 per meeting and $100 per
committee meeting attended together with such Trustees' out-of-pocket expenses.
The Trust has adopted a retirement plan for non-interested Trustees and Mr.
Bailey. Under this plan, a Trustee will retire upon reaching age 73 and if the
Trustee has completed at least 5 years of service, he would be entitled to
annual payments during his lifetime of up to 50% of such Trustee's average
annual compensation (based on the three years prior to his retirement) depending
on his length of service. A Trustee may also retire prior to age 73 and receive
reduced payments if he has completed at least 5 years of service. Under the
plan, a Trustee (or his beneficiaries) will also receive benefits for a period
of time in the event the Trustee is disabled or dies. These benefits will also
be based on the Trustee's average annual compensation and length of service.
There is no retirement plan provided by the Trust for Messrs. Brodkin, Scott and
Shames. The Fund will accrue its allocable share of compensation expenses each
year to cover current year's service and amortize past service cost.
Set forth below is certain information concerning the cash compensation paid to
the Trustees and benefits accrued, and estimated benefits payable, under the
retirement plan.
TRUSTEE COMPENSATION TABLE
RETIREMENT
BENEFIT ESTIMATED TOTAL TRUSTEE
ACCRUED AS CREDITED FEES FROM
TRUSTEE FEES PART OF FUND YEARS OF FUND AND FUND
TRUSTEE FROM FUND(1) EXPENSE(1) SERVICE(2) COMPLEX(3)
- -----------------------------------------------------------------------------
Richard B. Bailey $4,185 $1,091 8 $247,168
A. Keith Brodkin -0- -0- N/A -0-
Peter G. Harwood 4,585 720 5 105,995
J. Atwood Ives 4,285 1,136 17 98,750
Lawrence T. Perera 4,250 2,222 26 98,310
William J. Poorvu 4,450 2,377 25 102,840
Charles W. Schmidt 4,585 2,317 20 105,995
Arnold D. Scott -0- -0- N/A -0-
Jeffrey L. Shames -0- -0- N/A -0-
David B. Stone 4,685 1,703 11 108,710
Elaine R. Smith 4,585 1,158 27 105,995
(1) For fiscal year ended January 31, 1997.
(2) Based on normal retirement age of 73.
(3) Information provided is provided for calendar year 1996. All Trustees
receiving compensation served as Trustees of 23 funds within the MFS fund
complex (having aggregate net assets at December 31, 1996, of approximately
$21.1 billion) except Mr. Bailey, who served as Trustee of 81 funds within
the MFS fund complex (having aggregate net assets at December 31, 1996, of
approximately $38.4 billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY
FUND UPON RETIREMENT(4)
YEARS OF SERVICE
AVERAGE ---------------------------------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
- ------------------------------------------------------------------------------
$3,767 $565 $ 942 $1,318 $1,883
4,044 607 1,011 1,415 2,022
4,321 648 1,080 1,512 2,161
4,599 690 1,150 1,610 2,299
4,876 731 1,219 1,707 2,438
5,154 773 1,288 1,804 2,577
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of April 30, 1997, all Trustees and officers as a group owned less than 1% of
shares outstanding on that date. As of April 30, 1997, Merrill Lynch, Pierce,
Fenner & Smith Inc., Attn: Fund Administration, 4800 Deer Lake Drive East - 3rd
Floor, Jacksonville, FL 32246-6484, was the record owner of approximately 9.29%
of the outstanding Class B shares of the Fund. As of April 30, 1996, Merrill
Lynch, Pierce, Fenner & Smith Inc., Attn: Fund Administration, 4800 Deer Lake
Drive East - 3rd Floor, Jacksonville, FL 32246-6484, was the record owner of
approximately 27.64% of the outstanding Class C shares of the Fund. As of April
30, 1997, MFS Defined Contribution Plan, c/o Mark Leary, Massachusetts Financial
Services, 500 Boylston Street, Boston, MA 02116-3740 was the record owner of
approximately 100% of the outstanding Class I Shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to liabilities to the Trust or its shareholders, it is finally adjudicated
that they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect to
any matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined pursuant to the Declaration of Trust that such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.), which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Adviser manages the Fund pursuant to an Investment Advisory Agreement, dated
May 20, 1987, as amended (the "Advisory Agreement"). Under the Advisory
Agreement, the Adviser provides the Fund with overall investment advisory
services. Subject to such policies as the Trustees may determine, the Adviser
makes investment decisions for the Fund.
For these services and facilities, under the Advisory Agreement, the Adviser
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 the gross income (i.e., income other than gains from the sale of
securities) of the Fund, in each case on an annualized basis for the
then-current fiscal year. The applicable percentages are reduced as assets and
income reach the following levels:
ANNUAL RATE OF MANAGEMENT FEE ANNUAL RATE OF MANAGEMENT FEE
BASED ON AVERAGE DAILY NET ASSETS BASED ON GROSS INCOME
- -------------------------------------- --------------------------------
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
in excess of $200 million of $22 million
For the fiscal years ended January 31, 1995, 1996 and 1997, MFS received
management fees under the Advisory Agreement of $3,756,072, $4,031,708 and
$4,238,339, equivalent on an annualized basis to 0.45%, 0.45% and 0.46%,
respectively, of the Fund's average daily net assets.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any expense, exclusive of interest, taxes and brokerage
commissions, incurred by the Fund in any fiscal year to the extent such expenses
exceed the most restrictive of such state expense limitations. The Adviser will
make appropriate adjustments to such reimbursements in response to any amendment
or recission of the various state requirements. Any such adjustment would not
become effective until the beginning of the Fund's next fiscal year following
the date of such amendments or the date on which such requirements become no
longer applicable.
The Fund pays all of its expenses (other than those assumed by MFS or MFD)
including: Trustee fees (discussed above); governmental fees; interest charges;
taxes; membership dues in the Investment Company Institute allocable to the
Fund; fees and expenses of independent auditors, of legal counsel, and of any
transfer agent, registrar and dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares; expenses of preparing, printing and mailing
share certificates, shareholder reports, notices, proxy statements and reports
to governmental officers and commissions; brokerage and other expenses connected
with the execution, recording and settlement of portfolio security transactions;
insurance premiums; fees and expenses of the Fund's custodian, for all services
to the Fund, including safekeeping of funds and securities and maintaining
required books and accounts; expenses of calculating the net asset value of
shares of the Fund; and expenses of shareholder meetings. Expenses relating to
the issuance, registration and qualification of shares of the Fund and the
preparation, printing and mailing of prospectuses for such purposes are borne by
the Fund except that its Distribution Agreement with MFD, the Fund's
Distributor, requires MFD to pay for prospectuses that are to be used for sales
purposes. Expenses of the Trust which are not attributable to a specific series
are allocated among the series in a manner believed by management of the Trust
to be fair and equitable. For a list of the Fund's expenses, including the
compensation paid to the Trustees who are not officers of MFS, during the fiscal
year ended January 31, 1997, see "Statement of Operations" in the Fund's Annual
Report to shareholders incorporated by reference into this SAI.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing the investments of the Fund, effecting the portfolio
transactions of the Fund, and, in general, administering the affairs of the
Fund.
The Advisory Agreement will remain in effect until August 1, 1997 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's outstanding shares (as defined under "Investment Restrictions") and, in
either case, by a majority of the Trustees who are not parties to the Advisory
Agreement or interested persons of any such party. The Advisory Agreement
terminates automatically if it is assigned and may be terminated without penalty
by vote of a majority of the shares of the Fund (as defined in "Investment
Restrictions") or by either party to the Agreement on not more than 60 days' nor
less than 30 days' written notice. If MFS ceases to serve as the Adviser to the
Fund, the Fund will change its name so as to delete the term "MFS". The Advisory
Agreement provides that the Adviser may render services to others and may permit
clients in addition to the Fund to use the term "MFS" in their names. The
Advisory Agreement further provides that neither the Adviser nor its personnel
shall be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution and
management of the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its or their duties or by reason of reckless
disregard of its or their obligations and duties under the Advisory Agreement.
ADMINISTRATOR
MFS provides the Fund with certain administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997. Under this Agreement, MFS
provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee up
to 0.015% per annum of the Fund's average daily net assets, provided that the
administrative fee is not assessed on Fund assets that exceed $3 billion.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also acts as the dividend disbursing agent for the
Fund. The Custodian has contracted with the Adviser for the Adviser to perform
certain accounting functions related to options transactions for which the
Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement, effective August 1, 1985 (the "Agency
Agreement") with the Trust. The Shareholder Servicing Agent's responsibilities
under the Agency Agreement include administering and performing transfer agent
functions and the keeping of records in connection with the issuance, transfer
and redemption of each class of shares of the Fund. For these services, the
Shareholder Servicing Agent will receive a fee calculated as a percentage of the
average daily net assets of the Fund at an effective annual rate of 0.13%. In
addition, the Shareholder Servicing Agent will be reimbursed by the Fund for
certain expenses incurred by the Shareholder Servicing Agent on behalf of the
Fund. State Street Bank and Trust Company, the dividend and distribution
disbursing agent of the Fund, has contracted with the Shareholder Servicing
Agent to administer and perform certain dividend and distribution disbursing
functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement, dated
January 1, 1995, as amended (the "Distribution Agreement"). Prior to January 1,
1995, MFS Financial Services, Inc. ("FSI"), another wholly owned subsidiary of
MFS, was the Fund's distributor. Where this SAI refers to MFD in relation to the
receipt or payment of money with respect to a period or periods prior to January
1, 1995, such reference shall be deemed to include FSI, as the predecessor in
interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of Class A shares of the Fund is their net
asset value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share of the
Fund is calculated by dividing net asset value of a Class A share by the
difference (expressed as a decimal) between 100% and the sales charge percentage
of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any person, including
members of a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs" in this SAI). A
group might qualify to obtain quantity sales charge discounts (see "Investment
and Withdrawal Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons and in certain instances as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD and/or the Fund have business relationships, and because the sales
effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of offering price or as a percentage of the net amount invested
as listed in the Prospectus. In the case of the maximum sales charge, the dealer
retains 4% and MFS retains approximately 3/4 of 1% of the public offering price.
MFD, on behalf of the Fund, pays a commission to dealers who initiate and are
responsible for purchases of $1 million or more as described in the Prospectus.
CLASS B, CLASS C AND CLASS I SHARES: MFD acts as agent in selling Class B, Class
C and Class I shares of the Fund. The public offering price of Class B, Class C
and Class I shares is their net asset value next computed after the sale (see
"Purchases" in the Prospectus and the Prospectus Supplement pursuant to which
Class I shares are offered).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
For the Fund's fiscal year ended January 31, 1997, MFD received sales charges of
$193,347 and dealers received sales charges of $931,228 (as their concession on
gross sales charges of $1,124,575) for selling Class A shares of the Fund; the
Fund received $109,971,079 representing the aggregate net asset value of such
shares. For the Fund's fiscal year ended January 31, 1996, MFD received sales
charges of $136,238 and dealers received sales charges of $655,338 (as their
concession on gross sales charges of $791,576) for selling Class A shares of the
Fund; the Fund received $71,221,902 representing the aggregate net asset value
of such shares. For the Fund's fiscal year ended January 31, 1995, MFD received
sales charges of $105,333 and dealers received sales charges of $612,900 (as
their concession on gross sales charges of $718,233) for selling Class A shares
of the Fund; the Fund received $80,688,929 representing the aggregate net asset
value of such shares.
For the Fund's fiscal year ended January 31, 1997, 1996 and 1995, the CDSC
imposed on redemption of Class A shares was $24,467, $1,729 and $303,
respectively.
For the Fund's fiscal year ended January 31, 1997, 1996 and 1995, the CDSC
imposed on redemption of Class B shares was $441,696, $490,067 and $578,443,
respectively.
For the Fund's fiscal year ended January 31, 1997, the CDSC imposed on
redemption of Class C shares was $3,591.
The Distribution Agreement will remain in effect until August 1, 1997, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by a
portfolio manager who is an employee of the Adviser. Changes in the investments
of the Fund are reviewed by the Board of Trustees. The Fund's portfolio manager
may serve other clients of the Adviser or any subsidiary of the Adviser in a
similar capacity.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in which, and the broker-dealers through which, it seeks this
result. Debt securities are traded principally in the over-the-counter market on
a net basis through dealers acting for their own account and not as brokers. The
cost of securities purchased from underwriters includes an underwriter's
commission or concession, and the prices at which securities are purchased and
sold from and to dealers include a dealer's mark-up or markdown. The Adviser
normally seeks to deal directly with the primary market makers unless, in its
opinion, better prices are available elsewhere. Subject to the requirement of
seeking execution at the best available price, securities may, as authorized by
the Advisory Agreement, be bought from or sold to dealers who have furnished
statistical, research and other information or services to the Adviser. From
time to time soliciting dealer fees may be available to the Adviser on the
tender of the Fund's portfolio securities in so-called tender or exchange
offers. Such soliciting dealer fees will be in effect recaptured by the Fund to
the extent possible. At present no other recapture arrangements are in effect.
Consistent with the foregoing primary consideration, the Conduct Rules of the
National Association of Securities Dealers, Inc. (the "NASD"), and such other
policies as the Trustees may determine, the Adviser may consider sales of shares
of the Fund and of the other investment company clients of MFD as a factor in
the selection of broker-dealers to execute the Fund's portfolio transactions.
During the fiscal years ended January 31, 1995, 1996 and 1997, the Fund paid
total brokerage commissions (which term includes underwriters' concessions on
new issues of fixed income securities) of $14,184, $2,900 and $-0-,
respectively.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, the Fund believes that its ability to
participate in volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Fund's prospectus. The programs involve no extra charge to
shareholders (other than a sales charge in the case of certain Class A share
purchases) and may be changed or discontinued at any time by a shareholder or
the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with shares of Class B or Class C of the Fund or any of
the classes of other MFS Funds or MFS Fixed Fund within a 13-month period (or
36-month period for purchases of $1 million or more), the shareholder may obtain
Class A shares of the Fund at the same reduced sales charge as though the total
quantity were invested in one lump sum by completing the Letter of Intent
section of the Account Application or filing a separate Letter of Intent
application (available from the Shareholder Servicing Agent) within 90 days of
the commencement of purchases. Subject to acceptance by MFD and the conditions
mentioned below, each purchase will be made at a public offering price
applicable to a single transaction of the dollar amount specified in the Letter
of Intent application. The shareholder or his dealer must inform MFD that the
Letter of Intent is in effect each time shares are purchased. The shareholder
makes no commitment to purchase additional shares, but if his purchases within
13-months (or 36 months in the case of purchases of $1 million or more) plus the
value of shares credited toward completion of the Letter of Intent do not total
the sum specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a person
other than the person signing the Letter of Intent application must be
accompanied by a written statement from the dealer stating that the shares were
paid for by the person signing such Letter of Intent. Neither income dividends
nor capital gain distributions taken in additional shares will apply toward the
completion of the Letter of Intent. Dividends and distributions of other MFS
Funds automatically reinvested in shares of the Fund pursuant to the
Distribution Investment Program will also not apply toward completion of the
Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when that shareholder's new
investment, together with the current offering price value of Class A, B and C
shares of that shareholder in the MFS Funds or MFS Fixed Fund reaches a discount
level. (See "Purchases" in the Prospectus for the sales charges on quantity
purchases.) For example, if a shareholder owns shares valued at $75,000 and
purchases an additional $25,000 of Class A shares of the Fund, the sales charge
for the $25,000 purchase would be at the rate of 4% (the rate applicable to
single transactions of $100,000). A shareholder must provide the Shareholder
Servicing Agent (or his investment dealer must provide MFD) with information to
verify that the quantity sales charge discount is applicable at the time the
investment is made.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of net investment income and
capital gains made by the Fund with respect to a particular class of shares may
be automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (without a sales charge) and not subject to any CDSC. Distributions
will be invested at the close of business on the payable date for the
distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B and Class C shares in any year pursuant to a
SWP generally are limited to 10% of the value of the account at the time of
establishment of the SWP. SWP payments are drawn from the proceeds of share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). Redemptions of Class B and Class C shares will be made in the
following order: (i) to the extent necessary, any "Free Amount"; (ii) any
"Reinvested Shares"; and (iii) to the extent necessary the "Direct Purchase"
subject to the lowest CDSC (as such terms are defined in "Contingent Deferred
Sales Charge" in the Prospectus). The CDSC will be waived in the case of
redemptions of Class B and Class C shares pursuant to a SWP but will not be
waived in the case of SWP redemptions of Class A shares. To the extent that
redemptions for such periodic withdrawals exceed dividend income reinvested in
the account, such redemptions will reduce and may eventually exhaust the number
of shares in the shareholder's account. All dividend and capital gain
distributions for an account with a SWP will be reinvested in additional full
and fractional shares of the Fund at the net asset value in effect at the close
of business on the record date for such distributions. To initiate this service,
shares generally having an aggregate value of at least $5,000 either must be
held on deposit by, or certificates for such shares must be deposited with, the
Shareholder Servicing Agent. With respect to Class A shares, maintaining a
withdrawal plan concurrently with an investment program would be disadvantageous
because of the sales charges included in share purchases and the imposition of a
CDSC on certain redemptions. The shareholder may deposit into the account
additional shares of the Fund, change the payee or change the dollar amount of
each payment. The Shareholder Servicing Agent may charge the account for
services rendered and expenses incurred beyond those normally assumed by the
Fund with respect to the liquidation of shares. No charge is currently assessed
against the account, but one could be instituted by the Shareholder Servicing
Agent on 60 days' notice in writing to the shareholder in the event that the
Fund ceases to assume the cost of these services. The Fund may terminate any SWP
for an account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of shares of
the Fund for shares of another MFS Fund. Any SWP may be terminated at any time
by either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not a Letter of
Intent,) obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
the other MFS Funds, if available for sale, under the Automatic Exchange Plan, a
dollar cost averaging program. The Automatic Exchange Plan provides for
automatic exchanges of funds from the share- holder's account in an MFS Fund for
investment in the same class of shares of other MFS Funds selected by the
shareholder. Under the Automatic Exchange Plan, exchanges of at least $50 each
may be made to up to six different funds effective on the seventh day of each
month or of every third month, depending whether monthly or quarterly exchanges
are elected by the shareholder. If the seventh day of the month is not a
business day, the transaction will be processed on the next business day.
Generally, the initial exchange will occur after receipt and processing by the
Shareholder Servicing Agent of an application in good order. Exchanges will
continue to be made from a shareholder's account in any MFS Fund, as long as the
balance of the account is sufficient to complete the exchanges. Additional
payments made to a shareholder's account will extend the period that exchanges
will continue to be made under the Automatic Exchange Plan. However, if
additional payments are added to an account subject to the Automatic Exchange
Plan shortly before an exchange is scheduled, such funds may not be available
for exchanges until the following month; therefore, care should be used to avoid
inadvertently terminating the Automatic Exchange Plan through exhaustion of the
account balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanged shares of MFS Money Market Fund and
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the program)
must involve at least $50. Generally, if an Exchange Change Request is received
by telephone or in writing before the close of business on the last business day
of a month, the Exchange Change Request will be effective for the following
month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the
other MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund
and holders of Class A shares of MFS Cash Reserve Fund in the case where the
shares are acquired through direct purchase or reinvested dividends) who have
redeemed their shares have a one-time right to reinvest the redemption proceeds
in the same class of shares of any of the MFS Funds (if shares of the fund are
available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid. In the case of proceeds reinvested in
MFS Money Market Fund, MFS Government Money Market Fund and Class A shares of
MFS Cash Reserve Fund, the shareholder has the right to exchange the acquired
shares for shares of another MFS Fund at net asset value pursuant to the
exchange privilege described below. Such a reinvestment must be made within 90
days of the redemption and is limited to the amount of the redemption proceeds.
If the shares credited with any CDSC paid are then redeemed within six years of
the initial purchase or within 12-months of the initial purchase in the case of
Class C shares and certain Class A shares, such CDSC will be imposed upon
redemption. Although redemptions and repurchases of shares are taxable events, a
reinvestment within a certain period of time in the same fund may be considered
a "wash sale" and may result in the inability to recognize currently all or a
portion of any loss realized on the original redemption for federal income tax
purposes. Please see your tax adviser for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below and unless
otherwise noted in the Prospectus of any of the other MFS Funds, 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 shares of the fund
are available for sale and if the purchaser is eligible to purchase the class of
shares). In addition, Class C shares may be exchanged for shares of MFS Money
Market Fund at net asset value. Exchanges will be made only after instructions
in writing or by telephone (an "Exchange Request") for an established account
are received by the Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by telephone --
proper account identification is given by the dealer or shareholder of record),
and each exchange must involve either shares having an aggregate value of at
least $1,000 or all the shares in the account (except that the minimum is $50
for accounts of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent). Each
exchange involves the redemption of the shares of the Fund to be exchanged and
the purchase at the net asset value (i.e., without a sales charge) of the shares
of the same class of the other MFS Fund. Any gain or loss on the redemption of
the shares exchanged is reportable on the shareholder's federal income tax
return, unless both the shares received and the shares surrendered in the
exchange are held in a tax-deferred retirement plan or other tax-exempt account.
No more than five exchanges may be made in any one Exchange Request by
telephone. If the Exchange Request is received by the Shareholder Servicing
Agent prior to the close of regular trading on the Exchange, the exchange
usually will occur on that day if all of the requirements set forth above have
been complied with at the time. However, payment of the redemption proceeds by
the Fund, and thus purchase of shares of the other MFS Fund, may be delayed for
up to seven days if the Fund determines that such a delay would be in the best
interest of all its shareholders. Investment dealers which have satisfied
criteria established by MFD may also communicate a shareholder's Exchange
Request to MFD by facsimile subject to the requirements set forth above.
No CDSC is imposed on exchanges, although liability for the CDSC is carried
forward to the exchanged shares. For purposes of calculating the CDSC upon
redemption of shares acquired in an exchange, the purchase of shares acquired in
one or more exchanges is deemed to have occurred at the time of the original
purchase of the exchanged shares. Any gain or loss on the redemption of the
shares exchanged is reportable in the shareholders federal income tax return,
unless such shares were held in a tax-deferred retirement plan.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder should obtain and read the prospectus
of the other MFS Fund and consider the differences in objectives and policies
before making any exchange. Shareholders in the other MFS Funds (except holders
of shares of MFS Money Market Fund, MFS Government Money Market Fund and Class A
shares of MFS Cash Reserve Fund acquired through direct purchase and dividends
reinvested prior to June 1, 1992) have the right to exchange their shares for
shares of the Fund, subject to the conditions, if any, set forth in their
respective prospectuses. In addition, unitholders of the MFS Fixed Fund have the
right to exchange their units (except units acquired through direct purchases)
for shares of the Fund, subject to the conditions, if any, imposed upon such
unitholders by the MFS Fixed Fund.
Any state income tax advantages for investment in shares of each state- specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Except as noted below, shares of the Fund may
be purchased by all types of tax-deferred retirement plans. MFD makes available
through investment dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their non- employed
spouses who desire to make limited contributions to a tax-deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986 (the "Code"), as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents and forms provided by MFD designate a trustee or custodian
(unless another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
Investors should consult with their tax advisers before establishing any of the
tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any retirement plan
qualified under Internal Revenue Code section 401(a) or 403(b) if the retirement
plan and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k)
Plan or another similar 401(a) or 403(b) recordkeeping program made available by
the Shareholder Servicing Agent.
6. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, by meeting all
applicable requirements of Subchapter M, including requirements as to the nature
of the Fund's gross income, the amount of Fund distributions, and the
composition and holding period of the Fund's portfolio assets. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to shareholders in accordance with the timing requirements imposed by the
Code, it is not expected that the Fund will be required to pay any federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions from
net short-term capital gains, are taxable to the Fund's shareholders as ordinary
income for federal income tax purposes, whether the distributions are paid in
cash or reinvested in additional shares. Because the Fund expects to earn
primarily interest income, it is expected that no Fund dividends will qualify
for the dividends received deduction for corporations. Distributions from net
capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses), whether paid in cash or reinvested in additional
shares, are taxable to shareholders as long-term capital gains for federal
income tax purposes without regard to the length of time shareholders have held
their shares. Any Fund dividend declared in October, November or December of any
calendar year, that is payable to shareholders of record in such a month, and
that is paid the following January will be treated as if received by the
shareholder on December 31 of the year in which the dividend is declared. The
Fund will notify shareholders regarding the federal tax status of its
distributions after the end of each calendar year.
Any Fund distribution of net capital gains or net short-term capital gains will
have the effect of reducing the per share net asset value of shares in the Fund
by the amount of the distribution. Shareholders purchasing shares shortly before
the record date of any such distribution may thus pay the full price for the
shares and then effectively receive a portion of the purchase price back as a
taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss.
However, any loss realized upon a disposition of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within ninety days after their purchase
followed by any purchase (including purchases by exchange or by reinvestment)
without payment of an additional sales charge of Class A shares of the Fund or
of another MFS Fund (or any other shares of an MFS Fund generally sold subject
to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders. Any investment in zero
coupon bonds, deferred interest bonds, payment-in-kind bonds, certain stripped
securities, and certain securities purchased at a market discount will cause the
Fund to recognize income prior to the receipt of cash payments with respect to
those securities. In order to distribute this income and avoid a tax on the
Fund, the Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold, potentially resulting in additional taxable
gain or loss to the Fund. An investment in residual interests of a CMO that has
elected to be treated as a real estate mortgage investment conduit, or "REMIC,"
can create complex tax problems, especially if the Fund has state or local
governments or other tax-exempt organizations as shareholders.
The Fund's transactions in options, Futures Contracts and Forward Contracts will
be subject to special tax rules that may affect the amount, timing and character
of Fund income and distributions to shareholders. For example, certain positions
held by the Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on that day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, Futures Contracts, Forward
Contracts, and swaps and related transactions to the extent necessary to meet
the requirements of Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. Use of foreign currencies for non-
hedging purposes and investment by the Fund in certain "passive foreign
investment companies" may be limited in order to avoid a tax on the Fund.
Investment income received by the Fund from foreign securities may be subject to
foreign income taxes withheld at the source; the Fund does not expect to be able
to pass through to shareholders foreign tax credits with respect to such foreign
taxes. The United States has entered into tax treaties with many foreign
countries that may entitle the Fund to a reduced rate of tax or an exemption
from tax on such income; the Fund intends to qualify for treaty reduced rates
where available. It is not possible, however, to determine the Fund's effective
rate of foreign tax in advance since the amount of the Fund's assets to be
invested within various countries is not known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends to
withhold U.S. federal income tax at the rate of 30% on dividends and other
payments to Non-U.S. Persons that are subject to such withholding, regardless of
whether a lower rate may be permitted under an applicable treaty. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period appropriate to such
claims. Distributions received from the Fund by Non-U.S. Persons may also be
subject to tax under the laws of their own jurisdictions. The Fund is also
required in certain circumstances to apply backup withholding at the rate of 31%
on taxable dividends and redemption proceeds paid to any shareholder (including
a Non-U.S. Person) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding.
As long as it qualifies as a "regulated investment company" under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
Distributions that are derived from interest on obligations of the U.S.
Government and certain of its agencies and instrumentalities (but generally not
from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes. The Fund intends to advise shareholders of
the extent, if any, to which its distributions consist of such interest.
Shareholders are urged to consult their tax advisers regarding the possible
exclusion of such portion of their dividends for state and local income tax
purposes as well as regarding the tax consequences of an investment in the Fund.
7. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more series and to divide or combine the shares of any series into a greater or
lesser number of shares without thereby changing the proportionate beneficial
interests in that series. The Trustees have currently authorized shares of the
Fund and one other series. The Declaration of Trust further authorizes the
Trustees to classify or reclassify any series of shares into one or more
classes. Pursuant thereto, the Trustees have authorized the issuance of four
classes of shares of the Fund, Class A, Class B, Class C and Class I shares and
Class A and Class B shares of the Trust's other series. Each share of a class of
the Fund represents an equal proportionate interest in the assets of the Fund
allocable to that class. Upon liquidation of the Fund, shareholders of each
class are entitled to share pro rata in the net assets of the Fund attributable
to that class available for distribution to shareholders. The Trust has reserved
the right to create and issue additional series or classes of shares, in which
case the shares of each class of a series would participate equally in the
earnings, dividends and assets allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have under certain circumstances the right to remove one or more Trustees in
accordance with the provisions of section 16(c) of the 1940 Act. No material
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the Trust shares (as defined in "Investment Restrictions").
Shares have no pre-emptive or conversion rights (except as described in
"Purchases -- Conversion of Class B Shares" in the Prospectus). Shares are fully
paid and non-assessable. The Fund may be terminated (i) upon the merger or
consolidation of the Fund with another organization or upon the sale of all or
substantially all its assets if approved by the vote of the holders of
two-thirds of its outstanding shares, except that if the Trustees recommend such
merger, consolidation or sale, the approval by vote of the holders of a majority
of the Fund's outstanding shares will be sufficient or (ii) upon liquidation and
distribution of its assets, if approved by the vote of the holders of two-thirds
of its outstanding shares. If not so terminated, the Fund will continue
indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that it shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents covering
possible tort or other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance existed and the Trust itself was unable to
meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE -- The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays or days on which they are observed: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.) This determination is made once each day as
of the close of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets attributable
to the class and dividing the difference by the number of shares of the class
outstanding. Debt securities (other than short-term obligations), including
listed issues, are valued on the basis of valuations furnished by a pricing
service which utilizes both dealer-supplied valuations and electronic data
processing techniques which take into account appropriate factors such as
institution-size trading in similar groups of securities, yield, quality, coupon
rate, maturity, type of issue, trading characteristics and other market data,
without exclusive reliance upon exchange or over-the-counter prices, since such
valuations are believed to reflect more accurately the fair value of such
securities. Use of the pricing service has been approved by the Fund's Board of
Trustees. Positions in listed options, Futures Contracts and Options on Futures
Contracts will normally be valued at the settlement price on the exchange on
which they are traded. Short-term obligations with a remaining maturity in
excess of 60 days will be valued based upon dealer-supplied valuations. Other
short-term obligations are valued at amortized cost, which constitutes fair
value as determined by the Board of Trustees. If acquired, preferred stocks,
common stocks and warrants will be valued at the last sale price on an exchange
or at the last quoted bid price for unlisted securities. Portfolio securities
for which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees. A
share's net asset value is effective for orders received by the dealer prior to
its calculation and received by MFD prior to the close of that business day.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
offering price) to reach the value of that investment at the end of the periods.
The Fund may also calculate (i) a total rate of return, which is not reduced by
the CDSC (4% maximum for Class B shares and a 1% maximum for Class C shares) and
therefore may result in a higher rate of return, (ii) a total rate of return
assuming an initial account value of $1,000, which will result in a higher rate
of return since the value of the initial account will not be reduced by the
maximum sales charge (currently 4.75%), and/or (iii) total rates of return which
represent aggregate performance over a period or year-by-year performance, and
which may or may not reflect the effect of the maximum or other sales charge or
CDSC.
The Fund offers multiple classes of shares which were initially offered for sale
to the public on different dates. The calculation of total rate of return for a
class of shares which initially was offered for sale to the public subsequent to
another class of shares of the Fund is based both on (i) the performance of the
Fund's newer class from the date it initially was offered for sale to the public
and (ii) the performance of the Fund's oldest class from the date it initially
was offered for sale to the public up to the date that the newer class initially
was offered for sale to the public.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest shares (e.g., Rule 12b-1 fees). Therefore, the total
rate of return quoted for a newer class of shares will differ from the return
that would be quoted had the newer class of shares been outstanding for the
entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would have
been quoted had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for the newer
class are higher than the class specific expenses of the oldest class, and the
total rate of return quoted for the newer class will be lower than the return
that would be quoted had the newer class of shares been outstanding for this
entire period if the class specific expenses for the newer class are lower than
the class specific expenses of the oldest class).
PERFORMANCE RESULTS: The performance results for Class A shares presented in
Appendix A attached hereto under the heading "Performance Results" assume an
initial investment of $10,000 and cover the period from January 1, 1987 to
December 31, 1996. It has been assumed that dividends and capital gain
distributions were reinvested in additional shares. These performance results,
as well as any yield or total rate of return quotation provided by the Fund,
should not be considered as representative of the performance of the Fund in the
future since the net asset value and public offering price of shares of the Fund
will vary based not only on the type, quality and maturities of the securities
held in the portfolio of the Fund, but also on changes in the current value of
such securities and on changes in the Fund's expenses. These factors and
possible differences in the methods used to calculate yields and total rates of
return should be considered when comparing the yield and total rate of return to
yields and total rates of return published for other investment companies or
other investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value as well as account balance
information may be obtained by calling 1-800-MFS- TALK (637-8255).
YIELD: Any yield quotation of a class of shares of the Fund is based on the
annualized net investment income per share allocated to that class over a 30-
day period. The yield for each class of the Fund is calculated by dividing the
net investment income allocated to that class earned during the period by the
maximum offering price per share of that class of the Fund on the last day of
that period. The resulting figure is then annualized. Net investment income per
share of a class is determined by dividing (i) the dividends and interest
allocated to that class during the period, minus accrued expenses of that class
for the period by (ii) the average number of shares of the class entitled to
receive dividends during the period multiplied by the maximum offering price per
share on the last day of the period and no payment of any CDSC in the case of
Class B and Class C shares. The Fund's yield calculations for Class A shares
assume a maximum sales charge of 4.75%. Yield quotations for each class of
shares are presented in Appendix A attached hereto under the heading
"Performance Quotations."
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the Securities and Exchange Commission, is not indicative of the
amounts which were or will be paid to the Fund's shareholders. Amounts paid to
shareholders of each class are reflected in the quoted "current distribution
rate" for that class. The current distribution rate for a class is computed by
dividing the total amount of dividends per share paid by the Fund to
shareholders of that class during the past twelve months by the maximum public
offering price of that class at the end of such period. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid over the period such policies were in effect,
rather than using the dividends during the past twelve months. The current
distribution rate differs from the yield computation because it may include
distributions to shareholders from sources other than dividends and interest,
such as premium income for option writing, short-term capital gains and return
of invested capital, and is calculated over a different period of time. The
Fund's current distribution rate calculation for Class A shares assumes a
maximum sales charge of 4.75%. The Fund's current distribution rate calculation
for Class B shares and Class C shares assumes no CDSC is paid. Current
distribution rate quotations for each Class of shares are presented in Appendix
A attached hereto.
GENERAL: From time to time each Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Securities Corporaton, CDA Wiesenberger, Shearson
Lehman and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates,
Media General, Investment Company Data, The New York Times, Your Money,
Strangers Investment Advisor, Financial Planning on Wall Street, Standard and
Poor's, Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
From time to time, the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks, and similar or related matters.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planningsm program, an inter-generational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; and other
similar or related matters.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established
as the first open-end mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund
to make full public disclosure of its operations in shareholder
reports.
-- 1932 -- One of the first internal research departments is
established to provide in-house analytical capability for an
investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund
to register under the Securities Act of 1933 ("Truth in
Securities Act" or "Full Disclosure
Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund
to allow shareholders to take capital gain distributions either
in additional shares or cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal
bond funds established.
-- 1979 -- Spectrum becomes the first combination fixed/ variable
annuity with no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as
America's first globally diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end
mutual fund to seek high tax-free income from lower-rated
municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual
fund to target and shift investments among industry sectors for
shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock
Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first
closed-end, multimarket high income fund listed on the New York
Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified
market-value adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first
global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging
markets fund to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard
Trust, the first Trust to invest in companies deemed to be
union-friendly by an Advisory Board of senior labor officials,
senior managers of companies with significant labor contracts,
academics and other national labor leaders or experts.
9. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares (the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and
Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and each
respective class of shareholders. The provisions of the Distribution Plan are
severable with respect to each class of shares offered by the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the Fund's expense ratio to the
extent the Fund's fixed costs are spread over a larger net asset base. Also, an
increase in net assets may lessen the adverse effects that could result were the
Fund required to liquidate portfolio securities to meet redemptions. There is,
however, no assurance that the net assets of the Fund will increase or that the
other benefits referred to above will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to the Class A shares, no service fees will be paid:
(i) to any dealer who is the holder or dealer of record for investors who own
Class A shares having an aggregate net asset value less than $750,000, or such
other amount as may be determined from time to time by MFD (MFD, however, may
waive this minimum amount requirement from time to time); or (ii) to any
insurance company which has entered into an agreement with the Fund and MFD that
permits such insurance company to purchase Class A shares from the Fund at their
net asset value in connection with annuity agreements issued in connection with
the insurance company's separate accounts. Dealers may from time to time be
required to meet certain other criteria in order to receive service fees.
With respect to the Class B shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder or
dealer of record for investors who own Class B shares having an aggregate net
asset value of less than $750,000 or such other amount as may be determined by
MFD from time to time. MFD, however, may waive this minimum amount requirement
from time to time. Dealers may from time to time be required to meet certain
other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plans is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended January 31, 1997, the Fund paid the following Distribution
Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
CLASSES OF SHARES BY FUND BY MFD BY DEALERS
- ----------------- ------------ ------------- ----------
Class A Shares $1,835,620 $ 644,820 $1,190,800
Class B Shares $2,877,823 $2,242,278 $ 635,545
Class C Shares $ 216,394 $ 5,874 $ 210,520
GENERAL: The Distribution Plan will remain in effect until August 1, 1997, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the Trustees
shall review, at least quarterly, a written report of the amounts expended (and
purposes therefor) under such Plan. The Distribution Plan may be terminated at
any time by vote of a majority of the Distribution Plan Qualified Trustees or by
vote of the holders of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions"). All agreements relating to the
Distribution Plan entered into between the Fund or MFD and other organizations
must be approved by the Board of Trustees, including a majority of the
Distribution Plan Qualified Trustees. Agreements under the Distribution Plan
must be in writing, will be terminated automatically if assigned, and may be
terminated at any time without payment of any penalty, by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions") or may not be materially amended in
any case without a vote of the Trustees and a majority of the Distribution Plan
Qualified Trustees. The selection and nomination of Distribution Plan Qualified
Trustees shall be committed to the discretion of the non-interested Trustees
then in office. No Trustee who is not an "interested person" has any financial
interest in the Distribution Plan or in any related agreement.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, assistance and consultation with respect to the preparation of filings
with the SEC.
The Portfolio of Investments at January 31, 1997, the Statement of Assets and
Liabilities at January 31, 1997, the Statement of Operations for the year ended
January 31, 1997, the Statement of Changes in Net Assets for each of the two
years in the period ended January 31, 1997, the Notes to Financial Statements
and the Independent Auditors' Report, each of which is included in the Annual
Report to shareholders of the Fund, are incorporated by reference into this SAI
and have been so incorporated in reliance upon the report of Deloitte & Touche
LLP, independent auditors, as experts in accounting and auditing. A copy of the
Annual Report accompanies this SAI.
<PAGE>
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
<TABLE>
<CAPTION>
PERFORMANCE RESULTS -- CLASS A SHARES
- -----------------------------------------------------------------------------------------------------------------------------------
VALUE OF VALUE OF VALUE OF
INITIAL $10,000 CAP. GAIN REINVESTED TOTAL
DATE INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
------ ------- ------ ----- --
<S> <C> <C> <C> <C>
12/31/87 $8,069 $ 0 $1,137 $ 9,206
12/31/88 7,949 74 2,321 10,344
12/31/89 6,823 64 3,252 10,139
12/31/90 4,825 45 3,572 8,442
12/31/91 6,286 58 6,226 12,570
12/31/92 6,608 62 8,043 14,713
12/31/93 7,238 67 10,261 17,566
12/31/94 6,461 60 10,584 17,105
12/31/95 6,943 65 13,031 20,039
12/31/96 7,158 67 15,330 22,555
- ------------
Explanatory Notes: The results in the table assume that income dividends and capital gain distributions were invested in
additional shares. The results also assume that the initial investment in Class A shares was reduced by the current maximum
applicable sales charge. No adjustment has been made for income taxes, if any, payable by shareholders.
</TABLE>
PERFORMANCE QUOTATIONS
All performance quotations are for the fiscal year ended January 31, 1997.
<TABLE>
<CAPTION>
ACTUAL
30-DAY 30-DAY
YIELD YIELD
AVERAGE ANNUAL TOTAL RETURNS (INCLUDING (WITHOUT CURRENT
---------------------------- ANY ANY DISTRIBUTION
1 YEAR 5 YEAR TEN YEAR WAIVERS) WAIVERS) RATE
------ ------ -------- -------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Class A Shares with sales charge ....... 6.24% 10.59% 8.57% N/A 8.03% 8.27%
Class A Shares without sales charge .... 11.52% 11.67% 9.10% N/A N/A N/A
Class B Shares with CDSC ............... 6.66% 10.80%(1) 8.80%(1) N/A N/A N/A
Class B Shares without CDSC ............ 10.66% 11.06%(1) 8.80%(1) N/A 7.76% 7.93%
Class C Shares with CDSC ............... 9.71% 11.17%(2) 8.85%(2) N/A N/A N/A
Class C Shares without CDSC ............ 10.71% 11.17%(2) 8.85%(2) N/A 7.39% 7.97%
Class I Shares with CDSC ............... 11.46%(3) 11.66%(3) 9.09%(3) N/A 8.76% N/A
Class I Shares without CDSC ............ 11.46%(3) 11.66%(3) 9.09%(3) N/A 8.76% N/A
(1) Class B share performance includes the performance of the Fund's Class A shares for periods prior to the commencement of
offering of Class B shares on September 27, 1993. Sales charges, expenses and expense ratios, and therefore performance, for
Class A and Class B shares differ. Class B share performance has been adjusted to reflect that Class B shares generally are
subject to CDSC (unless the performance quotation does not give effect to the CDSC) whereas Class A shares generally are
subject to an initial sales charge. Class B share performance has not, however, been adjusted to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for Class A shares.
(2) Class C share performance includes the performance of the Fund's Class A shares for periods prior to the commencement of
offering of Class C shares on January 3, 1994. Sales charges, expenses and expense ratios, and therefore performance, for
Class A and Class C shares differ. Class C shares performance has been adjusted to reflect that Class C shares generally are
subject to a CDSC (unless the performance quotation does not give effect to the CDSC) whereas Class A shares generally are
subject to an initial sales charge. Class C share performance has not, however, been adjusted to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for Class A shares.
(3) Class I share performance includes the performance of the Fund's Class A shares for the periods prior to the commencement of
offering of Class I shares on January 1, 1997. Sales charges, expenses and expense ratios, and therefore performance for
Class I and A shares differ. Class I share performance has been adjusted to reflect that Class I shares are not subject to
an initial sales charge, whereas Class A shares generally are subject to an initial sales charge. Class I share performance
has not, however, been adjusted to reflect differences in operating expenses (e.g., Rule 12b-1 fees), which generally are
lower for Class I shares.
</TABLE>
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
HIGH INCOME
FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MHI-13-6/97/525 18/218/318
<PAGE>
Table of Contents
Letter from the Chairman ..................... 1
A Discussion with the Portfolio Manager ...... 2
Portfolio Manager's Profile .................. 5
Performance Summary ........................... 6
Fund Facts .................................... 8
Portfolio of Investments ..................... 9
Financial Statements ........................ 16
Notes to Financial Statements ............... 23
Independent Auditors' Report .................. 30
ABCs of Investing ........................... 31
Family of Funds .............................. 32
Trustees and Officers ........................ 33
Highlights
[bullet] For the year ended January 31, 1997, Class A shares of the Fund
provided a total return at net asset value of 11.52%, Class B shares
10.66%, and Class C shares 10.71%.
[bullet] A relatively stable economic environment, with moderate growth and low
inflation, has benefited investors reaching for a little extra yield
in high-yield corporate and emerging fixed-income markets.
[bullet] The overall credit quality of issuers in the high-yield market has
improved significantly in the 1990s, with dramatic reductions in
debt-to-cash flow ratios compared to the 1980s.
[bullet] However, the high-yield market is seeing an increase in the number of
speculative issues, particularly in the gaming and communications
industries, and we expect the rate of defaults to rise in 1997.
<PAGE>
Letter from the Chairman
[Picture of A. Keith Brodkin]
Dear Shareholders:
After more than six years of expansion, the U.S. economy appears headed
toward another year of at least moderate growth in 1997, although a few signs
point to the possibility of a modest rise in inflation during the year. On the
positive side, the pattern of moderate growth and inflation set over the past
few years now seems fairly well entrenched in the economy and, short of a major
international or domestic crisis, appears to have enough momentum to remain on
track for some time. Also, recent gains in such important sectors as housing,
automobiles, industrial production, and exports indicate a fair amount of
underlying strength in the economy. However, some reason for caution can be seen
in the continuing high level of consumer debt and the attendant rise in personal
bankruptcies, as well as in the modestly disappointing level of holiday sales.
Also, the ongoing tightness in labor markets, and price rises in such important
sectors as energy, could add some inflationary pressures to the economy. Given
these somewhat conflicting indicators, we expect real (inflation-adjusted)
growth to revolve around 2% in 1997, which would represent a modest decline from
1996.
In the bond markets, conflicting signals over the strength of the economy
have created near-term volatility, while comments by Federal Reserve Chairman
Alan Greenspan late in 1996 and in February of this year created some
uncertainty over the Federal Reserve Board's next move. However, we expect the
Fed to maintain its anti-inflationary stance should signs of more rapid economic
growth and, particularly, of higher inflation resurface. While inflationary
forces largely remained in check in 1996, the continued strength in the labor
market and rising energy prices mean that a pickup in inflation is still
possible. At the same time, the U.S. budget deficit continues to decline and, as
a percentage of gross domestic product, is now less than 2%, which we consider a
positive development for the bond markets. Although interest rates may move
higher over the coming months, we believe that, at current levels, fixed-income
markets remain equitably valued.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
February 14, 1997
1
<PAGE>
A Discussion with the Portfolio Manager
[Picture of Robert J. Manning]
For the year ended January 31, 1997, Class A shares of the Fund provided a
total return of 11.52%, Class B shares 10.66%, and Class C shares 10.71%. All of
these returns assume the reinvestment of distributions but exclude the effects
of any sales charges, and they compare to a 2.76% return for the Lehman Brothers
Corporate Bond Index (the Lehman Index) during the same period. Because the
Fund's portfolio generally consists of lower-rated issues, its results will not
necessarily mirror those of the Lehman Index, which is an unmanaged,
market-value-weighted index comprised of all public, fixed-rate, nonconvertible,
investment-grade corporate debt.
Q. What do you see as some of the reasons for this performance?
A. The environment for high-yield bonds has been quite favorable over the past
12 months, thanks in part to improved credit quality and a lower rate of
defaults compared to just a few years ago. Also, the Fund was more heavily
invested in the higher-quality segment of the high-yield market, and we believe
we were able to do a good job of credit selection, which helped the Fund's
overall performance.
Q. In general, how would you describe the fixed-income environment over the past
year?
A. It's been a relatively stable environment, with interest rates not moving in
any particular direction. With the economy growing moderately and inflation
remaining low, it has paid investors to reach for a little extra yield. This has
helped the performance of the "spread markets," that is, the high-yield
corporate and emerging fixed-income markets. The high-yield market, in
particular, has been extremely strong, with new issuance close to last year's
record volume of about $70 billion. However, the credit quality of the new-issue
market has started to deteriorate somewhat. Because of this, we've gotten even
more selective and have not let ourselves get caught up in some of the hype that
can accompany these issues. Also, the flow of money into high-yield mutual funds
has been quite strong, which has helped push up prices in this market just as
money flows into stock funds have helped drive the stock market.
Q. When a lot of people think of high-yield investing, they think of possible
defaults. How has the default picture changed in the past few years, and why?
2
<PAGE>
A Discussion with the Portfolio Manager - continued
A. Defaults are actually at historic lows. Over time, they average 2% to 3% of
the market, but in the past year the rate has been at less than 1.3%. However,
this is a lagging indicator, that is, we see credit losses going up - and the
prices of bonds trading down - long before the number of defaults increase. We
do expect the default rate to increase over the coming year.
Q. In spite of this, has the overall financial condition of the issuers in your
investment universe improved?
A. Yes. The overall credit quality of these issuers has improved dramatically in
the 1990s compared to the 1980s. In the late 1980s, debt-to-cash flow ratios
among issuers of high-yield bonds were 8 to 10 times, while interest-coverage
ratios were 1 to 1-1/2. (Debt-to-cash flow measures a company's total debt
divided by its cash flow, or revenues after operating expenses. Interest
coverage is the number of times a company's cash flow will cover its interest
expenses annually.) Today, debt-to-cash flow ratios have been cut to the 4 to 6
range, while interest-coverage ratios are usually at least 2. So generally the
companies that financed in the '80s were significantly more leveraged than the
companies that come to market today. However, we are seeing more speculation,
particularly in the gaming and communications industries. It's our job to
maintain discipline and not get caught up in the fever of the bull markets.
Q. In general, what characteristics or qualities do you look for in selecting
bonds for the Fund?
A. We start with management. We spend most of our time meeting with the managers
of the companies in the Fund. They're the people who know what's going on in
their businesses, what trends to watch, and how to position their companies for
any changes. We like to see managers have equity in their own companies, so if
something goes wrong they have something at stake. The second thing is stable
cash flow. Unlike equity fund managers, who stress earnings, we want to see how
much money is coming in, how much is going out, and how the company is meeting
its debt obligations. Third, we like companies to have tangible assets, like
machinery and equipment, that have value if something goes wrong. Finally, we
look for positive industry trends. We use MFS' equity analysts to leverage our
knowledge of what's going on in all industries to help us decide where we want
to be positioned for the future.
Q. Have you increased the Fund's weightings in any particular sectors, and why?
A. We've added to our industrial-company holdings. These tend to be strong
cash-flow generators, and several have been bought out by other
3
<PAGE>
A Discussion with the Portfolio Manager - continued
industrial companies as part of a consolidation trend. We have also found good
relative value in some gaming and cable companies, although neither of these
industries performed as well as expected last year.
Q. Have some segments of the high-yield bond market performed better than you
expected?
A. The telecommunications industry was helped by the passage of the
Telecommunications Act and an overall bull market in technology, while the
energy sector saw an upswing in prices that was unexpected. Meanwhile, a number
of cyclical industries also benefited from a stronger-than-expected economy.
Q. And have some segments of this market, or particular holdings, not performed
as well as you expected?
A. We saw underperformance in both the paging and supermarket sectors, as price
competition put downward pressure on profit margins in both industries.
Q. Did you reduce or eliminate your positions in some of these holdings as a
result?
A. We have reduced the Fund's position in paging. Although we don't see any
major change in fundamentals for this industry in the short term, we think
there's still some downside risk. We are, however, adding to our supermarket
holdings. There are some good franchises out there that we believe could do well
in a slowing economy, which we think is more probable now.
Q. Can you talk about any parts of this market you might be avoiding?
A. We've been staying away from utilities and retailing. Both have suffered from
overcapacity and lack of pricing power, and the utilities' performance has been
further hampered by deregulation. For instance, electric utilities have been
forced to compete with outside suppliers for the business of some of their
biggest customers, such as office buildings and factories.
Q. As you look ahead, what changes do you see in the overall market or economic
environment, particularly as it relates to the Fund, and how are you positioning
the Fund to try and take advantage of those changes?
A. We expected the economy to slow down in 1996 but it didn't. However, we
positioned the Fund defensively by increasing its overall credit quality. We
still believe we're at the end of an economic and credit cycle that began in
1991, and so it seems prudent to invest in the larger, well-capitalized
4
<PAGE>
A Discussion with the Portfolio Manager - continued
companies whose credits are more likely to perform better when the markets do
react to a slowdown. Currently, though, the high-yield market is yielding about
310 basis points (3.1%) more than comparable-maturity Treasuries, which is not a
very narrow range. (Principal value and interest on Treasury securities are
guaranteed by the U.S. government if held to maturity.) This indicates the
market is pricing in a fairly optimistic environment for the coming year. Still,
given the recent trend of lower-quality new issuance and the strong, almost
insatiable desire for yield, we believe it's more likely than not that something
will happen to cause a market correction, and we want to be positioned for it
when it happens. Given this environment, we believe disciplined credit
selection, and avoiding speculative risks, will become even more important in
the coming year.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Portfolio Manager
Portfolio Manager's Profile
Robert J. Manning began his career at MFS in 1984 as a research analyst in the
High Yield Bond Department. A graduate of the University of Lowell and Boston
College's Graduate School of Management, he was named Vice President -
Investments in 1988, Senior Vice President in 1993, and Portfolio Manager of MFS
High Income Fund in 1994.
5
<PAGE>
Performance Summary
The information below and on the following pages illustrate the historical
performance of MFS High Income Fund - Class A shares in comparison to various
market indicators. Class A share performance results reflect the deduction of
the 4.75% maximum sales charge; benchmark comparisons are unmanaged and do not
reflect any fees or expenses. The performance of other share classes will be
greater than or less than the line shown, based on the differences in loads and
fees paid by shareholders investing in the different classes. It is not possible
to invest in an index. All results are historical and assume the reinvestment of
dividends and capital gains.
Growth of a Hypothetical $10,000 Investment
(For the 5-Year Period Ended January 31, 1997)
1/92 9532 10000 10000
1/93 11091 11263 10326
1/94 13102 12584 10587
1/95 12585 12111 10883
1/96 14847 14591 11174
1/97 16556 14995 11484
$20,000 $15,000 $10,000 $5,000
MFS High Income Fund - Class A $16,556
Lehman Brothers Corporate Bond Index $14,995
Consumer Price Index - U.S $11,484
1/92 1/93 1/94 1/95 1/96 1/97
Growth of a Hypothetical $10,000 Investment
(For the 10-Year Period Ended January 31, 1997)
2/87 9531 10000 10000
1/89 10430 10888 11124
1/91 8613 12102 13558
1/93 15097 12821 17648
1/95 17129 13513 18976
1/97 22535 14259 23494
$30,000 $25,000 $20,000 $15,000 $10,000 $5,000
Lehman Brothers Corporate Bond Index $23,494
MFS High Income Fund - Class A $22,535
Consumer Price Index - U.S. $14,259
2/87 1/89 1/91 1/93 1/95 1/97
6
<PAGE>
Performance Summary - continued
<TABLE>
<CAPTION>
Average Annual Total Returns 1 Year 3 Years 5 Years 10 Years
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
MFS High Income Fund (Class A)
including 4.75% sales charge + 6.24% +6.40% +10.59% +8.57%
- ----------------------------------------- --------- -------- --------- --------
MFS High Income Fund (Class A)
at net asset value +11.52% +8.11% +11.67% +9.10%
- ----------------------------------------- --------- -------- --------- --------
MFS High Income Fund (Class B) with CDSC + 6.66% +6.37% +10.80% +8.80%
- ----------------------------------------- --------- -------- --------- --------
MFS High Income Fund (Class B)
without CDSC +10.66% +7.22% +11.06% +8.80%
- ----------------------------------------- --------- -------- --------- --------
MFS High Income Fund (Class C) with CDSC + 9.71% +7.35% +11.17% +8.85%
- ----------------------------------------- --------- -------- --------- --------
MFS High Income Fund (Class C)
without CDSC +10.71% +7.35% +11.17% +8.85%
- ----------------------------------------- --------- -------- --------- --------
Average high current yield fund++ +12.49% +7.82% +11.57% +9.27%
- ----------------------------------------- --------- -------- --------- --------
Lehman Brothers Corporate Bond Index+ + 2.76% +6.02% + 8.44% +8.92%
- ----------------------------------------- --------- -------- --------- --------
Consumer Price Index*+ + 2.77% +2.75% + 2.81% +3.61%
- ----------------------------------------- --------- -------- --------- --------
</TABLE>
* The cost of living (inflation) is measured by the Consumer Price Index
published by the U.S. Bureau of Labor Statistics.
+ Source: CDA/Wiesenberger.
++ Source: Lipper Analytical Services.
Investment return and principal value will fluctuate, and shares, when redeemed,
may be worth more or less than their original cost. Past performance is no
guarantee of future results.
Class B results including the applicable contingent deferred sales charge
(CDSC), reflect the CDSC which declines over six years as follows: 4%, 4%, 3%,
3%, 2%, 1%, 0%. Class C shares have no initial sales charge but, along with
Class B shares, have higher annual fees and expenses than Class A shares. As of
April 1, 1996, Class C shares redeemed within 12 months of purchase will be
subject to a 1% CDSC.
Class B and Class C share performance includes the performance of the Fund's
Class A shares for periods prior to the commencement of offering of Class B
shares on September 27, 1993 and of Class C shares on January 3, 1994. Sales
charges and operating expenses for Class A, Class B, and Class C shares differ.
The Class A share performance, which is included within the Class B and Class C
share performance which reflects the sales charges, has been adjusted to reflect
the CDSC generally applicable to Class B and Class C shares rather than the
initial sales charge generally applicable to Class A shares. Class B and Class C
share performance has not been adjusted, however, to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for Class
A shares.
Fund results reflect any applicable expense subsidies and waivers, without which
the performance results would have been less favorable. Subsidies and waivers
may be rescinded at any time. See the prospectus for details.
7
<PAGE>
Fund Facts
Strategy: The Fund's investment objective is to seek high current
income by investing primarily in fixed-income securities
rated below investment grade (BBB).
Commencement of
investment operations: February 17, 1978
Size: $1.0 billion net assets as of January 31, 1997
Portfolio Concentration as of January 31, 1997
Portfolio Structure
[PIE GRAPH]
High Yield 88.0%
Equity 6.2%
Cash and Cash Equivalents 5.8%
<PAGE>
Portfolio of Investments - January 31, 1997
Non-Convertible Bonds - 87.5%
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Aerospace - 2.6%
BE Aerospace, Inc., 9.875s, 2006 $4,700 $4,911,500
CHC Helicopter Corp., 11.5s, 2002 6,675 6,942,000
Derlan Manufacturing, Inc., 10s, 2007## 2,775 2,795,812
Haynes International, Inc., 11.625s, 2004 10,825 11,799,250
-----------
$26,448,562
- -----------------------------------------------------------------------------------------
Airlines - 1.7%
Airplane Pass-Thru Trust, 10.875s, 2019 $5,250 $5,801,250
K & F Industries, Inc., 11.875s, 2003 1,925 2,079,000
Moog, Inc., 10s, 2006 8,590 9,019,500
-----------
$16,899,750
- -----------------------------------------------------------------------------------------
Automotive - 1.6%
Exide Corp., 10s, 2005## $2,950 $3,049,563
Harvard Industries, Inc., 11.125s, 2005 775 589,000
Harvard Industries, Inc., 12s, 2004 980 754,600
Hayes Wheels International, Inc., 11s, 2006 4,350 4,763,250
SPX Corp., 11.75s, 2002 3,950 4,394,375
Venture Holdings Trust, 9.75s, 2004 2,775 2,636,250
-----------
$16,187,038
- -----------------------------------------------------------------------------------------
Building - 5.1%
American Standard, Inc., 0s,1998, 10.5s, 2005 $10,625 $10,014,062
Building Materials Corp., 8.625s, 2006## 1,550 1,550,000
Building Materials Corp., 0s, 1999, 11.75s, 2004 11,775 10,303,125
Lone Star Industries, Inc., 10s, 2003 4,542 4,621,485
Nortek, Inc., 9.875s, 2004 9,750 9,896,250
Schuller International Group, Inc., 10.875s, 2004 4,000 4,420,000
UDC Homes, Inc., 2000 30 16,650
USG Corp., 9.25s, 2001 9,850 10,465,625
-----------
$51,287,197
- -----------------------------------------------------------------------------------------
Cellular Telephones - 0.7%
Millicom International Cellular Communications, 0s,
2001, 13.5s, 2006 $10,625 $6,932,813
- -----------------------------------------------------------------------------------------
Chemicals - 2.8%
INDESPEC Chemical Corp., 0s, 1998, 11.5s, 2003 $5,450 $5,014,000
NL Industries, Inc., 11.75s, 2003 8,725 9,204,875
Rexene Corp., 11.75s, 2004 2,235 2,508,787
UCC Investors Holdings, Inc., 10.5s, 2002 4,750 5,189,375
UCC Investors Holdings, Inc., 0s, 1998, 12s, 2005 7,500 6,750,000
-----------
$28,667,037
- -----------------------------------------------------------------------------------------
Consumer Goods and Services - 7.9%
Consolidated Cigar Corp., 10.5s, 2003 $4,750 $4,940,000
E & S Holdings Corp., 10.375s, 2006## 8,350 8,746,625
FoodBrands America, Inc., 10.75s, 2006 5,755 6,071,525
Genmar Holdings, Inc., 13.5s, 2001 2,940 2,851,800
International Semi-Tech Microelectronics, Inc.,
11.5s, 2003 10,450 6,165,500
Iron Mountain, Inc., 10.125s, 2006 7,000 7,420,000
Pierce Leahy Corp., 11.125s, 2006 5,350 5,871,625
</TABLE>
9
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- ----------------------------------------------------------------------------------
<S> <C> <C>
Consumer Goods and Services - continued
Reeves Industries, Inc., 11s, 2002 $5,565 $5,342,400
Remington Arms, Inc., 10s, 2003## 2,000 1,620,000
Revlon, Inc., 10.5s, 2003 8,175 8,624,625
Samsonite Corp., 11.125s, 2005 5,500 6,022,500
Sealy Corp., 9.5s, 2003 2,650 2,676,500
Westpoint Stevens, Inc., 9.375s, 2005 12,850 13,331,875
-----------
$79,684,975
- ----------------------------------------------------------------------------------
Containers - 4.8%
Atlantis Group, Inc., 11s, 2003 $7,500 $7,762,500
Calmar, Inc., 11.5s, 2005 8,000 8,420,000
Ivex Packaging Corp., 12.5s, 2002 5,350 5,791,375
Owens-Illinois, Inc., 9.75s, 2004 2,500 2,637,500
Owens-Illinois, Inc., 9.95s, 2004 500 528,750
Owens-Illinois, Inc., 11s, 2003 5,850 6,508,125
Plastic Containers, Inc., 10s, 2006## 950 978,500
RXI Holdings, Inc., 14s, 2002** 3,500 2,730,000
Silgan Corp., 11.75s, 2002 6,860 7,323,050
U.S. Can Corp., 10.125s, 2006## 5,100 5,355,000
-----------
$48,034,800
- ----------------------------------------------------------------------------------
Defense Electronics - 0.5%
Alliant Techsystem, Inc., 11.75s, 2003 $4,350 $4,872,000
- ----------------------------------------------------------------------------------
Electronics - 0.5%
Clark Schwebel, Inc., 10.5s, 2006 $4,675 $4,932,125
- ----------------------------------------------------------------------------------
Entertainment - 4.5%
Act III Theaters, Inc., 11.875s, 2003 $2,250 $2,452,500
Albritton Communications Corp., 11.5s, 2004 6,350 6,746,875
American Skiing Company, 12s, 2006 5,300 5,445,750
Cinemark USA, Inc., 9.625s, 2008 1,600 1,628,000
Grand Casinos, Inc., 10.125s, 2003 8,225 8,430,625
Griffin Gaming & Entertainment, Inc., 2000 4,400 4,290,000
Lodgenet Entertainment Corp., 10.25s, 2006## 2,525 2,512,375
Marvel Holdings, Inc., 0s, 1998** 12,635 2,116,363
Plitt Theatres, Inc., 10.875s, 2004 2,775 2,809,687
Sam Houston Race Park, Inc., 11s, 2001** 1,809 777,926
SCI Television, Inc., 11s, 2005 7,655 8,152,575
-----------
$45,362,676
- ----------------------------------------------------------------------------------
Financial Institutions - 0.7%
Americo Life, Inc., 9.25s, 2005 $3,550 $3,523,375
Americredit Corp., 9.25s, 2004## 2,000 1,994,900
GPA Delaware, 8.75s, 1998 1,221 1,236,263
-----------
$6,754,538
- ----------------------------------------------------------------------------------
Food and Beverage Products - 1.9%
Delta Beverage Group, Inc., 9.75s, 2003## $2,800 $2,884,000
Keebler Corp., 10.75s, 2006 2,500 2,700,000
PMI Acquisition Corp., 10.25s, 2003 2,495 2,569,850
Specialty Foods Corp., 10.25s, 2001 5,000 4,750,000
</TABLE>
10
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- ----------------------------------------------------------------------------------
<S> <C> <C>
Food and Beverage Products - continued
Texas Bottling Group, Inc., 9s, 2003 $5,750 $5,865,000
-----------
$18,768,850
- ----------------------------------------------------------------------------------
Forest and Paper Products - 2.3%
Gaylord Container Corp., 0s, 1996, 12.75s, 2005 $10,395 $11,460,487
Pacific Lumber Co., 10.5s, 2003 9,675 9,820,125
Specialty Paperboard, Inc., 9.375s, 2006## 2,150 2,182,250
-----------
$23,462,862
- ----------------------------------------------------------------------------------
Machinery - 1.7%
AGCO Corp., 8.5s, 2006 $5,000 $5,050,000
Fairfield Manufacturing Corp., 11.375s, 2001 3,700 3,885,000
Thermadyne Holdings Corp., 10.25s, 2002 4,150 4,316,000
Thermadyne Holdings Corp., 10.75s, 2003 4,045 4,206,800
-----------
$17,457,800
- ----------------------------------------------------------------------------------
Medical and Health Technology and Services - 1.9%
Beverly Enterprises, Inc., 9s, 2006 $3,500 $3,508,750
Quorum Health Group, Inc., 8.75s, 2005 2,750 2,818,750
Tenet Healthcare Corp., 8s, 2005 11,550 11,506,688
Unilab Corp., 11s, 2006 1,610 1,110,900
-----------
$18,945,088
- ----------------------------------------------------------------------------------
Metals and Minerals - 0.5%
Jorgensen (Earle M.) Co., 10.75s, 2000 $4,575 $4,643,625
- ----------------------------------------------------------------------------------
Mortgage Backed Pass-Throughs - 0.4%
Merrill Lynch Mortgage Investors,
Inc., 8.142s, 2023+ $4,500 $3,622,500
- ----------------------------------------------------------------------------------
Oil Services - 2.1%
AmeriGas Partners, L.P., 10.125s, 2007 $3,400 $3,582,750
Clark USA, Inc., 10.875s, 2005 2,650 2,676,500
Falcon Drilling, Inc., 8.875s, 2003 3,725 3,892,625
Ferrell Gas L.P., 10s, 2001 4,700 4,935,000
Mesa Operating Co., 10.625s, 2006 1,700 1,840,250
Noble Drilling Corp., 9.125s, 2006 3,500 3,727,500
-----------
$20,654,625
- ----------------------------------------------------------------------------------
Oils - 0.6%
Gulf Canada, 9.25s, 2004 $6,000 $6,345,000
- ----------------------------------------------------------------------------------
Printing and Publishing - 1.3%
Day International Group, Inc., 11.125s, 2005 $2,350 $2,479,250
Golden Books Publishing, Inc., 7.65s, 2002 5,000 4,500,000
Newsquest Capital PLC, 11s, 2006 4,600 4,830,000
Newsquest Capital PLC, 11s, 2006## 1,500 1,575,000
-----------
$13,384,250
- ----------------------------------------------------------------------------------
Restaurants and Lodging - 5.2%
Aztar Corp., 11s, 2002 $5,175 $5,200,875
Boomtown, Inc., 11.5s, 2003 3,865 4,106,562
Coast Hotels & Casinos, Inc., 13s, 2002 3,625 4,032,813
Eldorado Resorts LLC, 10.5s, 2006## 4,455 4,722,300
Four Seasons Hotels, Inc., 9.125s, 2000## 7,750 7,934,062
Harrah's Jazz Co., 14.25s, 2001** 4,950 2,437,875
</TABLE>
11
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- ----------------------------------------------------------------------------------
<S> <C> <C>
Restaurants and Lodging - continued
Harrahs Operating, Inc., 8.75s, 2000 $3,500 $3,543,750
Harvey's Casinos Resorts, 10.625s, 2006 3,525 3,824,625
Red Roof Inns, Inc., 9.625s, 2003 8,260 8,383,900
Santa Fe Hotel, Inc., 11s, 2000 4,805 3,219,350
Station Casinos, Inc., 9.625s, 2003 4,350 4,393,500
-----------
$51,799,612
- ----------------------------------------------------------------------------------
Special Products and Services - 8.2%
AAF-McQuay, Inc., 8.875s, 2003 $8,325 $8,158,500
Buckeye Cellulose Corp., 8.5s, 2005 2,000 2,010,000
Howmet Corp., 10s, 2003 5,125 5,586,250
Idex Corp., 9.75s, 2002 1,260 1,313,550
IMO Industries, Inc., 11.75s, 2006 10,175 9,971,500
Interlake Corp., 12s, 2001 5,200 5,720,000
Interlake Corp., 12.125s, 2002 9,200 9,614,000
Interlake Revolver, "B", 5.75s, 1997## 1,135 1,123,681
International Knife & Saw, Inc., 11.375s, 2006## 5,360 5,520,800
K & F Industries, Inc., 10.375s, 2004 4,500 4,747,500
Mettler Toledo, Inc., 9.75s, 2006 1,620 1,701,000
Motors & Gears, Inc., 10.75s, 2006## 3,450 3,553,500
Newflow Corp., 13.25s, 2002 3,850 4,220,563
Polymer Group, Inc., 12.25s, 2002 4,817 5,298,700
Synthetic Industries, Inc., 12.75s, 2002 11,755 13,018,662
Wolverine Tube, Inc., 10.125s, 2002 400 422,000
-----------
$81,980,206
- ----------------------------------------------------------------------------------
Steel - 4.2%
AK Steel Corp., 9.125s, 2006## $3,950 $4,038,875
AK Steel Corp., 10.75s, 2004 960 1,041,600
Algoma Steel, Inc., 12.375s, 2005 675 744,187
Armco, Inc., 11.375s, 1999 2,875 3,018,750
Carbide/Graphite Group, Inc., 11.5s, 2003 500 545,000
Commonwealth Aluminum Corp., 10.75s, 2006 7,450 7,785,250
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 5,550 5,688,750
Kaiser Aluminum & Chemical Corp., 12.75s, 2003 8,050 8,734,250
Northwestern Steel & Wire Company, 9.5s, 2001 1,100 1,089,000
WCI Steel, Inc., 10s, 2004## 9,750 10,042,500
-----------
$42,728,162
- ----------------------------------------------------------------------------------
Stores - 1.6%
Finlay Enterprises, Inc., 0s, 1s, 2005 $10,750 $9,567,500
Finlay Fine Jewelry, 10.625s, 2003 1,000 1,060,000
Parisian, Inc., 9.875s, 2003 5,190 5,319,750
-----------
$15,947,250
- ----------------------------------------------------------------------------------
Supermarkets - 3.4%
Carr-Gottstein Foods Co., 12s, 2005 $1,500 $1,597,500
Dominick's Finer Foods Inc., 10.875s, 2005 4,425 4,878,562
Fleming Cos., Inc., 10.625s, 2001 1,800 1,845,000
Grand Union Co., 12s, 2004 4,425 4,436,063
Jitney Jungle Stores of America, Inc., 12s, 2006 4,765 5,074,725
</TABLE>
12
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Supermarkets - continued
Pathmark Stores, Inc., 9.625s, 2003 $ 700 $ 665,000
Ralph's Grocery Co., 10.45s, 2004 6,550 6,893,875
Smiths Food & Drug Centers, 11.25s, 2007 6,900 7,684,875
Star Market, Inc., 13s, 2004 750 847,500
-----------
$33,923,100
- -----------------------------------------------------------------------------------------
Telecommunications - 17.2%
American Radio Systems Corp., 9s, 2006 $10,650 $10,543,500
Bell Cablemedia PLC, 0s, 2000, 11.875s, 2005 7,750 6,180,625
Brooks Fiber Properties, Inc., 0s, 2001, 10.875, 2006 3,300 2,211,000
Brooks Fiber Properties, Inc., 0s, 2001, 11.875s, 2006## 7,000 4,055,387
Cablevision Systems Corp., 9.25s, 2005 6,000 5,932,500
Charter Communications Southeast L.P., 11.25s, 2006 4,775 5,061,500
Colt Telecommunications Group PLC, 0s, 2001, 12, 2006 6,800 4,216,000
Comcast Corp., 9.375s, 2005 4,950 5,073,750
Diamond Cable Communications Corp., 0s, 2000, 11.75s,
2005 8,450 5,957,250
Echostar Communications Corp., 0s, 1999, 12.875s, 2004 2,150 1,736,125
Echostar Satellite Broadcasting Corp., 0s, 2000, 13.125s,
2004 10,250 7,175,000
Esat Holdings Limited, 12.5s, 2007## 2,825 1,596,125
Falcon Holdings Group, Inc., 11s, 2003# 6,317 5,875,190
ICG Holdings, Inc., 0s, 2001, 12.5s, 2006 8,500 5,567,500
Intermedia Capital Partners LP, 11.25s, 2006 5,225 5,512,375
Jones Intercable, Inc., 9.625s, 2002 4,050 4,232,250
Jones Intercable, Inc., 10.5s, 2008 800 864,000
Jones Intercable, Inc., 11.5s, 2004 1,125 1,222,031
K-III Communications Corp., 10.625s, 2002 3,305 3,474,381
Lenfest Communications, Inc., 10.5s, 2006 9,750 10,261,875
Marcus Cable Operating Co., 0s, 1999, 13.5s, 2004 4,000 3,300,000
MFS Communications, Inc., 0s, 2001, 8.875s, 2006 14,450 10,620,750
Mobile Telecommunication Technologies Corp., 13.5s, 2002 2,765 2,709,700
Mobilemedia Communications, Inc., 10.5s, 2003 1,810 244,350
Mobilemedia Communications, Inc., 9.375s, 2007** 1,200 198,000
Orion Network Systems, Inc., 11.25s, 2007 5,000 5,000,000
Orion Network Systems, Inc., 12.5s, 2007 3,750 2,206,275
Paging Network, Inc., 8.875s, 2006 7,900 7,386,500
Park Broadcasting, Inc., 11.75s, 2004 2,503 3,028,630
ProNet, Inc., 11.875s, 2005 1,600 1,488,000
Rifkin Acquisition Partners, LP, 11.125s, 2006 50 52,625
Rogers Cablesystems Ltd., 9.625s, 2002 750 780,000
Rogers Cablesystems, Inc., 10.125s, 2012 5,000 5,200,000
Sprint Spectrum LP, 11s, 2006 6,750 7,256,250
Sprint Spectrum LP, 0s, 2001, 12.5s, 2006 4,000 2,680,000
Sygnet Wireless, Inc., 11.5s, 2006 5,000 5,162,500
Teleport Communications Group, Inc., 9.875s, 2006 3,000 3,172,500
Teleport Communications Group, Inc., 0s, 2001, 11.125s,
2007, 1s, 2007 9,000 6,165,000
</TABLE>
13
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Telecommunications - continued
Videotron Holdings PLC, 0s, 2000, 11s,2005, 1s, 2005 $ 6,850 $ 5,411,500
Western Wireless Corp., "A", 10.5s, 2007 3,600 3,739,500
------------
$172,550,444
- ---------------------------------------------------------------------------------------------
Transportation - 1.1%
Central Transport Rental Finance Corp., 9.5s, 2003 $ 7,724 $ 7,337,416
Moran Transportation Co., 11.75s, 2004 3,500 3,780,000
------------
$11,117,416
- ---------------------------------------------------------------------------------------------
Utilities - Electric - 0.5%
El Paso Electric Co., 8.9s, 2006 $ 2,550 $ 2,663,705
Kenetech Corp., 12.75s, 2002** 2,520 2,570,400
------------
$ 5,234,105
- ---------------------------------------------------------------------------------------------
Total Non-Convertible Bonds (Identified Cost, $852,746,597) $878,628,406
- ---------------------------------------------------------------------------------------------
Convertible Bond - 0.3%
- ---------------------------------------------------------------------------------------------
Exide Corporation, 2.9s, 2005##
(Identified Cost, $2,964,500) $ 4,900 $ 2,952,250
- ---------------------------------------------------------------------------------------------
Stocks - 0.8%
- ---------------------------------------------------------------------------------------------
Shares
- ---------------------------------------------------------------------------------------------
Apparel and Textiles - 0.2%
Ithaca Industries, Inc.** 304,000 $ 2,356,000
- ---------------------------------------------------------------------------------------------
Building
Atlantic Gulf Communities Corp., +* 690 $ 3,363
- ---------------------------------------------------------------------------------------------
Consumer Goods and Services
Ranger Industries, Inc., ++* 266,768 $ 66,692
- ---------------------------------------------------------------------------------------------
Pollution Control
Envirosource, Inc., +* 1,666 $ 3,228
- ---------------------------------------------------------------------------------------------
Printing and Publishing - 0.1%
Triton Group Ltd.* 588,876 $ 441,657
- ---------------------------------------------------------------------------------------------
Restaurants and Lodging - 0.3%
Vail Resorts, Inc. 85,019 $ 3,230,722
- ---------------------------------------------------------------------------------------------
Special Products and Services - 0.2%
Central Transport Rental Group PLC, ADR* 3,790,771 $ 2,132,309
IMO Industries, Inc. 28,000 101,500
------------
$ 2,233,809
- ---------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $16,901,190) $ 8,335,471
- ---------------------------------------------------------------------------------------------
Preferred Stocks - 5.1%
- ---------------------------------------------------------------------------------------------
Cablevision Systems Corp., 11.125s (Telecommunications)* 85,893 $ 7,794,790
El Paso Electric Company, 11.4 (Utilities-Electric)# 23,642 2,594,709
K-III Communications Corp., "B", 11.625s
(Specialty Products and Services) 93,526 9,071,992
Renaissance Cosmetics, Inc. (Consumer Goods and Services) + 5,475 5,584,500
Renaissance Cosmetics, Inc. (Consumer Goods and Services) ## 192 17,088
</TABLE>
14
<PAGE>
Portfolio of Investments - continued
Preferred Stocks - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Issuer Shares Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Supermarkets General Holdings Corp., $3.52 Exch.
(Supermarkets)* 569,098 $ 13,658,352
Time Warner, Inc., "K", 10.25s (Entertainment) 11,699 12,810,405
--------------
Total Preferred Stock (Identified Cost, $43,192,821) $ 51,531,836
- ---------------------------------------------------------------------------------------------
Convertible Preferred Stocks - 0.2%
- ---------------------------------------------------------------------------------------------
Granite Broadcasting Corp., Pfd, 1.938 (Entertainment)
(Identified Cost, $1,988,688) 33,000 $ 1,810,875
- ---------------------------------------------------------------------------------------------
Warrants - 0.1%
- ---------------------------------------------------------------------------------------------
CHC Helicopter Corp., Warrants* 16,000 $ 8,000
Crystal Oil Co., $0.075 Warrants* 3,954,527 0
Crystal Oil Co., $0.10 Warrants* 3,455,042 0
Crystal Oil Co., $0.125 Warrants* 4,107,411 0
Crystal Oil Co., $0.15 Warrants* 4,041,943 0
Crystal Oil Co., $0.25 Warrants* 4,041,943 0
Grand Palais Resorts, Warrants*## 111,660 0
Hemmeter Entertainment, Warrants* 111,660 0
ICO, Inc. Warrants* 706,250 459,062
Republic Health Corp., Warrants* 2,500 0
RXI Holdings, Inc., Warrants* 3,500 35
Sam Houston Race Park, Inc., Warrants* 481 1,924
Vail Resorts, Inc., Warrants* 85,019 0
- ---------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $399,009) $ 469,021
- ---------------------------------------------------------------------------------------------
Short-Term Obligations - 2.9%
- ---------------------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
---------------
Federal Home Loan Mortgage Assn., due 02/06/97 $3,970 $ 3,967,050
Federal Home Loan Mortgage Corp., due 02/10/97 6,000 5,992,170
Federal Home Loan Mortgage Corp., due 02/03/97 9,475 9,472,242
Student Loan Marketing Assn., due 03/21/97 9,950 9,880,748
--------------
Total Short-Term Obligations, at Amortized Cost and Value $ 29,312,210
- ---------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $947,505,015) $ 973,040,069
Other Assets, Less Liabilities - 3.1% 31,257,289
=============================================================================================
Net Assets - 100.0% $1,004,297,358
- ---------------------------------------------------------------------------------------------
</TABLE>
*Non-income producing security.
**Non-income producing security - in default.
+Restricted security.
#Payment-in-kind security.
##SEC Rule 144A restriction.
++Affiliated issuers are those in which the Fund's holdings of an issuer
represent 5% or more of the outstanding voting securities of the issuer.
See notes to financial statements
15
<PAGE>
Financial Statements
Statement of Assets and Liabilities
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 31, 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value -
Unaffiliated issuers (identified cost, $940,281,096) $ 972,973,377
Affiliated issuer (identified cost, $7,223,919) 66,692
-------------
Total investments, at value (identified cost, $947,505,015) $ 973,040,069
Cash 36,207
Receivable for investments sold 18,112,987
Receivable for Fund shares sold 8,785,319
Interest receivable 19,903,420
Other assets 9,602
-------------
Total assets $1,019,887,604
-------------
Liabilities:
Distributions payable $ 2,954,366
Payable for investments purchased 11,246,809
Payable for Fund shares reaquired 850,263
Payable to affiliates -
Management fee 5,314
Shareholder servicing agent fee 3,568
Distribution fee 7,078
Accrued expenses and other liabilities 522,848
-------------
Total liabilities $ 15,590,246
-------------
Net assets $1,004,297,358
=============
Net assets consist of:
Paid-in capital $1,251,191,564
Unrealized appreciation on investments 25,535,054
Accumulated net realized loss on investments and foreign currency transactions (274,106,492)
Accumulated undistributed net investment income 1,677,232
-------------
Total $1,004,297,358
=============
Shares of beneficial interest outstanding 187,692,891
=============
Class A shares:
Net asset value per share (net assets of $672,197,810 [divided by] 125,638,629 shares of
beneficial interest outstanding) $5.35
=====
Offering price per share (100 [divided by] 95.25) $5.62
=====
Class B shares:
Net asset value and offering price per share (net assets of $300,822,525 [divided by]
56,215,947 shares of beneficial interest outstanding) $5.35
=====
Class C shares:
Net asset value and offering price per share (net assets of $28,216,152 [divided by]
5,265,960 shares of beneficial interest outstanding) $5.36
=====
Class I shares:
Net asset value, offering price, and redemption price per share (net assets of
$3,060,871 [divided by] 572,355 shares of beneficial interest outstanding) $5.35
=====
</TABLE>
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class
B, and Class C shares.
See notes to financial statements
16
<PAGE>
Financial Statements - continued
Statement of Operations
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended January 31, 1997
- ---------------------------------------------------------------------------------------
<S> <C>
Net investment income:
Income -
Interest $ 91,865,911
Dividend 135,769
-----------
Total investment income $ 92,001,680
-----------
Expenses -
Management fee $ 4,238,339
Trustees' compensation 50,757
Shareholder servicing agent fee (Class A) 813,558
Shareholder servicing agent fee (Class B) 574,765
Shareholder servicing agent fee (Class C) 29,004
Shareholder servicing agent fee 109,715
Distribution and service fee (Class A) 1,835,620
Distribution and service fee (Class B) 2,877,823
Distribution and service fee (Class C) 216,394
Custodian fee 330,844
Postage 172,092
Auditing fees 55,975
Printing 44,752
Legal fees 1,850
Miscellaneous 486,168
-----------
Total expenses $ 11,837,656
Fees paid indirectly (254,586)
-----------
Net expenses $ 11,583,070
-----------
Net investment income $ 80,418,610
-----------
Realized and unrealized gain on investments:
Net realized gain on investment transactions (identified cost basis) $ 1,477,653
Change in unrealized appreciation on investments $ 18,445,626
-----------
Net realized and unrealized gain on investments $ 19,923,279
-----------
Increase in net assets from operations $100,341,889
===========
</TABLE>
See notes to financial statements
17
<PAGE>
Financial Statements - continued
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended January 31, 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 80,418,610 $ 75,745,935
Net realized gain (loss) on investments and
foreign currency transactions 1,477,653 (28,300,429)
Net unrealized gain on investments and
foreign currency 18,445,626 95,491,500
------------- -------------
Increase in net assets from operations $ 100,341,889 $ 142,937,006
------------- -------------
Distributions declared to shareholders -
From net investment income (Class A) $ (54,869,246) $ (50,453,186)
From net investment income (Class B) (23,285,081) (22,802,500)
From net investment income (Class C) (1,760,418) (756,472)
From net investment income (Class I) (21,807) --
------------- -------------
Total distributions declared to
shareholders $ (79,936,552) $ (74,012,158)
------------- -------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 487,463,015 $ 435,560,671
Net asset value of shares issued to
shareholders in reinvestment of
distributions 44,900,610 42,125,341
Cost of shares reacquired (468,259,801) (439,675,135)
------------- -------------
Increase in net assets from Fund share
transactions $ 64,103,824 $ 38,010,877
------------- -------------
Total increase in net assets $ 84,509,161 $ 106,935,725
Net assets:
At beginning of period 919,788,197 812,852,472
------------- -------------
At end of period (including accumulated
undistributed (distributions in excess of)
net investment income of $1,677,232 and
$(2,736,501), respectively) $1,004,297,358 $ 919,788,197
============= =============
</TABLE>
See notes to financial statements
18
<PAGE>
Financial Statements - continued
Financial Highlights
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended January 31, 1997 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------
Class A
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 5.24 $ 4.84 $ 5.50 $ 5.11 $ 4.89 $ 3.71
------ ------ ------ ------ ------ ------
Income (loss) from investment operations# -
Net investment income[sec] $ 0.47 $ 0.45 $ 0.44 $ 0.40 $ 0.51 $ 0.56
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 0.10 0.39 (0.66) 0.48 0.24 1.21
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.57 $ 0.84 $(0.22) $ 0.88 $ 0.75 $ 1.77
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.46) $(0.44) $(0.43) $(0.42) $(0.51) $(0.56)
From net realized gain on
investments and foreign
currency transactions -- -- (0.01) (0.07) -- --
From paid-in capital -- -- -- -- (0.02) (0.03)
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.46) $(0.44) $(0.44) $(0.49) $(0.53) $(0.59)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 5.35 $ 5.24 $ 4.84 $ 5.50 $ 5.11 $ 4.89
------ ------ ------ ------ ------ ------
Total return++ 11.52% 17.97% (3.95)% 18.13% 16.36% 49.64%
Ratios (to average net assets)/
Supplemental data
Expenses## 1.02% 1.00% 0.99% 1.00% 1.03% 1.10%
Net investment income 8.92% 8.83% 8.65% 8.22% 10.21% 11.59%
Portfolio turnover 87% 59% 59% 68% 75% 28%
Net assets, end of period
(000,000 omitted) $ 672 $ 620 $ 524 $ 645 $ 585 $ 556
++Total returns for Class A shares do not include the applicable sales charge (except for
reinvestment of dividends prior to March 1, 1991). If the charge had been included, the results
would have been lower.
#Per share data for the period subsequent to January 31, 1994 is based on average shares
outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without
reduction for fees paid indirectly.
[sec]
</TABLE>
See notes to financial statements
19
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended January 31, 1991 1990 1989 1988
- ------------------------------------------------------------------------------------
Class A
--------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 4.85 $ 6.04 $ 6.17 $ 7.11
-------- ------- ------ -------
Income (loss) from investment operations# -
Net investment income $ 0.65 $ 0.69 $ 0.76 $ 0.77
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions (1.08) (1.13) (0.09) (0.83)
-------- ------- ------ -------
Total from investment
operations $ (0.43) $ (0.44) $ 0.67 $ (0.06)
-------- ------- ------ -------
Less distributions declared to shareholders -
From net investment income $ (0.71) $ (0.75) $(0.75) $ (0.87)
From net realized gain on
investments and foreign
currency transactions -- -- (0.05) (0.01)
From paid-in capital -- -- --** --*
-------- ------- ------ -------
Total distributions declared to
shareholders $ (0.71) $ (0.75) $(0.80) $ (0.88)
-------- ------- ------ -------
Net asset value - end of period $ 3.71 $ 4.85 $ 6.04 $ 6.17
-------- ------- ------ -------
Total return++ (10.99)% (9.18)% 10.68% (1.94)%
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.05% 0.87% 0.87% 0.75%
Net investment income 14.97% 12.17% 12.44% 11.49%
Portfolio turnover 24% 25% 34% 28%
Net assets, end of period
(000,000 omitted) $ 380 $ 574 $ 880 $1,001
++Total returns for Class A shares do not include the applicable sales charge (except for
reinvestment of dividends prior to March 1, 1991). If the charge had been included, the results
would have been lower.
#Per share data for the period subsequent to January 31, 1994 is based on average shares
outstanding.
*Includes a per share distribution from paid-in capital of $0.0006.
**Includes a per share distribution from paid-in capital of $0.0004.
</TABLE>
See notes to financial statements
20
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended January 31, 1997 1996 1995 1994*
- ---------------------------------------------------------------------------------
Class B
-----------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 5.24 $ 4.84 $ 5.50 $ 5.27
------ ------ ------- -------
Income (loss) from investment operations# -
Net investment income $ 0.43 $ 0.41 $ 0.39 $ 0.15
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 0.10 0.39 (0.65) 0.22
------ ------ ------- -------
Total from investment
operations $ 0.53 $ 0.80 $ (0.26) $ 0.37
------ ------ ------- -------
Less distributions declared to shareholders -
From net investment income $(0.42) $(0.40) $ (0.39) $ (0.13)
In excess of net investment income -- -- (0.01) (0.01)
------ ------ ------- -------
Total distributions declared to
shareholders $(0.42) $(0.40) $ (0.40) $ (0.14)
------ ------ ------- -------
Net asset value - end of period $ 5.35 $ 5.24 $ 4.84 $ 5.50
------ ------ ------- -------
Total return 10.66% 16.98% (4.77)% 20.29%+
Ratios (to average net assets)/
Supplemental data
Expenses## 1.79% 1.85% 1.85% 1.79%+
Net investment income 8.13% 7.99% 7.79% 6.94%+
Portfolio turnover 87% 59% 59% 68%
Net assets, end of period
(000,000 omitted) $ 301 $ 283 $ 286 $ 371
*For the period from the commencement of offering of Class B shares, September 27, 1993 to
January 31, 1994.
+Annualized.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares
outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without
reduction for fees paid indirectly.
</TABLE>
See notes to financial statements
21
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended January 31, 1997 1996 1995 1994** 1997***
- ---------------------------------------------------------------------------------------------
Class C Class I
----------------------------------------- ---------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 5.25 $ 4.85 $ 5.50 $ 5.41 $ 5.34
------ ------ ------- ------- -------
Income (loss) from investment operations# -
Net investment income $ 0.43 $ 0.41 $ 0.41 $ -- $ 0.04
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 0.11 0.39 (0.66) 0.09 0.01
------ ------ ------- ------- -------
Total from investment
operations $ 0.54 $ 0.80 $ (0.25) $ 0.09 $ 0.05
------ ------ ------- ------- -------
Less distributions declared to shareholders -
From net investment income $(0.43) $(0.40) $ (0.39) $ -- $ (0.04)
In excess of net investment income -- -- (0.01) -- --
------ ------ ------- ------- -------
Total distributions declared to
shareholders $(0.43) $(0.40) $ (0.40) $ -- $ (0.04)
------ ------ ------- ------- -------
Net asset value - end of period $ 5.36 $ 5.25 $ 4.85 $ 5.50 $ 5.35
------ ------ ------- ------- -------
Total return 10.71% 17.03% (4.51)% 20.94%+ 0.91%++
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.72% 1.77% 1.79% 1.36%+ 0.59%+
Net investment income 8.16% 8.02% 8.01% 5.92%+ 8.70%+
Portfolio turnover 87% 59% 59% 68% 87%
Net assets, end of period
(000,000 omitted) $ 28 $ 16 $ 3 $ 1 $ 3
**For the period from the commencement of offering of Class C shares, January 3, 1994 to
January 31, 1994.
***For the period from the commencement of offering of Class I shares, January 1, 1997 to
January 31, 1997.
#Per share data for the periods subsequent to January 31, 1994 is based on average shares
outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without
reduction for fees paid indirectly.
+Annualized.
++Not annualized.
</TABLE>
See notes to financial statements
22
<PAGE>
Notes to Financial Statements
(1) Business and Organization
MFS High Income (the Fund) is a diversified series of MFS Series Trust III (the
Trust). The Trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Equity
securities listed on securities exchanges or reported through the NASDAQ system
are valued at last sale prices. Unlisted equity securities or listed equity
securities for which last sale prices are not available are valued at last
quoted bid prices. Securities for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Trustees.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Dividend
income is recorded on the ex-dividend date for dividends received in cash.
Dividend and interest payments received in additional securities are recorded on
the ex-dividend or ex-interest date in an amount equal to the value of the
security on such date.
The Fund can invest up to 100% of its portfolio in high-yield securities rated
below investment grade. Investments in high-yield securities involve greater
degrees of credit and market risk than investments in higher-rated securities,
and tend to be more sensitive to economic conditions.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded
ratably by the Fund at a constant yield to maturity. Legal fees and other
related expenses incurred to preserve and protect the value of a security owned
are added to the cost of the security; other legal fees are expensed. Capital
23
<PAGE>
Notes to Financial Statements - continued
infusions, which are generally non-recurring, incurred to protect or enhance the
value of high-yield debt securities, are reported as an addition to the cost
basis of the security. Costs that are incurred to negotiate the terms or
conditions of capital infusions or that are expected to result in a plan of
reorganization are reported as realized losses. Ongoing costs incurred to
protect or enhance an investment, or costs incurred to pursue other claims or
legal actions, are reported as operating expenses
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the Fund.
This amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Fund's tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Foreign taxes
have been provided for on interest and dividend income earned on foreign
investments in accordance with the applicable country's tax rates and to the
extent unrecoverable are recorded as a reduction of investment income.
Distributions to shareholders are recorded on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended January 31, 1997, $3,931,675 was reclassified from
accumulated undistributed net investment income to accumulated net realized loss
on investments due to differences between book and tax accounting for defaulted
securities. This change had no effect on the net assets or net asset value per
share.
24
<PAGE>
Notes to Financial Statements - continued
At January 31, 1997, the Fund, for federal income tax purposes, had a capital
loss carryforward of $267,129,382 which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration.
<TABLE>
<CAPTION>
Year Ending January 31, Amount
- ------------------------- ------------
<S> <C>
1998 $28,299,632
1999 91,805,710
2000 64,105,312
2001 16,884,352
2003 30,373,319
2004 35,661,057
2005 280,544
------------
Total $267,129,382
------------
</TABLE>
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B, Class C and Class I shares. The four classes of shares differ in their
respective, distribution and service fees. All shareholders bear the common
expenses of the Fund pro rata based on average daily net assets of each class,
without distinction between share classes. Dividends are declared separately for
each class. No class has preferential dividend rights; differences in per share
dividend rates are generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.19% of
average daily net assets and 2.64% of gross income.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $15,147 for the year ended
January 31, 1997.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$193,347 for the year ended January 31, 1997, as its portion of the sales charge
on sales of Class A shares of the Fund. The Trustees have adopted separate
distribution plans for Class A, Class B and Class C shares pursuant to Rule
12b-1 of the Investment Company Act of 1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
25
<PAGE>
Notes to Financial Statements - continued
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum (currently reduced to a maximum of 0.15% per annum for shares
purchased prior to March 1, 1991) of the Fund's average daily net assets
attributable to Class A shares which are attributable to that securities dealer,
a distribution fee to MFD of up to 0.10% per annum of the Fund's average daily
net assets attributable to Class A shares, commissions to dealers and payments
to MFD wholesalers for sales at or above a certain dollar level, and other such
distribution-related expenses that are approved by the Fund. MFD retains the
service fee for accounts not attributable to a securities dealer which amounted
to $335,369 for the year ended January 31, 1997. Payment of 0.05% of the 0.10%
per annum Class A distribution fee will commence on such date as the Trustees of
the Trust may determine. Fees incurred under the distribution plan during the
year ended January 31, 1997 were 0.30% of average daily net assets attributable
to Class A shares on an annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per annum,
of the Fund's average daily net assets attributable to Class B and Class C
shares. MFD will pay to securities dealers that enter into a sales agreement
with MFD all or a portion of the service fee attributable to Class B and Class C
shares, and will pay to such securities dealers all of the distribution fee
attributable to Class C shares. The service fee is intended to be additional
consideration for services rendered by the dealer with respect to Class B and
Class C shares. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $83,911 and $5,874 for Class B and Class C
shares, respectively, for the year ended January 31, 1997. Fees incurred under
the distribution plans during the year ended January 31, 1997 were 1.00% of
average daily net assets attributable to Class B and Class C shares on an
annualized basis.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within 12 months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class C shares in the event of a shareholder redemption within 12 months of
purchases made on or after April 1, 1996. MFD receives all contingent deferred
sales charges. Contingent deferred sales charges imposed during the year ended
January 31, 1997 were $24,467, $441,696 and $3,591 for Class A, Class B and
Class C shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the Fund's average daily net assets at an effective annual rate of
26
<PAGE>
Notes to Financial Statements - continued
0.13%. Prior to January 1, 1997, the fee was calculated as a percentage of
average daily assets of each class of shares at an effective annual rate of up
to 0.15%, up to 0.22% and up to 0.15% attributable to Class A, Class B, and
Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, aggregated $829,161,143 and $768,212,735, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
<TABLE>
<S> <C>
Aggregate cost $948,501,730
=============
Gross unrealized appreciation 54,284,000
Gross unrealized depreciation (29,745,661)
------------
Net unrealized appreciation $ 24,538,339
=============
</TABLE>
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Class A Shares
<TABLE>
<CAPTION>
Year Ended January 31, 1997 Year Ended January 31, 1996
------------------------------- -------------------------------
Shares Amount Shares Amount
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Shares sold 52,421,821 $ 275,165,167 43,551,810 $ 222,082,736
Shares issued to
shareholders in
reinvestment of
distributions 6,071,848 31,874,153 5,871,784 30,043,510
Shares reacquired (51,220,588) (268,276,630) (39,142,858) (200,253,761)
------------ ------------- ------------ -------------
Net increase 7,273,081 $ 38,762,690 10,280,736 $ 51,872,485
============ ============= ============ =============
</TABLE>
Class B Shares
<TABLE>
<CAPTION>
Year Ended January 31, 1997 Year Ended January 31, 1996
------------------------------- -------------------------------
Shares Amount Shares Amount
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Shares sold 35,443,924 $ 185,987,481 37,144,640 $ 188,766,014
Shares issued to
shareholders in
reinvestment of
distributions 2,271,608 11,933,444 2,276,017 11,631,868
Shares reacquired (35,539,089) (187,014,906) (44,373,502) (226,482,750)
------------ ------------- ------------ -------------
Net increase
(decrease) 2,176,443 $ 10,906,019 (4,952,845) $ (26,084,868)
============ ============= ============ =============
</TABLE>
27
<PAGE>
Notes to Financial Statements - continued
Class C Shares
<TABLE>
<CAPTION>
Year Ended January 31, 1997 Year Ended January 31, 1996
------------------------------- -------------------------------
Shares Amount Shares Amount
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Shares sold 4,433,093 $ 23,275,757 4,854,733 $ 24,711,921
Shares issued to
shareholders in
reinvestment of
distributions 203,510 1,071,206 87,659 449,963
Shares reacquired (2,477,675) (12,968,265) (2,541,586) (12,938,624)
----------- ------------ ----------- ------------
Net increase 2,158,928 $ 11,378,698 2,400,806 $ 12,223,260
============ ============ ============ ============
</TABLE>
Class I Shares
<TABLE>
<CAPTION>
Year Ended January 31, 1997*
----------------------------
Shares Amount
--------- ----------
<S> <C> <C>
Shares sold 568,279 $3,034,610
Shares issued to
shareholders in
reinvestment of
distributions 4,076 21,807
--------- ----------
Net increase 572,355 $3,056,417
--------- ----------
</TABLE>
*For the period from the commencement of offering of Class I shares, January 1,
1997, to January 31, 1997.
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended January 31,
1997 was $9,829.
(7) Transactions in Securities of Affiliated Issuers
Affiliated issuers, as defined under the Investment Company Act of 1940, are
those in which the Fund's holdings of an issuer represent 5% or more of the
outstanding voting securities of the issuer. A summary of the Fund's
transactions in the securities of these issuers during the year ended, January
31, 1997 is set forth on the following page.
28
<PAGE>
Notes to Financial Statements - continued
<TABLE>
<CAPTION>
Beginning Ending
Share Share Dividend Ending
Affiliate Amount Amount Income Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ranger Industries, Inc. 266,768 266,768 $ -- $66,692
</TABLE>
(8) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At January 31, 1997 the
Fund owned the following restricted securities (constituting 0.92% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933 (the 1933 Act). The Fund does not have the right to demand that such
securities be registered. The value of these securities is determined by
valuations supplied by a pricing service or brokers or, if not available, in
good faith by or at the direction of the Trustees.
<TABLE>
<CAPTION>
Share/Par
Amount
Description Date of Acquisition (000 Omitted) Cost Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Atlantic Gulf Communities
Corp. 9/25/95 690 $ -- $ 3,363
Envirosource, Inc. 5/15/91 1,666 7,289 3,228
Merrill Lynch Mortgage
Investors, Inc., 8.142s,
2023 6/22/94 4,500 3,119,063 3,622,500
Renaissance Cosmetics, Inc. 8/08/96 5,475 5,458,385 5,584,500
=========
$9,213,591
=========
</TABLE>
29
<PAGE>
Independent Auditors' Report
To the Trustees of MFS Series Trust III and Shareholders of
MFS High Income Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS High Income Fund (a series of MFS Series
Trust III) as of January 31, 1997, the related statement of operations for the
year then ended, the statement of changes in net assets for the years ended
January 31, 1997 and 1996, and the financial highlights for each of the years in
the ten-year period ended January 31, 1997. These financial statements and
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
January 31, 1997 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS High Income Fund
at January 31, 1997, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 6, 1997
--------------------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
30
<PAGE>
The MFS Family of Funds[RegTM]
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 MFS 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.
Stock
- --------------------------------------------
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS (R) Capital Growth Fund
MFS (R) Emerging Growth Fund
MFS (R) Gold & Natural Resources Fund
MFS (R) Growth Opportunities Fund
MFS (R) Managed Sectors Fund
MFS (R) OTC Fund
MFS (R) Research Fund
MFS (R) Research Growth and Income Fund
MFS (R) Value Fund
Stock and Bond
- --------------------------------------------
MFS (R) Total Return Fund
MFS (R) Utilities Fund
Bond
- --------------------------------------------
MFS (R) Bond Fund
MFS (R) Government Mortgage Fund
MFS (R) Government Securities Fund
MFS (R) High Income Fund
MFS (R) Intermediate Income Fund
MFS (R) Strategic Income Fund
Limited Maturity Bond
- --------------------------------------------
MFS (R) Government Limited Maturity Fund
MFS (R) Limited Maturity Fund
MFS (R) Municipal Limited Maturity Fund
World
- --------------------------------------------
MFS (R)/Foreign & Colonial Emerging
Markets Equity Fund
MFS (R)/Foreign & Colonial International
Growth Fund
MFS (R)/Foreign & Colonial International
Growth and Income Fund
MFS (R) World Asset Allocation Fund(SM)
MFS (R) World Equity Fund
MFS (R) World Governments Fund
MFS (R) World Growth Fund
MFS (R) World Total Return Fund
National Tax-Free Bond
- --------------------------------------------
MFS (R) Municipal Bond Fund
MFS (R) Municipal High Income Fund
MFS (R) Municipal Income Fund
State Tax-Free Bond
- --------------------------------------------
Alabama, Arkansas, California, Florida,
Georgia, Maryland, Massachusetts,
Mississippi, New York, North Carolina,
Pennsylvania, South Carolina, Tennessee,
Virginia, West Virginia
Money Market
- --------------------------------------------
MFS (R) Cash Reserve Fund
MFS (R) Government Money Market Fund
MFS (R) Money Market Fund
32
<PAGE>
MFS (R) High Income Fund
Trustees
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor; Former Chairman and Director (until
1991), Massachusetts Financial Services Company; Director, Cambridge Bancorp;
Director, Cambridge Trust Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive Officer, Eastern Enterprises
Lawrence T. Perera - Partner, Hemenway & Barnes
William J. Poorvu - Adjunct Professor, Harvard University Graduate School
of Business Administration
Charles W. Schmidt - Private Investor
Arnold D. Scott* - Senior Executive Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director, Massachusetts Financial Services
Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American Management Corp. (investment advisers)
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
Distributor MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
Portfolio Manager
Robert J. Manning*
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Custodian
State Street Bank and Trust Company
Auditors
Deloitte & Touche LLP
Investor Information For MFS stock and bond market outlooks, call toll free:
1-800-637-4458 anytime from a touch-tone telephone.
For information on MFS mutual funds, call your financial adviser or, for an
information kit, call toll free: 1-800-637-2929 any business day from 9 a.m. to
5 p.m. Eastern time (or leave a message anytime).
Investor Service
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free: 1-800-225-2606 any business day from 8
a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll free: 1-800-637-6576 any
business day from 9 a.m. to 5 p.m. Eastern time. To use this service, your phone
must be equipped with a Telecommunications Device for the Deaf.
For share prices, account balances, and exchanges, call toll free:
1-800-MFS-TALK (1-800-637-8255) anytime from a touch-tone telephone.
World Wide Web
www.mfs.com
Dalbar Logo
For the third year in a row, MFS earned a #1 ranking in the DALBAR, Inc.
Broker/Dealer Survey, Main Office Operations Service Quality Category. The firm
achieved a 3.48 overall score on a scale of 1 to 4 in the 1996 survey. A total
of 110 firms responded, offering input on the quality of service they received
from 29 mutual fund companies nationwide. The survey contained questions about
service quality in 15 categories, including "knowledge of phone service
contacts," "accuracy of transaction processing," and "overall ease of doing
business with the firm."
*Affiliated with the Investment Adviser
33
<PAGE>
COVER
[MFS LOGO] Annual Report
INVESTMENT MANAGEMENT for Year Ended
January 31, 1997
MFS (R) High Income Fund
[Picture on Cover of Documents and glasses.]
Learning financial basics the easy way (see page 31)
<PAGE>
BACK COVER
MFS (R) High Income
Fund
500 Boylston Street
Boston, MA 02116-3741
DALBAR LOGO #1
Bulk Rate
U.S. Postage
P A I D
Permit #55638
Boston, MA
[MFS LOGO]
INVESTMENT MANAGEMENT
We invented the mutual fund (SM)
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
MHI-2-3/97/72M 16/216
<PAGE>
PROSPECTUS
MFS(R) MUNICIPAL June 1, 1997
HIGH INCOME FUND Class A Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) Class B Shares of Beneficial Interest
- -------------------------------------------------------------------------------
Page
1. Expense Summary .................................................. 2
2. The Fund ......................................................... 3
3. Condensed Financial Information .................................. 4
4. Investment Objective and Policies ................................ 5
5. Investment Techniques ............................................ 6
6. Additional Risk Factors .......................................... 10
7. Management of the Fund ........................................... 11
8. Information Concerning Shares of the Fund ........................ 12
Purchases .................................................... 12
Exchanges .................................................... 17
Redemptions and Repurchases .................................. 18
Distribution Plan ............................................ 20
Distributions ................................................ 21
Tax Status ................................................... 21
Net Asset Value .............................................. 22
Description of Shares, Voting Rights and Liabilities ......... 22
Performance Information ...................................... 22
9. Shareholder Services ............................................. 23
Appendix A ................................................... A-1
Appendix B ................................................... B-1
Appendix C ................................................... C-1
Appendix D ................................................... D-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS MUNICIPAL HIGH INCOME FUND 500 Boylston Street, Boston, MA 02116
(617) 954-5000
The investment objective of MFS Municipal High Income Fund (the "Fund") is to
provide high current income exempt from federal income taxes. The Fund seeks to
achieve this objective by investing its assets primarily in municipal bonds and
notes which may be of medium and lower quality (see "Investment Objective and
Policies"). The Fund is a non-diversified series of MFS Series Trust III (the
"Trust"), an open-end investment company.
THE FUND MAY INVEST UP TO 100% OF ITS NET ASSETS IN LOWER-RATED MUNICIPAL BONDS,
COMMONLY KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING DEFAULT
RISKS, THAN THOSE FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD CAREFULLY
CONSIDER THESE RISKS BEFORE INVESTING (SEE "ADDITIONAL RISK FACTORS -- LOWER
RATED MUNICIPAL BONDS").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Trust and
the Fund that a prospective investor ought to know before investing. The Trust,
on behalf of the Fund, has filed with the Securities and Exchange Commission
(the "SEC") a Statement of Additional Information dated June 1, 1997, as amended
or supplemented from time to time (the "SAI"), which contains more detailed
information about the Trust and the Fund. The SAI is incorporated into this
Prospectus by reference. See page 25 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number). The SEC maintains an Internet World Wide Web site that
contains the SAI, materials that are incorporated by reference into this
Prospectus and the SAI, and other information regarding the Fund. This
Prospectus is available on the Adviser's Internet World Wide Web site at
http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
<TABLE>
<CAPTION>
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B
<S> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund Shares (as a
percentage of offering price) ........................................ 4.75% 0.00%
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase or redemption proceeds, as
applicable) .......................................................... See Below(1) 4.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ........................................................ 0.67 % 0.67 %
Rule 12b-1 Fees ........................................................ 0.00 % 0.88 %(2)
Other Expenses(3) ...................................................... 0.275% 0.275%
----- -----
Total Operating Expenses ............................................... 0.945% 1.825%
</TABLE>
- ----------
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a Contingent Deferred
Sales Charge (a "CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such
purchases. See "Information Concerning Shares of the Fund -- Purchases"
below.
(2) The Fund has adopted a distribution plan for its Class B shares in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act") (the "Distribution Plan"), which provides that it
will pay distribution/service fees aggregating up to (but not necessarily
all of) 1.00% per annum of the average daily net assets attributable to the
Class B shares. Except in the case of the 0.25% per annum Class B service
fee paid by the Fund upon the sale of Class B shares, payment of the Class B
service fee will be suspended until such date as the Trustees of the Trust
may determine. Distribution expenses paid under the Plan with respect to
Class B shares, together with any CDSC, may cause long-term shareholders to
pay more than the maximum sales charge that would have been permissible if
imposed entirely as an initial sales charge. See "Information Concerning
Shares of the Fund -- Distribution Plan" below.
(3) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
PERIOD CLASS A CLASS B
- ------ ---------- -----------------------
(1)
1 year .................. $ 57 $ 59 $ 19
3 years ................. 76 87 57
5 years ................. 97 119 99
10 years ................. 158 191(2) 191(2)
- ------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
The purpose of the expense table provided above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. More complete descriptions of the following
expenses of the Fund are set forth in the following sections of the Prospectus:
(i) varying sales charges on share purchases -- "Purchases"; (ii) varying CDSCs
- -- "Purchases"; (iii) management fees -- "Investment Adviser"; and (iv) Rule
12b-1 (i.e., distribution plan) fees -- "Distribution Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
<PAGE>
2. THE FUND
The Fund is a non-diversified series of the Trust, an open-end management
investment company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts in 1977. The Trust presently consists of two
series, each of which represents a portfolio with separate investment policies.
Two classes of shares of the Fund are offered for sale to the general public.
Class A shares are offered at net asset value plus an initial sales charge up to
a maximum of 4.75% of the offering price (or a CDSC of 1.00% upon redemption
during the first year in the case of certain purchases of $1 million or more and
certain purchases by retirement plans). Class B shares are offered at net asset
value without an initial sales charge but are subject to a CDSC upon redemption
(declining from 4.00% during the first year to 0% after 6 years) and an annual
distribution fee and service fee up to a maximum of 1.00% per annum. Class B
shares will convert to Class A shares approximately eight years after purchase.
The Fund buys securities (primarily municipal bonds and notes that may be in the
medium or lower rating categories or may be unrated, the interest on which is
exempt from federal income tax) for its portfolio.
In June 1985, the Trust's Board of Trustees decided to terminate sales of Fund
shares, other than to the Fund's shareholders, because the Fund had attained
optimal size for management purposes. The Board of Trustees voted to re-open the
Fund for sales to new shareholders for the period from March 1, 1989 to the
close of business on March 23, 1989. During such period the Fund's net assets
increased by approximately $109 million as a result of such additional
investments. The Board of Trustees voted again to re-open the Fund for sales to
new shareholders for the period from February 6, 1990 to the close of business
on February 7, 1990. During such period, the Fund's net assets increased by
approximately $205 million as a result of such additional investments. On
February 28, 1990, the sale of Fund shares to existing shareholders (other than
through the reinvestment of dividends and capital gains of the Fund) was
terminated. On November 5, 1990, Fund shares were made available for sale to
existing shareholders only. Upon a vote by the Board of Trustees, the Fund was
again reopened for sales to new shareholders for one day, June 3, 1994. During
such day, the Fund's net assets increased by approximately $189 million as a
result of such additional investments. On August 5, 1996, Class A shares and
Class B shares of the Fund became available for sale to new shareholders.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. MFS is the Fund's investment adviser. A majority of the Trustees are not
affiliated with the Adviser. The Adviser is responsible for the management of
the assets of the Fund and the officers of the Trust are responsible for the
Fund's operations. The Adviser manages the Fund's portfolio from day to day in
accordance with the investment objective and policies of the Fund. The selection
of investments and the way they are managed depend on the conditions and trends
in the economy and the financial marketplaces. The Fund also offers to buy back
(redeem) its shares from its shareholders at any time at their net asset value,
less any applicable CDSC.
<PAGE>
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the SAI in reliance upon the report of the Fund's
independent auditors, given upon their authority as experts in accounting and
auditing. The Fund's independent auditors are Ernst & Young LLP.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
YEAR ENDED JANUARY 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
---- ---- ---- ----- ---- ----- -----
CLASS A
-------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value -- beginning of period .............. $ 9.12 $ 8.60 $ 9.38 $ 9.26 $ 9.22 $ 9.09 $ 9.45
----- ----- ----- ----- ----- ------ ------
Income from investment operations# --
Net investment income ............................. $ 0.61 $ 0.61 $ 0.64 $ 0.77 $ 0.73 $ 0.73 $ 0.74
Net realized and unrealized gain (loss)
on investments .................................. (0.36) 0.59 (0.75) 0.05 0.06 0.17 (0.32)
------ ------ ------ ------ ------ ------ ------
Total from investment operations ................ $ 0.25 $ 1.20 $(0.11) $ 0.82 $ 0.79 $ 0.90 $ 0.42
------ ------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ........................ $(0.64) $(0.68) $(0.67) $(0.70) $(0.75) $(0.77) $(0.78)
From net realized gain on investments ............. -- -- -- -- -- -- --
From paid-in capital .............................. -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ -----
Total distributions declared to shareholders $(0.64) $(0.68) $(0.67) $(0.70) $(0.75) $(0.77) $(0.78)
------ ------ ------ ------ ------ ------ ------
Net asset value -- end of period .................... $ 8.73 $ 9.12 $ 8.60 $ 9.38 $ 9.26 $ 9.22 $ 9.09
====== ====== ====== ====== ====== ====== ======
Total return(+) ..................................... 2.87% 13.92% (1.04)% 9.19% 9.02% 10.34% 4.65%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ........................................ 0.93% 0.93% 1.04% 1.10% 1.00% 1.03% 1.05%
Net investment income ............................. 6.96% 6.83% 7.27% 7.15% 7.95% 7.96% 8.17+%
PORTFOLIO TURNOVER .................................. 17% 20% 32% 18% 10% 21% 41%
NET ASSETS AT END OF PERIOD (000 OMITTED) .......... $988,178 $1,009,031 $920,043 $809,957 $731,968 $648,043 $638,185
</TABLE>
#Per share data for the periods subsequent to January 31, 1995 is based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses
are calculated without reduction for fees paid indirectly.
(++)Total returns for Class A shares do not include the applicable sales
charge (except for reinvested dividends prior to October 1, 1989). If
the charge had been included, the results would have been lower.
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-----------------------------------------------------------------------
1990 1989 1988 1997 1996 1995 1994*
---- ---- ---- ----- ---- ----- -----
CLASS A CLASS B
------- -------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value -- beginning of period .............. $ 9.55 $ 9.68 $10.38 $ 9.12 $ 8.60 $ 9.38 $ 9.40
----- ----- ----- ----- ----- ------ ------
Income from investment operations# --
Net investment income ............................. $ 0.85 $ 0.88 $ 0.84 $ 0.52 $ 0.52 $ 0.57 $ 0.32
Net realized and unrealized gain (loss)
on investments .................................. (0.09) (0.12) (0.67) (0.35) 0.59 (0.78) (0.14)
------ ------ ------ ------ ------ ------ ------
Total from investment operations ................ $ 0.76 $ 0.76 $ 0.17 $ 0.17 $ 1.11 $(0.21) $ 0.18
------ ------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ........................ $(0.81) $(0.82) $(0.84) $(0.55) $(0.59) $(0.57) $(0.20)
From net realized gain on investments ............. (0.04) (0.07) (0.03) -- -- -- --
From paid-in capital .............................. (0.01) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ -----
Total distributions declared to shareholders $(0.86) $(0.89) $(0.87) $(0.55) $(0.59) $(0.57) $(0.20)
------ ------ ------ ------ ------ ------ ------
Net asset value -- end of period .................... $ 9.45 $ 9.55 $ 9.68 $ 8.74 $ 9.12 $ 8.60 $ 9.38
====== ====== ====== ====== ====== ====== ======
Total return(+) ..................................... 8.24% 8.32% 1.87% 1.96% 12.78% (2.13)% 1.89%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ........................................ 1.02% 0.65% 1.03% 1.86% 1.91% 2.10% 2.04%+
Net investment income ............................. 8.90% 9.27% 8.54% 6.00% 5.84% 6.32% 5.43+%
PORTFOLIO TURNOVER .................................. 21% 23% 16% 17% 20% 32% 18%
NET ASSETS AT END OF PERIOD (000 OMITTED) .......... $485,037 $325,044 $349,655 $125,971 $77,808 $55,675 $1
</TABLE>
*For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
#Per share data for the periods subsequent to January 31, 1995 is based on
average shares outstanding.
+Annualized.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(++)Total returns for Class A shares do not include the applicable sales
charge (except for reinvested dividends prior to October 1, 1989). If the
charge had been included, the results would have been lower.
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The investment objective of the Fund is to provide high
current income exempt from federal income taxes. Any investment involves risk
and there can be no assurance that the Fund will achieve its investment
objective.
INVESTMENT POLICIES -- The Fund seeks to achieve its investment objective by
investing primarily (i.e., at least 80% of its assets under normal
circumstances) in debt securities issued by or on behalf of states, territories
and possessions of the United States, the District of Columbia and their
political subdivisions, agencies or instrumentalities, the interest on which is
exempt from federal income tax ("Municipal Bonds" or "tax-exempt securities").
The interest income on certain of these obligations may be subject to an
alternative minimum tax, which is considered to be tax-exempt for purposes of
the 80% test described above. Under normal circumstances, the Fund will invest
at least 65% of its total assets in tax-exempt securities which offer a current
yield above that generally available on tax-exempt securities in the three
highest rating categories of the recognized rating agencies (commonly known as
"junk bonds" if rated below the four highest categories of recognized rating
agencies). For a comparison of yields on Municipal Bonds and taxable securities,
see Appendix B to this Prospectus, for a general discussion on Municipal Bonds
and their rating categories, see Appendix C, and for a chart showing the Fund's
fixed income securities broken down by rating category, see Appendix D. The Fund
may invest up to 100% of its net assets in these lower-rated securities. Such
high risk securities generally involve greater volatility of price and greater
risk of nonpayment of principal and interest (including the possibility of
default by or bankruptcy of the issuers of such securities) than securities in
higher rating categories. See "Additional Risk Factors -- Lower-Rated Municipal
Bonds" below. However, since available yields and yield differentials vary over
time, no specific level of income or yield differential can ever be assured.
Also, any income earned on portfolio securities would be reduced by the expenses
of the Fund before it is distributed to shareholders.
The value of the tax-exempt securities that the Fund intends to purchase may be
less sensitive to market factors than other securities; however, they may be
more sensitive to changes in the perception of the credit quality of such
securities, or of similar types of securities or of securities issued within the
same geographical region. Changes in the value of securities subsequent to their
acquisition will not affect income or yields to maturity of the Fund's portfolio
securities but will be reflected in the net asset value of the shares of the
Fund. In order to preserve or enhance the value of its investments, the Fund
may, on occasion, make additional capital expenditures beyond the initial cost
of an investment. The Fund will seek to reduce risk through diversification,
credit analysis and attention to current developments and trends in both the
economy and financial markets.
The net asset value of the shares of an open-end investment company, such as the
Fund, which invests primarily in fixed income tax-exempt securities, changes as
the general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested at higher yields can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested at lower
yields can be expected to decline.
When the Adviser believes that investing for temporary defensive purposes is
appropriate, such as during periods of unusual market conditions or at times
when yield spreads are narrow and the higher yields do not justify the increased
risk or if acceptable quantities of higher yielding securities are unavailable,
the Fund may either invest in tax-exempt securities in the higher rating
categories of recognized rating agencies (that is, ratings of A or higher by
Moody's Investors Service, Inc., ("Moody's"), Standard & Poor's Ratings Services
("S&P"), Fitch Investors Service, Inc. ("Fitch") or Duff & Phelps Credit Rating
Co. ("Duff & Phelps") or comparable unrated tax-exempt securities) or in cash or
cash equivalent short-term obligations of similar quality (i.e., with ratings
equivalent to A or better by Moody's, S&P, Fitch or Duff & Phelps or comparable
unrated tax-exempt securities) including, but not limited to, short-term
municipal obligations, certificates of deposit, commercial paper, short-term
notes, obligations issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities and repurchase agreements. From time to time, a
portion of the Fund's distributions will be taxable to shareholders (e.g.,
distributions of income from taxable obligations, from capital gains, from
transactions in certain Municipal Bonds purchased at market discount and from
certain other transactions).
The Fund may invest in a relatively high percentage of municipal bonds issued by
entities having similar characteristics. The issuers may be located in the same
geographic area, or may pay interest on their obligations from revenue of
similar projects such as hospitals, electric utility systems, multi-family
housing, nursing homes, commercial facilities (including hotels), steel
companies or life care facilities. This may make the Fund more susceptible to
similar economic, political or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation of the net asset value of
shares of the Fund also increases.
The Fund reserves the right to invest more than 25% of its assets in industrial
revenue bonds, including industrial revenue bonds issued for hospitals, electric
utility systems, multi-family housing, nursing homes, commercial facilities
(including hotels), steel companies and life care facilities. See the SAI for a
discussion of the risks which these investments might entail. Certain of the
bonds issued for these purposes provide financing for construction or
rehabilitation of facilities as described above. As such they are susceptible to
various construction related risks, including labor costs and environmental,
zoning and site development considerations, as well as the ability of
contractors to perform within time and cost constraints.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Bonds. See "Information Concerning Shares of the Fund --
Tax Status" below for the effect of current federal tax law on this exemption.
5. INVESTMENT TECHNIQUES
Consistent with the Fund's investment objective and policies, the Fund may
engage in the following investment techniques, many of which are described more
fully in the SAI. See "Investment Objective, Policies and Restrictions" in the
SAI.
ZERO COUPON BONDS: Municipal Bonds in which the Fund may invest also include
zero coupon bonds. Zero coupon bonds are debt obligations which are issued at a
significant discount from face value and do not require the periodic payment of
interest. The discount approximates the total amount of interest the bonds will
accrue and compound over the period until maturity or the first interest payment
date at a rate of interest reflecting the market rate of the security at the
time of issuance. Zero coupon bonds benefit the issuer by mitigating its need
for cash to meet debt service, but also require a higher rate of return to
attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value due to changes in
interest rates than debt obligations which make regular payments of interest.
The Fund will accrue income on such investments for tax and accounting purposes,
as required, which is distributable to shareholders and which, because no cash
is received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Fund's distribution obligations. Because of
the higher rates of return, such investments are regarded by the Fund as
consistent with its investment objective.
INVERSE FLOATING RATE OBLIGATIONS: The Fund may invest in so called "inverse
floating rate obligations" or "residual interest" bonds, or other obligations or
certificates relating thereto structured to have similar features. Such
obligations generally have floating or variable interest rates that move in the
opposite direction of short-term interest rates and generally increase or
decrease in value in response to changes in short-term interest rates at a rate
which is a multiple (typically two) of the rate at which fixed-rate long-term
tax-exempt securities increase or decrease in response to such changes. As a
result, such obligations have the effect of providing investment leverage and
may be more volatile than long-term fixed rate tax exempt obligations.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize risk.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion of its assets
in loans. By purchasing a loan, the Fund acquires some or all of the interest of
a bank or other lending institution in a loan to a corporate borrower. Many such
loans are secured, and most impose restrictive covenants which must be met by
the borrower. These loans are made generally to finance internal growth,
mergers, acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans may be in default at the time of purchase. The Fund may
also purchase trade or other claims against companies, which generally represent
money owed by the company to a supplier of goods and services. These claims may
also be purchased at a time when the company is in default. Certain of the loans
acquired by the Fund may involve revolving credit facilities or other standby
financing commitments which obligate the Fund to pay additional cash on a
certain date or on demand.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loans and other
direct investments may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, the Fund may be unable to sell such investments
at an opportune time or may have to resell them at less than fair market value.
"WHEN-ISSUED" SECURITIES: Some tax-exempt securities may be purchased on a
"when-issued" or on a "forward delivery" basis, which means that the obligations
will be delivered to the Fund at a future date, usually beyond customary
settlement time. The commitment to purchase a security for which payment will be
made on a future date may be deemed a separate security. Although the Fund is
not limited as to the amount of tax-exempt securities for which it has such
commitments, it is expected that under normal circumstances, the Fund will not
commit more than 30% of its assets to such purchases. The Fund does not pay for
the securities until received, and does not start earning interest on the
securities until the contractual settlement date. In order to invest its assets
immediately while awaiting delivery of securities purchased on such bases, the
Fund will normally invest in short-term securities that offer same-day
settlement and earnings, but that may bear interest at a lower rate than
longer-term securities; however, the Fund also may invest in longer-term
securities. It is the intention of the Fund that these investments will usually
be in securities the interest on which is exempt from federal income tax.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to interest rates, commodities, indices or other financial indicators.
Most indexed securities are short to intermediate term fixed-income securities
whose values at maturity (i.e. principal value) or interest rates rise or fall
according to changes in the value of one or more specified underlying
instruments. Indexed securities may be positively or negatively indexed (i.e.,
their principal value or interest rates may increase or decrease if the
underlying instrument appreciates), and may have return characteristics similar
to direct investments in the underlying instrument or to one or more options on
the underlying instrument. Indexed securities may be more volatile than the
underlying instrument itself and could involve the loss of all or a portion of
the principal amount of the instrument.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933 ("1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). A determination is made, based upon a continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to a Fund's limitation on investing not more than
15% of its net assets in illiquid investments. The Board of Trustees has adopted
guidelines and delegated to MFS the daily function of determining and monitoring
the liquidity of Rule 144A securities. The Board, however, retains oversight,
focusing on factors, such as valuation, liquidity and availability of
information. Investing in Rule 144A securities could have the effect of
decreasing the level of liquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing Rule 144A
securities held in the Fund's portfolio. Subject to the Fund's 15% limitation on
investments in illiquid investments, the Fund may also invest in restricted
securities that may not be sold under Rule 144A, which presents certain risks.
As a result, the Fund might not be able to sell these securities when the
Adviser wishes to do so, or might have to sell them at less than fair value. In
addition, market quotations are less readily available. Therefore, judgment may
at times play a greater role in valuing these securities than in the case of
unrestricted securities.
OPTIONS ON SECURITIES: The Fund intends to write (sell) "covered" put and call
options on fixed income securities. Call options written by the Fund give the
holder the right to buy the underlying securities from the Fund at a fixed
exercise price up to a stated expiration date or, in the case of certain
options, on such date. Put options written by the Fund give the holder the right
to sell the underlying securities to the Fund during the term of the option at a
fixed exercise price up to a stated expiration date or, in the case of certain
options, on such date. Call options are "covered" by the Fund, for example, when
it owns the underlying securities, and put options are "covered" by the Fund,
for example, when it has established a segregated account of liquid assets which
can be liquidated promptly to satisfy any obligation of the Fund to purchase the
underlying securities. The Fund may also write straddles (combinations of puts
and calls on the same underlying security). Such transactions generate
additional premium income but also include greater risk.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand and interest rates. By writing a call option, the Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option. By writing a put option, the
Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price higher than its then-current market value,
resulting in a potential capital loss unless the security subsequently
appreciates in value.
The Fund may terminate an option that it has written prior to its expiration by
entering into a closing purchase transaction in which it purchases an option
having the same terms as the option written. It is possible, however, that
illiquidity in the options markets may make it difficult from time to time for
the Fund to close out its written option positions.
The Fund may also purchase put or call options in anticipation of changes in
interest rates which may adversely affect the value of its portfolio or the
prices of securities that the Fund wants to purchase at a later date. The
premium paid for a put or call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security changes sufficiently, the option may expire
without value to the Fund.
The Fund intends to write and purchase options on securities for hedging
purposes and also in an effort to increase current income, which involves
greater risk. Options on securities that are written or purchased by the Fund
will be traded on U.S. exchanges and over-the-counter.
The Fund may purchase detachable call options on municipal securities, which are
options issued by an issuer of the underlying municipal securities giving the
purchaser the right to purchase the securities at a fixed price, up to a stated
time in the future, or in some cases, on a future date.
In addition, the Fund may purchase warrants on fixed income securities. A
warrant on a fixed income security is a long-dated call option conveying to the
holder of the warrant the right, but not the obligation, to purchase a fixed
income security of a specific description (from the issuer) on a certain date or
dates (the exercise date) at a fixed exercise price.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and
sell futures contracts on fixed income securities or indices of such securities,
including Municipal Bond indices and any other indices of fixed income
securities which may become available for trading ("Futures Contracts"). The
Fund may also purchase and write options on such Futures Contracts ("Options on
Futures Contracts"). These instruments will be used to hedge against anticipated
future changes in interest rates which otherwise might either adversely affect
the value of the Fund's portfolio securities or adversely affect the prices of
securities which the Fund intends to purchase at a later date. Should interest
rates move in an unexpected manner, the Fund may not achieve the anticipated
benefits of the hedging transactions and may realize a loss. Such transactions
may also be entered into for non-hedging purposes to the extent permitted by
applicable law, which involves greater risk and may result in losses which are
not offset by gains on other portfolio assets.
In order to assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the Commodity Futures
Trading Commission (the "CFTC") require that the Fund enter into transactions in
Futures Contracts and Options on Futures Contracts only (i) for bona fide
hedging purposes (as defined in CFTC regulations), or (ii) for non-hedging
purposes, provided that the aggregate initial margin and premiums on such
non-hedging positions does not exceed 5% of the liquidation value of the Fund's
assets. In addition, the Fund must comply with the requirements of various state
securities laws in connection with such transactions.
The Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
options on securities or on Futures Contracts, if as a result, more than 5% of
its total assets would be invested in such options.
Futures Contracts and Options on Futures Contracts that are entered into by
the Fund will be traded on U.S. exchanges.
PORTFOLIO TRADING: The Fund intends to engage in portfolio trading rather than
holding all portfolio securities to maturity. In trading portfolio securities,
the Fund seeks to take advantage of market developments, yield disparities and
variations in the creditworthiness of issuers.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Conduct Rules
of the National Association of Securities Dealers, Inc., (the "NASD") and such
other policies as the Trustees may determine, the Adviser may consider sales of
shares of the Fund and of the other investment company clients of MFD as a
factor in the selection of broker-dealers to execute the portfolio transactions
of the Fund. From time to time, the Adviser may direct certain portfolio
transactions to broker-dealer firms which, in turn, have agreed to pay a portion
of the Fund's operating expenses (e.g., fees charged by the custodian of the
Fund's assets). For a further discussion of portfolio trading, see "Portfolio
Trading" in the Fund's SAI.
----------------
The investment objective and policies of the Fund described above may be changed
without shareholder approval.
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the investment policies of the
Fund. Except as otherwise indicated, the Fund's specific investment restrictions
listed in the SAI may be changed without the approval of the shareholders of the
Fund unless indicated otherwise (see "Investment Restrictions" in the SAI). 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.
6. ADDITIONAL RISK FACTORS
LOWER-RATED MUNICIPAL BONDS: Tax-exempt securities offering the high current
income sought by the Fund are ordinarily in the medium and lower rating
categories of recognized rating agencies or are unrated and, therefore,
generally are high risk securities involving greater volatility of price
(especially during periods of economic uncertainty or change) and risk of
principal (including the possibility of default by or bankruptcy of the issuers
of such securities) and income than securities in the higher rating categories
and because yields vary over time, no specific level of income can ever be
assured. No minimum rating is required by the Fund. In particular, securities
rated BBB by S&P, Fitch or Duff & Phelps or Baa by Moody's or comparable unrated
securities, while normally exhibiting adequate protection parameters, have
speculative characteristics and changes in economic conditions and other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade Municipal Bonds.
Securities rated lower than BBB by S&P, Fitch or Duff & Phelps or Baa by Moody's
or comparable unrated securities (high risk securities) are considered
speculative. While such high risk securities may have some quality and
protective characteristics, they can be expected to be outweighed by large
uncertainties or major risk exposures to adverse conditions. These Municipal
Bonds will be affected by the market's perception of their credit quality,
economic changes and the outlook for economic growth to a greater extent than
higher rated securities which react primarily to fluctuations in the general
level of interest rates. Medium and lower-rated Municipal Bonds are also
affected by changes in interest rates, as noted in "Investment Objective and
Policies" above. Furthermore, an economic downturn may result in a higher
incidence of defaults by issuers of these securities. During certain periods,
the higher yields on the Fund's lower-rated high yielding fixed income
securities are paid primarily because of the increased risk of loss of principal
and income, arising from such factors as the heightened possibility of default
or bankruptcy of the issuers of such securities. Due to the fixed income
payments of these securities, the Fund may continue to earn the same level of
interest income while its net asset value declines due to portfolio losses,
which could result in an increase in the Fund's yield despite the actual loss of
principal.
In addition, medium and lower-rated or unrated tax-exempt securities are
frequently traded only in markets where the number of potential purchasers and
sellers, if any, is very limited. Furthermore, the liquidity of these securities
may be affected by the market's perception of the issuer's credit quality.
Therefore, judgment may at times play a greater role in valuing these securities
than in the case of higher grade tax-exempt securities. This consideration may
also have the effect of limiting the availability of such securities for the
Fund to purchase and may also have the effect of limiting the ability of the
Fund to sell such securities at their fair value either to meet redemption
requests or to respond to changes in the economy or the financial markets.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the policy of the Fund to rely exclusively on ratings issued
by these agencies, but rather to supplement such ratings with the Adviser's own
independent and ongoing review of credit quality. The Fund's achievement of its
investment objective may be more dependent on the Adviser's own credit analysis
than in the case of an investment company investing in primarily higher quality
bonds. With respect to those municipal bonds and notes which are not rated by a
major rating agency, the Fund will be more reliant on the Adviser's judgment,
analysis and experience than would be the case if such bonds and notes were
rated. In evaluating the creditworthiness of an issuer, whether rated or
unrated, the Adviser will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and trends,
any operating history of and the community support for the facility financed by
the issue, the ability of the issuer's management and regulatory matters.
The Adviser will attempt to reduce the risks of investing in medium or lower-
rated or unrated tax-exempt securities to the greatest extent practicable
through portfolio management techniques (see the SAI) and through the use of
credit analysis and Futures Contracts.
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: Although the Fund
will enter into certain transactions in options, Futures Contracts and Options
on Futures Contracts for hedging purposes, such transactions nevertheless
involve risks. For example, a lack of correlation between the instrument
underlying an option or Futures Contract and the assets being hedged, or
unexpected adverse price movements, could render the Fund's hedging strategy
unsuccessful and could result in losses. The Fund also may enter into
transactions in options, Futures Contracts and Options on Futures Contracts for
other than hedging purposes, to the extent permitted by applicable law, which
involves greater risk. 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 SAI contains a further description of options, Futures Contracts and Options
on Futures Contracts, and a discussion of the risks related to transactions
therein. Transactions entered into for non-hedging purposes involve greater risk
and could result in losses which are not offset by gains on other portfolio
assets.
Transactions in options may be entered into on U.S. exchanges regulated by the
SEC and in the over-the-counter market, while Futures Contracts and Options on
Futures Contracts may be entered into on U.S. commodities exchanges regulated by
the CFTC. Over-the-counter transactions involve certain risks which may not be
present in exchange-traded transactions.
Gains recognized from options and futures transactions engaged in by the Fund
are taxable to shareholders upon distribution.
NON-DIVERSIFICATION: The Fund has registered as a "non-diversified" investment
company as that term is defined by the 1940 Act, but intends to qualify as a
"regulated investment company" ("RIC") for federal tax purposes. This means, in
general, that although more than 5% of the Fund's total assets may be invested
in the obligations of one issuer, at the close of each quarter of its taxable
year the aggregate amount of such holdings may not exceed 50% of the value of
its total assets, and no more than 25% of the value of its total assets may be
invested in the obligations of a single issuer. Since the Fund may invest a
relatively high percentage of its assets in the obligations of a limited number
of issuers, the Fund may be more susceptible to any single economic, political
or regulatory occurrence than a diversified investment company.
For the above reasons, an investment in shares of the Fund should not constitute
a complete investment program and may not be appropriate for investors who
cannot assume the greater risk of capital depreciation or loss inherent in
seeking higher tax-exempt yields.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the assets of the Fund pursuant to an
Investment Advisory Agreement dated September 1, 1993, as amended. Under the
Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. Cynthia M. Brown, a Senior Vice President of the Adviser, has
been the Fund's portfolio manager since 1993 and has been employed as a
portfolio manager by the Adviser since 1984. Subject to such policies as the
Trustees may determine, MFS makes investment decisions for the Fund. For these
services and facilities, MFS receives a management fee, computed and paid
monthly, in an amount equal to the sum of 0.30% of the first $1.3 billion of the
Fund's average daily net asset value and 0.25% of the amount in excess of $1.3
billion plus 4.75% of the Fund's gross income (i.e., income other than from the
sale of securities), in each case on an annualized basis for the Fund's
then-current fiscal year.
For the Fund's fiscal year ended January 31, 1997, MFS received management fees
under the Fund's Investment Advisory Agreement of $7,154,011, (equivalent on an
annualized basis to 0.67% of the Fund's average daily net assets).
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds"), to MFS Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS
Institutional Trust, MFS Union Standard Trust, MFS Variable Insurance Trust,
MFS/Sun Life Series Trust and seven variable accounts, each of which is a
registered investment company established by Sun Life Assurance Company of
Canada (U.S.) ("Sun Life of Canada (U.S.)") in connection with the sale of
various fixed/variable annuity contracts. MFS and its wholly owned subsidiary,
MFS Institutional Advisors Inc., provide investment advice to substantial
private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $55.5 billion on behalf of approximately 2.4 million investor
accounts as of April 30, 1997. As of such date, the MFS organization managed
approximately $6.1 billion of assets in municipal bond securities and
approximately $20.5 billion of assets in fixed income securities. MFS is a
subsidiary of Sun Life of Canada (U.S.), which in turn is a wholly owned
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). The Directors
of MFS are A. Keith Brodkin, Jeffrey L. Shames, Donald A. Stewart, John D.
McNeil and Arnold D. Scott. Mr. Brodkin is the Chairman, Mr. Shames is the
President and Mr. Scott is a Senior Executive Vice President and the Secretary
of MFS. Messrs. McNeil and Stewart are the Chairman and the President,
respectively, of Sun Life. Sun Life, a mutual life insurance company, is one of
the largest international life insurance companies and has been operating in the
United States since 1895, establishing a headquarters office here in 1973. The
executive officers of MFS report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman and
President of the Trust. Joan S. Batchelder, Cynthia M. Brown, Robert J.
Manning, Bernard Scozzafava, James T. Swanson, W. Thomas London, James O.
Yost, Ellen Moynihan, Stephen E. Cavan and James R. Bordewick, Jr., all of
whom are officers of MFS, are officers of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign & Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG), the oldest publicly
listed bank in Germany, founded in 1835. As part of this alliance, the portfolio
managers and investment analysts of MFS and Foreign & Colonial share their views
on a variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other portfolio
management matters. MFS has access to the extensive international equity
investment expertise of Foreign & Colonial, and Foreign & Colonial has access to
the extensive U.S. equity investment expertise of MFS. MFS and Foreign &
Colonial each have investment personnel working in each other's offices in
Boston and London, respectively.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
ADMINISTRATOR -- MFS provides the Fund with certain administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997.
Under this Agreement, MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services. As a
partial reimbursement for the cost of providing these services, the Fund pays
MFS an administrative fee up to 0.015% per annum of the Fund's average daily net
assets, provided that the administrative fee is not assessed on Fund assets that
exceed $3 billion.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. ("Shareholder Servicing
Agent"), a wholly owned subsidiary of MFS, performs transfer agency, certain
dividend disbursing agency and other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A and Class B shares of the Fund may be purchased at the public offering
price through any dealer and other financial institutions ("dealers") having a
selling agreement with MFD. Dealers may also charge their customers fees
relating to investments in the Fund.
This Prospectus offers Class A and B shares to the general public which bear
sales charges and distribution fees in different forms and amounts, as described
below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE* AS
PERCENTAGE OF:
-------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
- ------------------ -------------- ---------- -----------------
<S> <C> <C> <C>
Less than $100,000 ......................................................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000 ............................................ 4.00 4.17 3.20
$250,000 but less than $500,000 ............................................ 2.95 3.04 2.25
$500,000 but less than $1,000,000 .......................................... 2.20 2.25 1.70
$1,000,000 or more ......................................................... None** None** See Below**
</TABLE>
- ----------
*Because of rounding in the calculation of offering price, actual sales charges
may be more or less than those calculated using the percentages above.
**A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge). In
the following four circumstances, Class A shares are offered at net asset value
without an initial sales charge but subject to a CDSC, equal to 1% of the lesser
of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if, prior to July 1, 1996: (a) the Plan had established an
account with the Shareholder Servicing Agent and (b) the sponsoring
organization has demonstrated to the satisfaction of MFD that either
(i) the employer had at least 25 employees or (ii) the aggregate
purchases by the retirement plan of Class A shares of the MFS Funds
would be in an amount of at least $250,000 within a reasonable period
of time, as determined by MFD in its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes
an account with the Shareholder Servicing Agent on or after July 1,
1996; and (c) the aggregate purchases by the retirement plan of Class
A shares of the MFS Funds will be in an aggregate amount of at least
$500,000 within a reasonable period of time, as determined by MFD in
its sole discretion; and
(iv) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the
time of purchase, a market value of $500,000 or more invested in shares
of any class or classes of the MFS Funds. THE RETIREMENT PLAN WILL
QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING
ORGANIZATION INFORMS THE SHAREHOLDER SERVICING AGENT PRIOR TO THE
PURCHASES THAT THE PLAN HAS A MARKET VALUE OF $500,000 OR MORE INVESTED
IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS. THE SHAREHOLDER
SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER
SUCH A PLAN QUALIFIES UNDER THIS CATEGORY.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
COMMISSION PAID
BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
---------------- --------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemptions of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus. In addition to these circumstances,
the CDSC imposed upon the redemption of Class A shares is waived with respect to
shares held by certain retirement plans qualified under Section 401(a) or 403(b)
of the Internal Revenue Code of 1986, as amended (the "Code"), and subject to
ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe
to the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to the Shareholder Servicing Agent that
the retirement plan has, at the time of certification or will have
pursuant to a purchase order placed with the certification, a market
value of $500,000 or more invested in shares of any class or classes of
the MFS Funds and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated or partially terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or consolidated
with, any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but are subject to a CDSC upon redemption as follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
<S> <C>
First ............................................................. 4%
Second ............................................................ 4%
Third ............................................................. 3%
Fourth ............................................................ 3%
Fifth ............................................................. 2%
Sixth ............................................................. 1%
Seventh and following ............................................. 0%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Fund's Distribution Plan. As
discussed above, such retirement plans are eligible to purchase Class A shares
of the Fund at net asset value without an initial sales charge but subject to a
1% CDSC if the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds. IN THIS EVENT,
THE PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption
of Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain
outstanding for approximately eight years will convert to Class A shares of the
Fund. Shares purchased through the reinvestment of distributions paid in respect
of Class B shares will be treated as Class B shares for purposes of the payment
of the distribution and service fees under the Fund's Distribution Plan
applicable to Class B shares. See "Distribution Plan" below. However, for
purposes of conversion to Class A shares, all shares in a shareholder's account
that were purchased through the reinvestment of dividends and distributions paid
in respect of Class B shares (and which have not converted to Class A shares as
provided in the following sentence) will be held in a separate sub-account. Each
time any Class B shares in the shareholder's account (other than those in the
sub-account) convert to Class A shares, a portion of the Class B shares then in
the sub-account will also convert to Class A shares. The portion will be
determined by the ratio that the shareholder's Class B shares not acquired
through reinvestment of dividends and distributions that are converting to Class
A shares bears to the shareholder's total Class B shares not acquired through
reinvestment. The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversion will not constitute a taxable event for
federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B shares
would continue to be subject to higher expenses than Class A shares for an
indefinite period.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases - Contingent Deferred Sales Charge" below for
further discussion of the CDSC.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other than
IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and the
minimum additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares at any time.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserves the
right to reject or restrict any specific purchase or exchange request. In the
event that the Fund or MFD rejects an exchange request, neither the redemption
nor the purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individudals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase or exchange requests by market
timers. In the event that any individual or entity is determined either by the
Fund or MFD, in its sole discretion, to be a market timer with respect to any
calendar year, the Fund and/or MFD will reject all exchange requests into the
Fund during the remainder of that calendar year. Other funds in the MFS Family
of Funds may have different and/or more restrictive policies with respect to
market timers than the Fund. These policies are disclosed in the prospectuses of
these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect
to sales of Class A and Class B shares. In addition, from time to time, MFD may
pay dealers 100% of the applicable sales charge on sales of Class A shares of
certain specified MFS Funds sold by such dealer during a specified sales period.
In addition, MFD or its affiliates may, from time to time, pay dealers an
additional commission equal to 0.50% of the net asset value of all of the Class
B shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, from time to time, MFD, at its expense, may provide
additional commissions, compensation or promotional incentives ("concessions")
to dealers which sell shares of the Fund. Such concessions provided by MFD may
include financial assistance to dealers in connection with preapproved
conferences or seminars, sales or training programs for invited registered
representatives, payment for travel expenses, including lodging, incurred by
registered representatives for such seminars or training programs, seminars for
the public, advertising and sales campaigns regarding one or more MFS Funds,
and/or other dealer-sponsored events. From time to time, MFD may make expense
reimbursements for special training of a dealer's registered representatives in
group meetings or to help pay the expenses of sales contests. Other concessions
may be offered to the extent not prohibited by state laws or any self-regulatory
agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a handheld calculator, or (ii) make a nominal charitable
contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting, selling
or distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services in
respect of Shareholders who invested in the Fund through a national bank. It is
not expected that shareholders would suffer any adverse financial consequence as
a result of these occurrences. In addition, state securities laws on this issue
may differ from the interpretation of federal law expressed herein and banks and
financial institutions may be required to register as broker-dealers pursuant to
state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale). Shares of one class
may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING MFS MONEY MARKET FUNDS): No initial sales
charges or CDSC will be imposed in connection with an exchange from shares of an
MFS Fund to shares of any other MFS Fund, except with respect to exchanges from
an MFS money market fund to another MFS Fund which is not an MFS money market
fund (discussed below). With respect to an exchange involving shares subject to
a CDSC, the CDSC will be unaffected by the exchange and the holding period for
purposes of calculating the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth above in this
paragraph.
GENERAL: A shareholder should read the prospectuses of the other MFS Funds into
which an exchange is made, and consider the differences in objectives, policies
and restrictions before making any exchange. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received for
an established account by the Shareholder Servicing Agent in proper form (i.e.,
if in writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in the case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by the
Shareholder Servicing Agent) or all the shares in the account. If an Exchange
Request is received by the Shareholder Servicing Agent on any business day prior
to the close of regular trading on the New York Stock Exchange (generally, 4:00
p.m., Eastern time) (the "Exchange"), the exchange will occur on that day if all
the requirements set forth above have been complied with at that time and
subject to the Fund's right to reject purchase orders. No more than five
exchanges may be made in any one Exchange Request by telephone. Additional
information concerning this exchange privilege and prospectuses for any of the
other MFS Funds may be obtained from dealers or the Shareholder Servicing Agent.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares exchanged and, therefore, an exchange could result in a
gain or loss to the shareholder making the exchange. Exchanges by telephone are
automatically available to most non-retirement plan accounts and certain
retirement plan accounts. For further information regarding exchanges by
telephone, see "Redemptions by Telephone." The exchange privilege (or any aspect
of it) may be changed or discontinued and is subject to certain limitations,
including certain restrictions on purchases by market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent
will not be responsible for any losses resulting from unauthorized telephone
transactions if it follows reasonable procedures designed to verify the identity
of the caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A or Class B shares
("Direct Purchases") will be subject to a CDSC for a period of (i) with respect
to Class A shares, 12 months (however, the CDSC on Class A shares is only
imposed with respect to purchases of $1 million or more of Class A shares or
purchases by certain retirement plans of Class A shares) or (ii) with respect to
Class B shares, six years. Purchases of Class A shares made during a calendar
month, regardless of when during the month the investment occurred, will age one
month on the last day of the month and each subsequent month. Class B shares
purchased on or after January 1, 1993 will be aggregated on a calendar month
basis -- all transactions made during a calendar month, regardless of when
during the month they have occurred, will age one year at the close of business
on the last day of such month in the following calendar year and each subsequent
year. For Class B shares of the Fund purchased prior to January 1, 1993,
transactions will be aggregated on a calendar year basis -- all transactions
made during a calendar year, regardless of when during the year they have
occurred, will age one year at the close of business on December 31 of that year
and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of $1 million or more of Class A shares or purchases by certain
retirement plans of Class A shares) of Direct Purchases may be redeemed without
charge ("Free Amount"). Moreover, no CDSC is ever assessed on additional shares
acquired through the automatic reinvestment of dividends or capital gain
distributions ("Reinvested Shares"). Therefore, at the time of redemption of a
particular class, (i) any Free Amount is not subject to the CDSC and (ii) the
amount of the redemption equal to the then-current value of Reinvested Shares is
not subject to the CDSC, but (iii) any amount of the redemption in excess of the
aggregate of the then-current value of Reinvested Shares and the Free Amount is
subject to a CDSC. The CDSC will first be applied against the amount of Direct
Purchases which will result in any such charge being imposed at the lowest
possible rate. The CDSC to be imposed upon redemptions of shares will be
calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days of
the redemption pursuant to the Reinstatement Privilege. If the shares credited
for any CDSC paid are then redeemed within six years of the initial purchase in
the case of Class B shares or within 12 months of the initial purchase for
certain Class A share purchases, a CDSC will be imposed upon redemption. Such
purchases under the Reinstatement Privilege are subject to all limitations in
the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund solely
in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions either totally or partially, by a distribution
in-kind of securities (instead of cash) from the Fund's portfolio. The
securities distributed in such a distribution would be valued at the same amount
as that assigned to them in calculating the net asset value for the shares being
sold. If a shareholder received a distribution in-kind, the shareholder could
incur brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions or exchanges, except in the case
of accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment." Shareholders will be notified that
the value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class B shares pursuant to
Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the "Distribution
Plan"), after having concluded that there is a reasonable likelihood that the
Plan would benefit the Fund and its Class B shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
SERVICE FEES. The Distribution Plan for Class B shares provides that the
Fund may pay MFD a service fee of up to 0.25% of the average daily net assets
attributable to the Class B shares annually in order that MFD may pay expenses
on behalf of the Fund relating to the servicing of shares of the Class B shares.
The service fee is used by MFD to compensate dealers which enter into a sales
agreement with MFD in consideration for all personal services and/or account
maintenance services rendered by the dealer with respect to Class B shares owned
by investors for whom such dealer is the dealer or holder of record. MFD may
from time to time reduce the amount of the service fees paid for shares sold
prior to a certain date. Service fees may be reduced for a dealer that is the
holder or dealer of record for an investor who owns shares of the Fund having an
aggregate net asset value at or above a certain dollar level. Dealers may from
time to time be required to meet certain criteria in order to receive service
fees. MFD or its affiliates are entitled to retain all service fees payable
under the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD
a distribution fee based on the average daily net assets attributable to the
Class B shares as partial consideration for distribution services performed and
expenses incurred in the performance of MFD's obligations under its distribution
agreement with the Fund. See "Management of the Fund -- Distributor" in the SAI.
While the amount of compensation received by MFD in the form of distribution
fees during any year may be more or less than the expense incurred by MFD under
its distribution agreement with the Fund, the Fund is not liable to MFD for any
losses MFD may incur in performing services under its distribution agreement
with the Fund.
OTHER FEATURES. Fees payable under the Distribution Plan are charged to, and
therefore reduce, income allocated to the Class B shares. The provisions of the
Distribution Plan relating to operating policies as well as initial approval,
renewal, amendment and termination are substantially identical as they relate to
each class of shares covered by the Distribution Plan.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class B distribution
and service fees for its current fiscal year are equal to 0.88% per annum.
Except in the case of the 0.25% per annum Class B service fee paid by the Fund
upon the sale of Class B shares, payment of the Class B service fee will be
suspended until such date as the Trustees of the Trust may determine.
DISTRIBUTIONS
The Fund intends to declare daily and pay substantially all of its net
investment income to its shareholders as dividends on a monthly basis. In
determining the net investment income available for distributions, the Fund may
rely on projections of its anticipated net investment income over a longer term,
rather than its actual net investment income for the period in order to provide
more stable periodic distributions. The Fund may make one or more distributions
during the calendar year to its shareholders from any long-term capital gains
and may also make one or more distributions during the calendar year to its
shareholders from short-term capital gains. Shareholders may elect to receive
dividends and capital gain distributions in either cash or additional shares of
the same class with respect to which a distribution is made. Reinvestments (net
of any tax withholding) will be made in additional full and fractional shares at
the net asset value in effect at the close of business on the last business day
of the month. (See "Tax Status" and "Shareholder Services -- Distribution
Options" below.) Distributions paid by the Fund with respect to Class A shares
will generally be greater than those paid with respect to Class B shares because
expenses attributable to Class B shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). Because the Fund intends to distribute all of
its net investment income and net realized capital gains to its shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Fund will be required to pay any federal income or excise taxes.
The Fund expects that none of its distributions will be eligible for the
dividends received deduction for corporations. The Fund expects that dividends
paid to shareholders from interest on Municipal Obligations will be exempt from
federal income tax because the Fund intends to satisfy certain requirements of
the Code. One such requirement is that at the close of each quarter of its
taxable year, at least 50% of the value of the Fund's total assets consists of
obligations whose interest is exempt from federal income tax. Distributions of
income from capital gains, from investments in taxable securities, and from
certain other transactions (including options and futures transactions) will be
taxable to the shareholders, whether the distribution is paid in cash or
reinvested in additional shares.
Interest on indebtedness incurred by shareholders to purchase or carry shares of
the Fund will not be deductible for federal income tax purposes. Exempt-
interest dividends are taken into account in calculating the amount of social
security and railroad retirement benefits that may be subject to federal income
tax, and certain distributions of exempt-interest dividends may also be a tax
preference item for purposes of the federal individual and corporate alternative
minimum tax. All exempt-interest dividends may affect a corporate shareholder's
alternative minimum tax liability. Depending on the nature of the distribution
and the residence of the shareholder, certain Fund distributions may be subject
to state and local income taxes. Entities or persons who are "substantial users"
(or persons related to "substantial users") of facilities financed by private
activity bonds should consult their tax advisers before purchasing shares of the
Fund.
Shortly after the end of each calendar year, each shareholder will be sent a
statement setting forth the federal income tax status of all dividends and
distributions for that year, including the portion exempt from federal taxes as
"exempt-interest dividends," the portion, if any, that is a tax preference item
under the federal alternative minimum tax, the portion, if any, taxable as
ordinary income, the portion taxable as long-term capital gain, the portion, if
any, representing a return of capital (which is free of current taxes, but
results in a basis reduction), and the amount, if any, of federal income tax
withheld.
Fund distributions of net capital gains or net short-term capital gains will
reduce the Fund's net asset value per share. Shareholders who buy shares shortly
before the Fund makes such a distribution may thus pay the full price for the
shares and then effectively receive a portion of the purchase price back as a
taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and that are
made to persons who are neither citizens nor residents of the U.S., regardless
of whether a lower rate may be permitted under an applicable treaty. The Fund is
also required in certain circumstances to apply backup withholding at a rate of
31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the U.S.)
who does not furnish to the Fund certain information and certifications or who
is otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
Prospective investors should read the Fund's Account Application for additional
information regarding backup withholding of federal income tax and should
consult their own tax advisers as to the tax consequences to them of an
investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of shares of the Fund is determined
each day during which the Exchange is open for trading. This determination is
made once during each such day as of the close of regular trading on the
Exchange by deducting the amount of the liabilities attributable to the class
from the value of the Fund's assets attributable to the class and dividing the
difference by the number of shares of the class outstanding. Assets in the
Fund's portfolio are valued on the basis of their market or other fair value, as
described in the SAI. The net asset value of each class of shares is effective
for orders received in "good order" by the dealer prior to its calculation and
received by MFD prior to the close of business on that day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of two series of the Trust, has two classes of shares which it
offers to the general public, entitled Class A and Class B Shares of Beneficial
Interest (without par value). The Trust has reserved the right to create and
issue additional classes and series of shares, in which case each class of
shares of a series would participate equally in the earnings, dividends and
assets attributable to that class of that particular series. Shareholders are
entitled to one vote for each share held and shares of each series would be
entitled to vote separately to approve investment advisory agreements or changes
in investment restrictions, but shares of all series would vote together in the
election of Trustees and ratification of selection of accountants. Additionally,
each class of shares of a series will vote separately on any material increases
in the fees under its Rule 12b-1 plan (in the case of Class B shares) or on any
other matter that affects solely that class of shares, but will otherwise vote
together with all other classes of shares of the series on all other matters.
The Trust does not intend to hold annual shareholder meetings. The Declaration
of Trust provides that a Trustee may be removed from office in certain instances
(see "Description of Shares, Voting Rights and Liabilities" in the SAI).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as set
forth above in "Purchases -- Conversion of Class B Shares"). Shares of the Fund
are fully paid and non-assessable. Should the Fund be liquidated, shareholders
of each class would be entitled to share pro rata in the net assets attributable
to that class available for distribution to shareholders. Shares will remain on
deposit with the Shareholder Servicing Agent and certificates will not be issued
except in connection with pledges and assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance existed (e.g., fidelity bonding and errors and omission insurance) and
the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate,
tax-equivalent yield and total rate of return quotations for each class of
shares and may also quote fund rankings in the relevant fund category from
various sources, such as the Lipper Analytical Securities Corporation and
Wiesenberger Investment Companies Service. Any yield and tax-equivalent yield
quotations are based on the annualized net investment income per share allocated
to each class of the Fund over a 30-day period stated as a percent of the
maximum public offering price of that class on the last day of that period.
Yield calculations for Class B shares assume no CDSC is paid. The current
distribution rate for each class is generally based upon the total amount of
dividends per share paid by the Fund to shareholders of that class during the
past twelve months and is computed by dividing the amount of such dividends by
the maximum public offering price of that class at the end of such period.
Current distribution rate calculations for Class B shares assume no CDSC is
paid. The current distribution rate differs from the yield calculation because
it may include distributions to shareholders from sources other than dividends
and interest, such as premium income from option writing, short-term capital
gains, and return of invested capital, and is calculated over a different period
of time. Total rate of return quotations reflect the average annual percentage
change over stated periods in the value of an investment in each class of shares
of the Fund made at the maximum public offering price of the shares of that
class with all distributions reinvested and which will give effect to the
imposition of any applicable 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. The Fund
offers multiple classes of shares which were initially offered for sale to the
public on different dates. The calculation of total rate of return for a class
of shares which initially was offered for sale to the public subsequent to
another class of shares of the Fund is based both on (i) the performance of the
Fund's newer class from the date it initially was offered for sale to the public
and (ii) the performance of the Fund's oldest class from the date it initially
was offered for sale to the public up to the date that the newer class initially
was offered for sale to the public. See the SAI for further information on the
calculation of total rate of return for share classes initially offered for sale
to the public on different dates.
All performance quotations are based on historical performance and are not
intended to indicate future performance. Yield and tax-equivalent yield reflect
only net portfolio income allocable to a class as of a stated time and current
distribution rate reflects only the rate of distributions paid by the Fund over
a stated period of time while total rate of return reflects all components of
investment return over a stated period of time. The Fund's quotations may from
time to time be used in advertisements, shareholder reports or other
communications to shareholders. For a discussion of the manner in which the Fund
will calculate its yield, current distribution rate, tax-equivalent yield and
total rate of return, see the SAI. For further information about the Fund's
performance for the fiscal year ended January 31, 1997, please see the Fund's
Annual Report. A copy of the Annual Report may be obtained without charge by
contacting the Shareholder Servicing Agent (see back cover for address and phone
number). In addition to information provided in shareholder reports, the Fund
may, in its discretion, from time to time, make a list of all or a portion of
its holdings available to investors upon request.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund should contact the Shareholder Servicing
Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year each shareholder will receive income tax information
regarding the tax status of all reportable dividends and distributions for that
year.
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified.
-- Dividends in cash; capital gain distributions reinvested in additional
shares.
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) of dividends and capital gain
distributions will be made in additional full and fractional shares of the same
class of shares of the Fund at the net asset value in effect at the close of
business on the record date. Dividends and capital gains distributions in
amounts less than $10 will automatically be reinvested in additional shares of
the Fund. If a shareholder has elected to receive dividends and/or capital gain
distributions in cash, and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, or the shareholder does
not respond to mailings from the Shareholder Servicing Agent with regard to
uncashed distribution checks, such shareholder's distribution option will
automatically be converted to having all dividends and other distributions
reinvested in additional shares. Any request for an option change must be
received by the Shareholder Servicing Agent by the record date for a dividend or
distribution in order to be effective for that dividend or distribution. No
interest will accrue on amounts represented by uncashed distribution or
redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $100,000 or more of Class A shares
of the Fund alone or in combination with shares of any class of other MFS Funds
or MFS Fixed Fund (a bank collective 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 Class A, B and C shares of
that shareholder in the MFS Funds or MFS Fixed Fund reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of distributions of dividends and capital gains from the
same class of another MFS Fund. Furthermore, distributions made by the Fund may
be automatically invested at net asset value in shares of the same class of any
other MFS Fund, if shares of such Fund are available for sale (without any
applicable CDSC).
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments
based upon the value of his account. Each payment under a Systematic Withdrawal
Plan (a "SWP") must be at least $100, except in certain limited circumstances.
The aggregate withdrawals of Class B shares in any year pursuant to a SWP will
not be subject to a CDSC and generally are limited to 10% of the value of the
account at the time of the establishment of the SWP. The CDSC will not be waived
in the case of SWP redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for shares of the same class of
shares of the other MFS Funds under the Automatic Exchange Plan if such shares
are available for sale. The Automatic Exchange Plan provides for automatic
exchanges of funds from the shareholder's account in an MFS Fund for investment
in the same class of shares of other MFS Funds selected by the shareholder if
such fund is available for sale. Under the Automatic Exchange Plan, exchanges of
at least $50 each may be made to up to six different funds. A shareholder should
consider the objectives and policies of a fund and review its prospectus before
electing to exchange money into such fund through the Automatic Exchange Plan.
No transaction fee is imposed in connection with exchange transactions under the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. For federal and (generally)
state income tax purposes, an exchange is treated as a sale of the shares
exchanged and, therefore, could result in a capital gain or loss to the
shareholder making the exchange. See the SAI for further information concerning
the Automatic Exchange Plan. Investors should consult their tax advisers for
information regarding the potential capital gain and loss consequences of
transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchase through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases.
------------------------
The SAI, dated June 1, 1997, as amended or supplemented from time to time,
contains more detailed information about the Trust and the Fund including, but
not limited to, information related to (i) investment objective, policies and
restrictions, (ii) the Trustees, officers and investment adviser, (iii)
portfolio transactions and brokerage commissions, (iv) the method used to
calculate yield, tax-equivalent yield and total rate of return quotations of the
Fund, (v) the Distribution Plan and (vi) various services and privileges
provided by the Fund for the benefit of its shareholders, including additional
information with respect to the exchange privilege.
<PAGE>
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the contingent
deferred sales charge ("CDSC") for Class A shares is waived (Section II), and
the CDSC for Class B shares is waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B shares, as applicable, is
waived:
1. DIVIDEND REINVESTMENT
* Shares acquired through dividend or capital gain reinvestment; and
* Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Family of Funds
("MFS Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
* Shares acquired on account of the acquisition or liquidation of
assets of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
* Officers, eligible directors, employees (including retired
employees) and agents of Massachusetts Financial Services Company
("MFS"), Sun Life Assurance Company of Canada ("Sun Life") or any of
their subsidiary companies;
* Trustees and retired trustees of any investment company for which
MFS Fund Distributors, Inc. ("MFD") serves as distributor;
* Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
* Employees or registered representatives of dealers and other
financial institution ("dealers") which have a sales agreement with
MFD;
* Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or
other retirement plans for the sole benefit of such persons,
provided the shares are not resold except to the MFS Fund which
issued the shares; and
* Institutional Clients of MFS or MFS Institutional Advisors, Inc.
("MFSI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
* Shares redeemed at an MFS Fund's direction due to the small size of
a shareholder's account. See "Redemptions and Repurchases -- General
-- Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
* Death or disability of the IRA owner.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
* Death, disability or retirement of 401(a) or ESP Plan participant;
* Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
* Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
* Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the 401(a) or
ESP Plan);
* Tax-free return of excess 401(a) or ESP Plan contributions;
* To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes
to the MFS FUNDamental 401(k) Plan or another similar recordkeeping
system made available by the Shareholder Servicing Agent; and
* Distributions from a 401(a) or ESP Plan that has invested its assets
in one or more of the MFS Funds for more than 10 years from the
later to occur of: (i) January 1, 1993 or (ii) the date such 401(a)
or ESP Plan first invests its assets in one or more of the MFS
Funds. The sales charges will be waived in the case of a redemption
of all of the Plan's shares in all MFS Funds (i.e., all the assets
of the 401(a) or ESP Plan invested in the MFS Funds are withdrawn),
unless immediately prior to the redemption, the aggregate amount
invested by the 401(a) or ESP Plan in shares of the MFS Funds
(excluding the reinvestment of distributions) during the prior four
years equals 50% or more of the total value of the 401(a) or ESP
Plan's assets in the MFS Funds, in which case the sales charges will
not be waived.
SECTION 403(b) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
* Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
* To an IRA rollover account where any sales charges with respect to
the shares being reregistered would have been waived had they been
redeemed; and
* From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants of such Plan, provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the
following circumstances the initial sales charge imposed on
purchases of Class A shares and the contingent deferred sales charge
imposed on certain redemptions of Class A shares is waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
* Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or
managed by MFD or its affiliates if: (i) the investment is made
through a dealer and appropriate documentation is submitted to MFD;
(ii) the redeemed shares were subject to an initial sales charge or
deferred sales charge (whether or not actually imposed); (iii) the
redemption occurred no more than 90 days prior to the purchase of
Class A shares; and (iv) the MFS Fund, MFD or its affiliates have
not agreed with such company or its affiliates, formally or
informally, to waive sales charges on Class A shares or provide any
other incentive with respect to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
* Shares acquired by investments through certain dealers which have
established certain operational arrangements with MFD which include
a requirement that such shares be sold for the sole benefit of
clients participating in a "wrap" account or a similar program under
which such clients pay a fee to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
* Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
* Shares acquired by retirement plans whose third party administrators,
or dealers have entered into an administrative services agreement with
MFD or one of its affiliates to perform certain administrative
services, subject to certain operational and minimum size requirements
specified from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
* Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
Shares redeemed on account of distributions made under the following
circumstances:
IRA'S
* Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
* Tax-free returns of excess IRA contributions.
401(a) PLANS
* Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
* Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a Plan.
ESP PLANS AND SRO PLANS
* Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
III. WAIVERS OF CLASS B SALES CHARGES
In addition to the waivers set forth in Section I above, in the
following circumstances the CDSC imposed on redemptions of Class B
shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
* Systematic Withdrawal Plan redemptions with respect to up to 10% per
year of the account value at the time of establishment.
2. DEATH OF OWNER
* Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
* Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled
individual's name or in a living trust for the benefit of the
disabled individual (in which case a disability certification form
is required to be submitted to the Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made
under the following circumstances:
IRA'S, 401(a) PLANS, ESP PLANS AND SRO PLANS
* Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
applicable Internal Revenue Code ("Code") rules.
SALARY REDUCTION ON SIMPLIFIED EMPLOYEE REDUCTION PLANS ("SAR-SEP
PLANS")
* Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
* Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
TAXABLE EQUIVALENT YIELD TABLE
(UNDER FEDERAL INCOME TAX LAW AND RATES FOR 1997)
The table below shows the approximate taxable bond yields which are
equivalent to tax-exempt bond yields from 3% to 8% under federal income tax laws
that apply to 1997. (Such yields may differ under the laws applicable to
subsequent years.) Separate calculations, showing the applicable taxable income
brackets, are provided for investors who file joint returns and for those
investors who file individual returns.
<TABLE>
<CAPTION>
SINGLE RETURN JOINT RETURN INCOME TAX-EXEMPT YIELD
- ----------------------- -------------------- TAX ----------------------------------------------------------------------
(TAXABLE INCOME)* BRACKET** 3% 4% 5% 6% 7% 8%
- --------------------------------------------- ------------ ----------------------------------------------------------------------
1997 1997 EQUIVALENT TAXABLE YIELD
---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-$ 24,650 $ 0-$ 41,200 0.15% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 24,650-$ 59,750 $ 41,200-$ 99,600 0.28 4.17 5.56 6.94 8.33 9.72 11.11
$ 59,750-$124,650 $ 99,600-$151,750 0.31 4.35 5.80 7.25 8.70 10.14 11.59
$124,650-$271,050 $151,750-$271,050 0.36 4.69 6.25 7.81 9.38 10.94 12.50
$271,050 & Over $271,050 & Over 0.396 4.97 6.62 8.28 9.93 11.59 13.25
</TABLE>
*Net amount subject to Federal personal income tax after deductions and
exemptions.
**Effective federal tax bracket.
<PAGE>
APPENDIX C
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as bridges, highways, housing, hospitals, mass transportation, schools,
streets and water and sewer works. Other public purposes for which Municipal
Bonds may be issued include refunding outstanding obligations, obtaining funds
for general operating expenses, and obtaining funds to loan to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to obtain
funds to provide privately-operated housing facilities, sports facilities,
convention or trade show facilities, airport, mass transit, port or parking
facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity or sewage or solid waste disposal.
Such obligations are included within the term Municipal Bonds if the interest
paid thereon qualifies as exempt from federal income taxes. Other types of
industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Bonds, although the current
federal tax laws place substantial limitations on the size of such issues.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its good faith, credit and taxing power for the payment of
principal and interest. The payment of such bonds may be dependent upon an
appropriation by the issuer's legislative body. The characteristics and
enforcement of general obligation bonds vary according to the law applicable to
the particular issuer. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Industrial
development bonds which are Municipal Bonds are in most cases revenue bonds and
do not generally constitute the pledge of the credit of the issuer of such
bonds. Municipal Bonds also include participations in municipal leases. These
are undivided interests in a portion of an obligation in the form of a lease or
installment purchase which is issued by state and local governments to acquire
equipment and facilities. Municipal leases frequently have special risks not
normally associated with general obligation or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title to the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt-issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
provide that the governmental issuer has no obligation to make future payments
under the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Although the
obligations will be secured by the leased equipment or facilities, the
disposition of the underlying property in the event of non-appropriation or
foreclosure might, in some cases, prove difficult. In light of these concerns,
the staff of the SEC has advised investment companies to adopt and follow
procedures for determining whether municipal lease securities purchased are
liquid and for monitoring the liquidity of municipal lease securities held in
such company's portfolio. The Board of Trustees has adopted such procedures and
has delegated to the Adviser the authority to make determinations on the
liquidity of municipal lease securities in accordance with the procedures. The
procedures require that the Adviser use a number of factors in calculating the
liquidity of a municipal lease security, including, the frequency of trades and
quotes for the security, the number of dealers willing to purchase or sell the
security and the number of other potential purchasers, the willingness of
dealers to undertake to make a market in the security, the nature of the
marketplace in which the security trades, the credit quality of the security and
other factors which the Adviser may deem relevant. There are, of course,
variations in the security of Municipal Bonds, both within a particular
classification and between classifications, depending on numerous factors.
The yields on Municipal Bonds are dependent on a variety of factors,
including general money market conditions, supply and demand and general
conditions of the Municipal Bond market, size of a particular offering, the
maturity of the obligation and rating of the issue.
DESCRIPTION OF MUNICIPAL BOND RATINGS
The ratings of Moody's, S&P, Fitch and Duff & Phelps represent their
opinions as to the quality of various debt instruments.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
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 both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
STANDARD & POOR'S RATINGS SERVICES
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: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating catgegory is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CC: The rating "CC" is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
C: The rating "C" is typically applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating "CI" is reserved for income bonds on which no interest is being
paid.
D: Bonds rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payment is jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeble future
developments, short-term debt of these issuers is generally rated "F-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in immiment default in payment of interest or principal.
PLUS (+) MINUS (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR Indicates that Fitch does not rate the specific issue.
CONDITIONAL A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
SUSPENDED A rating is suspended when Fitch deems the amount of information
available from the issuer to be indadequate for rating purposes.
WITHDRAWN A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of an occurrence
that is likely to result in a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for potential downgrade, or "Evolving", where ratings may be raised
or lowered. FitchAlert is relatively short-term, and should be resolved within
12 months.
DUFF & PHELPS CREDIT RATING CO.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "D-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business, and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within a rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR: Indicates that Duff & Phelps does not rate the specific issue.
DUFF & PHELPS SHORT-TERM RATINGS
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3: Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
<PAGE>
APPENDIX D
PORTFOLIO COMPOSITION CHART
MFS MUNICIPAL HIGH INCOME FUND
JANUARY 31, 1997
The table below shows the percentages of the Fund's assets at January 31,
1997 invested in bonds assigned to the various rating categories by S&P, Moody's
(provided only for securities not rated by S&P) and Fitch (provided only for
securities not rated by S&P or Moody's) and Duff & Phelps (provided only for
securities not rated by S&P, Moody's or Fitch) and in unrated securities
determined by MFS to be of comparable quality. For a split rated issue, the S&P
rating is used, and when an S&P rating is unavailable, secondary sources are
selected in the following order: Moody's, Fitch, and Duff & Phelps.
<TABLE>
<CAPTION>
UNRATED
SECURITIES OF
COMPILED COMPARABLE
RATING RATINGS QUALITY TOTAL
------ ------- ------------- -----
<S> <C> <C> <C>
AAA/Aaa 11.9% 1.71% 13.61%
AA/Aa 7.01% 0.27% 7.28%
A/A 2.15% 1.55% 3.70%
BBB/Baa 14.66% 4.43% 19.09%
BB/Ba 9.56% 24.33% 33.89%
B/B 2.63% 10.83% 13.46%
CCC/Caa 0.00% 7.71% 7.71%
CC/Ca 0.00% 0.00% 0.00%
C/C 0.00% 0.46% 0.46%
D 0.00% 0.31% 0.31%
-----
TOTAL 47.91% 51.60% 99.51%
</TABLE>
The chart does not necessarily indicate what the composition of the Fund's
portfolio will be in subsequent years. Rather, the Fund's investment objective,
policies and restrictions indicate the extent to which the Fund may purchase
securities in the various categories.
<PAGE>
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) MUNICIPAL HIGH
INCOME FUND
500 Boylston Street
Boston, MA 02116
MMH-1-6/97/80M 25/225
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) MUNICIPAL HIGH
INCOME FUND
Prospectus
June 1, 1997
<PAGE>
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
MFS(R) MUNICIPAL STATEMENT OF
HIGH INCOME FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) June 1, 1997
- ------------------------------------------------------------------------------
Page
1. Definitions ................................................... 2
2. Investment Objective, Policies and Restrictions ............... 2
3. Management of the Fund ........................................ 9
Trustees ................................................... 9
Officers ................................................... 9
Trustee Compensation Table ................................. 10
Investment Adviser ......................................... 10
Administrator .............................................. 11
Custodian .................................................. 11
Shareholder Servicing Agent ................................ 11
Distributor ................................................ 11
4. Portfolio Transactions and Brokerage Commissions .............. 12
5. Shareholder Services .......................................... 12
Investment and Withdrawal Programs ......................... 12
Exchange Privilege ......................................... 14
6. Tax Status .................................................... 15
7. Determination of Net Asset Value and Performance .............. 16
8. Distribution Plan ............................................. 18
9. Description of Shares, Voting Rights and Liabilities .......... 19
10. Independent Auditors and Financial Statements ................. 20
Appendix A -- Performance Information ......................... A-1
MFS MUNICIPAL HIGH INCOME FUND
A Series of MFS Series Trust III
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time, (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus, dated
June 1, 1997. This SAI should be read in conjunction with the Prospectus, a copy
of which may be obtained without charge by contacting the Shareholder Servicing
Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
1. DEFINITIONS
"Fund" -- MFS(R) Municipal High Income Fund,
a series of MFS Series Trust III
(the "Trust"), a Massachusetts
business trust. The Trust was
previously known as Massachusetts
Financial High Income Trust until
its name was changed on August 20,
1993. The Fund is the successor to
MFS High Yield Municipal Bond Fund
which was reorganized as a series
of the Trust on September 7, 1993.
"MFS" or the "Adviser" -- Massachusetts Financial Services
Company, a Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc., a
Delaware corporation.
"Prospectus" -- The Prospectus of the Fund, dated
June 1, 1997, as amended or
supplemented from time to time.
2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE. The investment objective of the Fund is to provide high
current income exempt from federal income taxes. Any investment involves risk
and there can be no assurance that the Fund will achieve its investment
objective.
INVESTMENT POLICIES. The Fund seeks to achieve its investment objective by
investing primarily (i.e., at least 80% of its assets under normal
circumstances) in debt securities issued by or on behalf of states, territories
and possessions of the United States, the District of Columbia, and their
political subdivisions, agencies or instrumentalities, the interest on which is
exempt from federal income tax ("Municipal Bonds" or "tax-exempt securities").
Under normal circumstances, the Fund will invest at least 65% of its total
assets in tax-exempt securities which offer a current yield above that generally
available on tax-exempt securities in the three highest rating categories of the
recognized rating agencies (commonly known as "junk bonds" if rated below the
four highest categories of recognized rating agencies). Such high risk
securities generally involve greater volatility of price and greater risk of
nonpayment of principal and interest (including the possibility of default by or
bankruptcy of the issuers of such securities) than securities in higher rating
categories. However, since available yields and yield differentials vary over
time, no specific level of income or yield differential can ever be assured.
Also, any income earned on portfolio securities would be reduced by the Fund's
expenses before it is distributed to shareholders.
The Fund may invest in a relatively high percentage of municipal bonds issued by
entities having similar characteristics. The issuers may be located in the same
geographic area, or may pay their interest obligations from revenue of similar
projects such as hospitals, electric utility systems, multi-family housing,
nursing homes, commercial facilities (including hotels), steel companies or life
care facilities. This may make the Fund more susceptible to similar economic,
political, or regulatory occurrences. As the similarity in issuers increases,
the potential for fluctuation of the net asset value of shares of the Fund also
increases.
The Fund reserves the right to invest more than 25% of its assets in industrial
revenue bonds such as industrial revenue bonds issued for electric utility
systems, multi-family housing, health care facilities, and steel companies.
Industrial revenue bonds are issued by various state and local agencies to
finance various projects. These investments might entail risks as described
below.
Electric utility systems face problems in financing large construction programs
in an inflationary period, cost increases and delay occasioned by environmental
considerations (particularly with respect to nuclear facilities), difficulty in
obtaining fuel at reasonable prices, the cost of competing fuel sources,
difficulty in obtaining sufficient rate increases and other regulatory problems,
the effect of energy conservation and difficulty of the capital market to absorb
utility debt.
The financing of multi-family housing projects is affected by a variety of
factors, including satisfactory completion of construction within cost
constraints, the achievement and maintenance of a sufficient level of occupancy,
sound management of the developments, timely and adequate increases in rents to
cover increases in operating expenses, including taxes, utility rates and
maintenance costs, changes in applicable laws and governmental regulations and
social and economic trends.
Healthcare facilities include lifecare facilities, nursing homes and hospitals.
Lifecare facilities and nursing homes are alternative forms of long-term housing
for the elderly which offer residents the independence of condominium life style
and, if needed, the comprehensive care of nursing home services. Bonds to
finance lifecare facilities have been issued by various state industrial
development authorities. Since the bonds are secured only by the revenues of
each facility and not by state or local government tax payments, they are
subject to a wide variety of risks. Primarily, the projects must maintain
adequate occupancy levels to be able to provide revenues adequate to maintain
debt service payments. Moreover, in the case of life care facilities, since a
portion of housing, medical care and other services may be financed by an
initial deposit, there may be risk if the facility does not maintain adequate
financial reserves to secure estimated actuarial liabilities. The ability of
management to forecast inflationary cost pressures accurately weighs importantly
in this process. The facilities may also be impacted by regulatory cost
restrictions applied to health care delivery in general, particularly state
regulations or changes in Medicare and Medicaid payments or qualifications, or
restrictions imposed by medical insurance companies. They may also face
competition from alternative health care or conventional housing facilities in
the private or public sector. Hospital bond ratings are often based on
feasibility studies which contain projections of expenses, revenues and
occupancy levels. A hospital's gross receipts and net income available to
service its debt are influenced by demand for hospital services, the ability of
the hospital to provide the services required, management and medical
capabilities, economic developments in the service area, efforts by insurers and
government agencies to limit rates and expenses, confidence in the hospital,
service area economic developments, competition, availability and expense of
malpractice insurance, Medicaid and Medicare funding, and possible federal
legislation limiting the rates of increase of hospital charges.
The Fund may also invest in bonds for other commercial facilities (including
hotels) and industrial projects. Financing for such projects will be subject to
inflation and other general economic factors as well as construction risks
including labor problems, difficulties with construction sites and the ability
of contractors to meet specifications in a timely manner.
If a revenue bond is secured by payments generated from a project, and the
revenue bond is also secured by a lien on the real estate comprising the
project, foreclosure by the indenture trustee on the lien for the benefit of the
bondholders creates additional risks associated with owning real estate,
including environmental risks.
RESTRICTED SECURITIES: The Fund may invest in restricted securities of companies
which the Adviser believes have significant growth potential. These securities
are subject to legal or contractual restrictions on resale. Consequently, there
is no public trading market for these securities and market quotations are not
readily available. 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. The Fund may not invest more than 15% of its net assets in
restricted securities (as described in the Fund's investment restrictions)
(restricted securities the Board of Trustees has determined are liquid are not
included in this amount). See "Investment Objective, Policies and Restrictions
- -- Investment Restrictions."
REPURCHASE AGREEMENTS: As described in the Prospectus, the Fund may enter into
repurchase agreements with sellers who are member firms (or a subsidiary
thereof) of the New York Stock Exchange (the "Exchange"), members of the Federal
Reserve System, recognized primary U.S. Government securities dealers or
institutions which the Adviser has determined to be of comparable
creditworthiness. The securities that the Fund purchases and holds through its
agent are U.S. Government securities, the values of which are equal to or
greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Fund together with the repurchase price
on repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and other
direct claims against a borrower. In purchasing loans, the Fund acquires some or
all of the interest of a bank or other lending institution in a loan to a
corporate borrower. Many such loans are secured, although some may be unsecured.
Such loans may be in default at the time of purchase. Loans that are fully
secured offer the Fund more protection than an unsecured loan in the event of
non-payment of scheduled interest or principal. However, there is no assurance
that the liquidation of collateral from a secured loan would satisfy the
corporate borrower's obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which the
Fund would assume all of the rights of the lending institution in a loan, or as
an assignment, pursuant to which the Fund would purchase an assignment of a
portion of a lender's interest in a loan either directly from the lender or
through an intermediary. The Fund may also purchase trade or other claims
against companies, which generally represent money owed by the company to a
supplier of goods or services. These claims may also be purchased at a time when
the company is in default.
Certain of the 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. These commitments may have the
effect of requiring the Fund to increase its investment in a company at a time
when the Fund might not otherwise decide to do so (including at a time when the
company's financial condition makes it unlikely that such amounts will be
repaid). To the extent that the Fund is committed to advance additional funds,
it will at all times hold and maintain in a segregated account cash or other
high grade debt obligations in an amount sufficient to meet such commitments.
The Fund's ability to receive payments of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. In selecting the loans and other direct investments
which the Fund will purchase, the Adviser will rely upon its (and not that of
the original lending institution's) own credit analysis of the borrower. As the
Fund may be required to rely upon another lending institution to collect and
pass on to the Fund amounts payable with respect to the loan and to enforce the
Fund's rights under the loan, an insolvency, bankruptcy or reorganization of the
lending institution may delay or prevent the Fund from receiving such amounts.
In such cases, the Fund will evaluate as well the creditworthiness of the
lending institution and will treat both the borrower and the lending institution
as an "issuer" of the loans for purposes of certain investment restrictions
pertaining to the diversification of the Fund's portfolio investments. The
highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Investments in
such loans may involve additional risks to the Fund. For example, if a loan is
foreclosed, the Fund could become part owner of any collateral, and would bear
the costs and liabilities associated with owning and disposing of the
collateral. In addition, it is conceivable that under emerging legal theories of
lender liability, the Fund could be held liable as a co-lender. It is unclear
whether loans and other forms of direct indebtedness offer securities law
protections against fraud and misrepresentation. In the absence of definitive
regulatory guidance, the Fund relies on the Adviser's research in an attempt to
avoid situations where fraud or misrepresentation could adversely affect the
Fund. In addition, 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. To the extent that the Adviser determines that
any such investments are illiquid, the Fund will include them in the investment
limitations described below.
"WHEN-ISSUED" SECURITIES: The Fund may purchase securities on a "when-issued" or
on a "forward delivery" basis. When the Fund commits to purchase a security on a
"when-issued" or "forward delivery" basis, it will set up procedures consistent
with the General Statement of Policy of the Securities and Exchange Commission
(the "SEC") concerning such purchases. Since that policy currently recommends
that an amount of the Fund's assets equal to the amount of the purchase be held
aside or segregated to be used to pay for the commitment, the Fund will always
have liquid assets sufficient to cover any commitments or to limit any potential
risk. However, although the Fund does not intend to make such purchases for
speculative purposes and intends to adhere to the provisions of the SEC policy,
purchases of securities on such bases may involve more risk than other types of
purchases. For example, the Fund may have to sell assets which have been set
aside in order to meet redemptions. Also, if the Fund determines it is necessary
to sell the "when-issued" or "forward delivery" securities before delivery, it
may incur a loss because of market fluctuations since the time the commitment to
purchase such securities was made and any gain or loss would not be tax-exempt.
INVERSE FLOATING RATE OBLIGATIONS: The Fund may invest in so called "inverse
floating rate obligations" or "residual interest" bonds or certificates
structured to have similar features. In creating such an obligation, a
municipality issues a certain amount of debt and pays a fixed interest rate. A
portion of the debt is issued as variable rate short-term obligations, the
interest rate of which is reset at short intervals, typically ranging from
thirty-five days to one year. The other half of the debt is issued as inverse
floating rate obligations, the interest rate of which is calculated based on the
difference between the entire amount of interest paid by the issuer on all of
the debt and the interest paid on the short-term obligation. Under usual
circumstances, the holder of the inverse floating rate obligation can generally
purchase an equal principal amount of the short-term obligation and link the two
obligations in order to create long-term fixed-rate bonds. Because the interest
rate on the inverse floating rate obligation is determined by subtracting the
short-term rate from a fixed amount, the interest rate will decrease as the
short-term rate increases and will increase as the short-term rate decreases.
The magnitude of increases and decreases in the market value of inverse floating
rate obligations may be approximately twice as large (or more if the inverse
instrument is issued in principal amount greater than the principal amount of
the short-term piece) as the comparable change in the market value of an equal
principal amount of long-term bonds which bear interest at the rate paid by the
issuer and have similar credit quality, redemption and maturity provisions.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, precious metals or other
commodities, or other financial indicators. Indexed securities typically, but
not always, are debt securities or deposits whose value at maturity (i.e.,
principal value) or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example, typically provide
for a maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices.
The performance of indexed securities depends to a great extent on the
performance of the security or other instrument to which they are indexed, and
may also be influenced by interest rate changes in the U.S. and abroad. At the
same time, indexed securities are subject to the credit risks associated with
the issuer of the security, and their values may decline substantially if the
issuer's creditworthiness deteriorates. Recent issuers of indexed securities
have included banks, corporations, and certain U.S. government agencies.
OPTIONS: The Fund intends to write covered put and call options and purchase put
and call options on fixed income securities that are traded on U.S. securities
exchanges and over-the-counter. Call options written by the Fund give the holder
the right to buy the underlying securities from the Fund at a fixed exercise
price; put options written by the Fund give the holder the right to sell the
underlying securities to the Fund at a fixed exercise price. A call option
written by the Fund is "covered" if the Fund owns the underlying security
covered by the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Fund in liquid assets in a segregated account with its custodian. A put
option written by the Fund is "covered" if the Fund maintains liquid assets in a
segregated account with its custodian, or else holds a put on the same security
and in the same principal amount as the put written where the exercise price of
the put held is equal to or greater than the exercise price of the put written
or is less than the exercise price of the put written if the difference is
maintained by the Fund in liquid assets in a segregated account with its
custodian. Put and call options written by the Fund may also be covered in such
other manner as may be in accordance with the requirements of the exchange on
which, or the counter party with which, the option is traded, and applicable
laws and regulations. The writer of an option may have no control over when the
underlying securities must be sold, in the case of a call option, or purchased,
in the case of a put option, since with regard to certain options, the writer
may be assigned an exercise notice at any time prior to the expiration of the
option.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by deposited liquid assets. Such
transactions permit the Fund to generate additional premium income, which will
partially offset declines in the value of portfolio securities or increases in
the cost of securities to be acquired. Also, effecting a closing transaction
will permit the cash or proceeds from the concurrent sale of any securities
subject to the option to be used for other Fund investments. If the Fund desires
to sell a particular security from its portfolio on which it has written a call
option, it will effect a closing transaction prior to or concurrent with the
sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; the Fund will realize a loss from
a closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the closing out of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a secondary market
for an option of the same series. If a secondary market does not exist, it might
not be possible to effect closing transactions in particular options with the
result that the Fund would have to exercise options purchased in order to
realize any profit or maintain options written until exercise or expiration. If
the Fund is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise. Reasons for the
absence of a liquid secondary market include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by a national securities exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation (the "OCC") may not at all times be adequate to handle
current trading volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the OCC as a result of trades on that exchange would continue to
be exercisable in accordance with their terms.
The Fund may write options in connection with buy-and-write transactions (i.e.,
the Fund may purchase a security and then write a call option against that
security). The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at- the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. If the call options are exercised in such
transactions, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Fund's purchase price of the security and the exercise price. If the options are
not exercised and the price of the underlying security declines, the amount of
such decline will be offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options may be used by the
Fund in the same market environments that call options are used in equivalent
buy-and-write transactions.
The Fund may write combinations of put and call options on the same security, a
practice known as a "straddle." By writing a straddle, the Fund undertakes a
simultaneous obligation to sell and purchase the same security in the event that
one of the options is exercised. If the price of the security subsequently rises
sufficiently above the exercise price to cover the amount of the premium and
transaction costs, the call will likely be exercised and the Fund will be
required to sell the underlying security at a below market price. This loss may
be offset, however, in whole or in part, by the premiums received on the writing
of the two options. Conversely, if the price of the security declines by a
sufficient amount, the put will likely be exercised. The writing of straddles
will likely be effective, therefore, only where the price of a security remains
stable and neither the call nor the put is exercised. In an instance where one
of the options is exercised, the loss on the purchase or sale of the underlying
security may exceed the amount of the premiums received.
The Fund may purchase put options to hedge against a decline in the value of its
portfolio. By using put options in this way, the Fund will reduce any profit it
might otherwise have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the price of
securities that the Fund anticipates purchasing in the future. The premium paid
for the 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 rises sufficiently, the option may expire worthless to the
Fund.
The Fund may also purchase warrants on fixed income securities. A warrant on a
fixed income security is a long-dated call option that provides the holder with
the right, but not the obligation, to purchase from an issuer a fixed income
security with a specified par value, coupon, and maturity at a fixed exercise
price on a specified date or between specified dates. Typically, the fixed
income securities that are deliverable pursuant to the warrant will be
noncallable securities. Warrants may be issued as entirely separate securities
or they may be attached to, but subsequently detachable from, a fixed income
security of the same issuer.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a certain
percentage (the "SEC illiquidity ceiling") of the Fund's assets. Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts which the Fund has in place with
such primary dealers will provide that the Fund has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by the Fund for writing the option, plus the
amount, if any, of the option's intrinsic value (i.e., the amount that the
option is in-the-money). The formula may also include a factor to account for
the difference between the price of the security and the strike price of the
option if the option is written out-of- the-money. The Fund will treat all or a
portion of the formula price as illiquid for purposes of the SEC illiquidity
ceiling imposed by the SEC staff. The Fund may also write over-the-counter
options with non-primary dealers and will treat the assets used to cover these
options as illiquid for purposes of such SEC illiquidity ceiling.
The Fund may purchase detachable call options on municipal securities, which are
options issued by an issuer of the underlying municipal securities giving the
purchaser the right to purchase the securities at a fixed price, up to a stated
time in the future or, in some cases, on a future date. The Fund may purchase
detachable call options either in connection with its purchase of the underlying
municipal securities or in separate transactions unrelated to purchases of the
underlying municipal securities. In general, however, the Fund will only
purchase detachable call options that are issued at the same time as the
underlying municipal securities. The Fund may or may not purchase the underlying
municipal securities. Because detachable call options may be long term
instruments, their value could be subject to greater volatility and, if the Fund
seeks to sell an option it has purchased, it could sustain a loss of all or a
portion of the amount paid to purchase the option. In this regard, detachable
call options have only recently been introduced and there is not yet an
established market for the sale of such instruments. In addition, depending on
changes in the value of the underlying municipal security, it may not be
profitable for the Fund to exercise an option it has purchased. In that event,
the Fund will lose the amount of the purchase price paid for the option.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities or contracts based on municipal
bond or other financial indices, including any index of fixed income securities,
as such contracts become available for trading ("Futures Contracts"). A "sale"
of a Futures Contract means a contractual obligation to deliver the securities
called for by the contract at a specified price in a fixed delivery month or, in
the case of a Futures Contract on an index of securities, to make or receive a
cash settlement. A "purchase" of a Futures Contract means a contractual
obligation to acquire the securities called for by the contract at a specified
price in a fixed delivery month or, in the case of a Futures Contract on an
index of securities, to make or receive a cash settlement. Futures Contracts
have been designed by exchanges which have been designated as "contract markets"
by the Commodity Futures Trading Commission (the "CFTC"), and must be executed
through a futures commission merchant, or brokerage firm, which is a member of
the relevant contract market. Existing contract markets include the Chicago
Board of Trade and the International Monetary Market of the Chicago Mercantile
Exchange. Futures Contracts are traded on these markets, and, through their
clearing corporations, the exchanges guarantee performance of the contracts as
between the clearing members of the exchange.
At the same time a Futures Contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit"). The initial deposit
varies but may be as low as 5% or less of the value of the contract. Daily
thereafter, the Futures Contract is valued and the payment of "variation margin"
may be required since each day the Fund would provide or receive cash that
reflects any decline or increase in the contract's value.
At the time of delivery of securities pursuant to a Futures Contract based on
fixed income securities, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest rate from that
specified in the contract. In some (but not many) cases, securities called for
by a Futures Contract may not have been issued when the contract was written.
A Futures Contract based on an index of securities, such as a municipal bond
index Futures Contract, provides for a cash payment, equal to the amount, if
any, by which the value of the index at maturity is above or below the value of
the index at the time the contract was entered into, times a fixed index
"multiplier". The index underlying such a Futures Contract is generally a broad
based index of securities designed to reflect movements in the relevant market
as a whole. The index assigns weighted values to the securities included in the
index, and its composition is changed periodically.
Although Futures Contracts call for the actual delivery of securities or, in the
case of Futures Contracts based on an index, the making or acceptance of a cash
settlement at a specified future time, the contractual obligation is usually
fulfilled before such date by buying or selling, as the case may be, on a
commodities exchange, an identical Futures Contract calling for settlement in
the same month, subject to the availability of a liquid secondary market. The
Fund incurs brokerage fees when it purchases and sells Futures Contracts.
One purpose of the purchase or sale of a Futures Contract entered into for
hedging purposes, in the case of a portfolio such as that of the Fund, which
holds or intends to acquire long-term fixed income securities, is to attempt to
protect the Fund from fluctuations in interest rates without actually buying or
selling long-term fixed income securities. For example, if the Fund owns
long-term bonds, and interest rates were expected to increase, the Fund might
enter into Futures Contracts for the sale of debt securities. Such a sale would
have much the same effect as selling an equivalent value of the long-term bonds
owned by the Fund. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the Futures
Contracts would increase at approximately the same rate, thereby keeping the net
asset value of the Fund from declining as much as it otherwise would have. The
Fund could accomplish similar results by selling bonds with long maturities and
investing in bonds with short maturities when interest rates are expected to
increase. However, the use of Futures Contracts as an investment technique
allows the Fund to maintain a hedging position without having to sell its
portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to attempt to hedge against anticipated purchases of
long-term bonds at higher prices. Since the fluctuations in the value of Futures
Contracts should be similar to that of long-term bonds, the Fund could take
advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the Futures
Contracts could be liquidated and the Fund could then buy long-term bonds on the
cash market. To the extent the Fund enters into Futures Contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Fund's obligations with respect to such Futures Contracts will consist of liquid
assets from its portfolio in an amount equal to the difference between the
fluctuating market value of such Futures Contracts and the aggregate value of
the initial and variation margin payments made by the Fund with respect to such
Futures Contracts.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out Futures Contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still not
result in a successful transaction.
In addition, Futures Contracts entail risks. Although the Fund believes that use
of such contracts will benefit the Fund, if the Adviser's investment judgment
about the general direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any such contract.
For example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of bonds held in its
portfolio and interest rates decrease instead, the Fund will lose part or all of
the benefit of the increased value of its bonds which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell bonds from
its portfolio to meet daily variation margin requirements. Such sales of bonds
may be, but will not necessarily be, at increased prices which reflect the
rising market. The Fund may have to sell securities at a time when it may be
disadvantageous to do so. The Fund may also enter into transactions in Futures
Contracts for non-hedging purposes, to the extent permitted by applicable law,
which involves greater risks.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options on Futures
Contracts ("Options on Futures Contracts") for hedging purposes and for
non-hedging purposes, to the extent permitted by applicable law. An Option on a
Futures Contract provides the holder with the right to enter into a "long"
position in the underlying Futures Contract, in the case of a call option, or a
"short" position in the underlying Futures Contract, in the case of a put
option, at a fixed exercise price up to a stated expiration date or, in the case
of certain options, on such date. Such Options on Futures Contracts will be
traded on contract markets regulated by the CFTC. Depending on the pricing of
the option compared to either the price of the Futures Contract upon which it is
based or the price of the underlying debt securities, it may or may not be less
risky than ownership of the Futures Contract or underlying debt securities. As
with the purchase of Futures Contracts, when the Fund is not fully invested, it
may purchase a call Option on a Futures Contract to hedge against a market
advance due to declining interest rates.
The writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the securities which are deliverable upon exercise
of the Futures Contract. If the futures price at expiration of the option is
below the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. The writing of a put Option on a
Futures Contract constitutes a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the Futures Contract. If the
futures price at expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium, less related transaction
costs, which provides a partial hedge against any increase in the price of
securities which the Fund intends to purchase. If a put or call option the Fund
has written is exercised, the Fund will incur a loss which will be reduced by
the amount of the premium it receives, less related transaction costs. Depending
on the degree of correlation between changes in the value of its portfolio
securities and changes in the value of its futures positions, the Fund's losses
from existing Options on Futures Contracts may to some extent be reduced or
increased by changes in the value of portfolio securities. The writer of an
Option on a Futures Contract is subject to the requirement of initial and
variation margin payments.
The Fund may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
security, or securities included in the index, underlying the Futures Contract,
or (c) through the holding of a call on the same Futures Contract and in the
same principal amount as the call written where the exercise price of the call
held (i) is equal to or less than the exercise price of the call written or (ii)
is greater than the exercise price of the call written if the difference is
maintained by the Fund in liquid assets in a segregated account with its
custodian. The Fund may cover the writing of put Options on Futures Contracts
(a) through sales of the underlying Futures Contract, (b) through segregation of
liquid assets in an amount equal to the value of the security or index
underlying the Futures Contract, or (c) through the holding of a put on the same
Futures Contract and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written or is less than the exercise price of the put written if the
difference is maintained by the Fund in liquid assets in a segregated account
with its custodian. Put and call Options on Futures Contracts written by the
Fund may also be covered in such other manner as may be in accordance with the
requirements of the exchange on which they are traded and applicable laws and
regulations.
The purchase of a put Option on a Futures Contract is similar in some respects
to the purchase of protective put options on portfolio securities. The Fund will
purchase a put Option on a Futures Contract to hedge the Fund's portfolio
against the risk of rising interest rates.
The amount of risk the Fund assumes when it purchases an Option on a Futures
Contract is the premium paid for the option plus related transaction costs,
although in order to realize a profit it may be necessary to exercise the option
and close out the underlying Futures Contract. In addition to the correlation
risks discussed above, the purchase of an option also entails the risk that
changes in the value of the underlying Futures Contract will not be fully
reflected in the value of the option purchased.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS: Various additional risks exist with respect to the trading of
options and futures. For example, the Fund's ability effectively to hedge all or
a portion of its portfolio through transactions in such instruments will depend
on the degree to which price movements in the underlying index or instrument
correlate with price movements in the relevant portion of the Fund's portfolio.
The trading of futures and options entails the additional risk of imperfect
correlation between movements in the futures or option price and the price of
the underlying index or obligation, while the trading of options also entails
the risk of imperfect correlation between securities used to cover options
written and the securities underlying such options. The anticipated spread
between the prices may be distorted because of various factors, which are set
forth under "Futures Contracts" above. The Fund may also enter into transactions
in such instruments for non-hedging purposes, which involves greater risks and
could result in losses which are not offset by gains on other portfolio assets.
The Fund's ability to engage in options and futures strategies will also depend
on the availability of liquid markets in such instruments. "Options" above sets
forth certain reasons why a liquid secondary market may not exist.
The liquidity of a secondary market in a Futures Contract or option thereon may
be adversely affected by "daily price fluctuation limits" established by
exchanges which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limit. In addition,
the exchanges on which futures and options are traded may impose limitations
governing the maximum number of positions on the same side of the market and
involving the same underlying instrument which may be held by a single investor,
whether acting alone or in concert with others (regardless of whether such
contracts are held on the same or different exchanges or held or written in one
or more accounts or through one or more brokers).
Options on securities may be traded over-the-counter. In an over-the-counter
trading environment, many of the protections afforded to exchange participants
will not be available. For example, there are no clearing house performance
guarantees. In addition, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over
a period of time. Although the purchaser
of an option cannot lose more than the amount of the premium plus related
transaction costs, this entire amount could be lost.
----------------
The investment objective and policies described above and the policies with
respect to portfolio management described below may be changed without
shareholder approval.
PORTFOLIO MANAGEMENT: Although in many cases the Fund will hold securities
(particularly, those which are unrated or which are in the medium and lower
rating categories) until maturity, the Fund intends to manage its portfolio by
buying and selling securities to the fullest extent practicable.
In managing its portfolio, the Fund seeks to take advantage of market
developments and yield disparities, which may include use of the following
strategies:
(1) shortening the average maturity of its portfolio in anticipation of a
rise in interest rates so as to minimize depreciation of principal;
(2) lengthening the average maturity of its portfolio in anticipation of a
decline in interest rates so as to maximize tax-exempt yield;
(3) selling one type of debt security (e.g., revenue bonds) and buying
another (e.g., general obligation bonds) when disparities arise in the
relative values of each; and
(4) changing from one debt security to an essentially similar debt security
when their respective yields are distorted due to market factors.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
shares of the Fund (which means the lesser of (i) more than 50% of its
outstanding shares of the Trust or a series or class, as applicable, or (ii) 67%
or more of the outstanding shares of the Trust or a series or class, as
applicable, present at a meeting at which holders of more than 50% of the
outstanding shares of the Trust or a series or class, as applicable, are
represented in person or by proxy):
The Fund may not:
(1) borrow money or pledge, mortgage or hypothecate in excess of 1/3 of its
assets, except as a temporary measure for extraordinary or emergency purposes
(the Fund intends to borrow money only from banks and only to accommodate
requests for the repurchase of shares of the Fund while effecting an orderly
liquidation of portfolio securities) (for the purpose of this restriction,
collateral arrangements with respect to options on fixed income securities,
Futures Contracts and Options on Futures Contracts and payments of initial and
variation margin in connection therewith are not considered a pledge of
assets);
(2) purchase any security or evidence of interest therein on margin, except
that the Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of securities and except that the Fund may
make deposits on margin in connection with options on fixed income securities,
Futures Contracts and Options on Futures Contracts;
(3) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent the writing, purchasing and selling of
puts, calls or combinations thereof with respect to securities and Futures
Contracts;
(4) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933, as
amended, in selling a portfolio security;
(5) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except Futures Contracts and Options on Futures Contracts) in the ordinary
course of the business of the Fund (the Fund reserves the freedom of action to
hold and to sell real estate acquired as a result of the ownership of
securities);
(6) purchase securities of any issuer if such purchase at the time thereof
would cause more than 10% of the voting securities of such issuer to be held
by the Fund;
(7) issue any senior security (as that term is defined in the Investment
Company Act of 1940, as amended (the "1940 Act")), if such issuance is
specifically prohibited by the 1940 Act or the rules and regulations
promulgated thereunder; and
(8) make loans to other persons except through the use of repurchase
agreements, the purchase of commercial paper or the purchase of all or a
portion of an issue of debt securities in accordance with its investment
objective, policies and restrictions, and provided that not more than 10% of
the Fund's assets will be invested in repurchase agreements maturing in more
than seven days.
As a matter of non-fundamental policy, the Fund may not knowingly invest in
securities (other than repurchase agreements), which are subject to legal or
contractual restrictions on resale unless the Board of Trustees has determined
that such securities are liquid based upon trading markets for the specific
security, if more than 15% of the Fund's net assets (taken at market value)
would be so invested.
For purposes of the investment restrictions described above and the state and
federal restrictions described below, the issuer of a tax-exempt security is
deemed to be the entity (public or private) ultimately responsible for the
payment of the principal of and interest on the security.
STATE AND FEDERAL RESTRICTIONS: In order to comply with certain state and
federal statutes, the Fund will not, as a matter of operating policy, (i) invest
more than 5% of its total assets at the time of investment in unsecured
obligations of issuers which, including predecessors, controlling persons,
general partners and guarantors, have a record of less than three years'
continuous business operation or relevant business experience, (ii) purchase or
retain in its portfolio any securities issued by an issuer any of whose
officers, directors, trustees or security holders is an officer or Trustee of
the Fund, or is a member, partner, officer or Director of the Adviser if, after
the purchase of the securities of such issuer by the Fund, one or more of such
persons owns beneficially more than 1/2 of 1% of the shares or securities, or
both, (all taken at market value) of such issuer and such persons owning more
than 1/2 of 1% of such shares or securities together own beneficially more than
5% of such shares or securities, or both, (all taken at market value), (iii)
sell any security which it does not own unless by virtue of its ownership of
other securities the Fund has at the time of sale a right to obtain securities,
without payment of further consideration, equivalent in kind and amount to the
securities sold and provided that if such right is conditional the sale is made
upon the same conditions, (iv) invest for the purpose of exercising control or
management, or (v) purchase securities issued by any registered investment
company except by purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open market, is
part of a plan of merger or consolidation, provided, however, that the Fund
shall not purchase the securities of any registered investment company if such
purchase at the time thereof would cause more than 10% of the total assets of
the Fund (taken at market value) to be invested in the securities of such
issuers or would cause more than 3% of the outstanding voting securities of any
such issuer to be held by the Fund, and provided further, that the Fund shall
not purchase securities issued by any open-end investment company. These
policies are not fundamental and may be changed by the Fund without shareholder
approval in response to changes in the various state and federal requirements.
Except for investment restriction (1) above, these investment restrictions are
adhered to at the time of purchase or utilization of assets; a subsequent change
in circumstances will not be considered to result in a violation of policy.
3. MANAGEMENT OF THE FUND
The Board of Trustees provides broad supervision over the affairs of the Fund.
The Adviser is responsible for the management of the Fund's assets, and the
officers of the Trust are responsible for its operations. The Trustees and
officers of the Trust are listed below, together with their principal
occupations during the past five years (their titles may have varied during that
period).
TRUSTEES
A. KEITH BRODKIN,* Chairman and President (born 8/4/35)
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY* (born 9/14/26)
Private investor; Massachusetts Financial Services Company, former Chairman
and Director (prior to September 30, 1991); Cambridge Bancorp, Director;
Cambridge Trust Company, Director
PETER G. HARWOOD (born 4/3/26)
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES (born 5/1/36)
Eastern Enterprises (diversified services company), Chairman and Chief
Executive Officer
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA (born 6/23/35)
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU (born 4/10/35)
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge,
Massachusetts
CHARLES W. SCHMIDT (born 3/18/28)
Private investor; OHM Corporation, Director; The Boston Company, Director;
Boston Safe Deposit and Trust Company, Director; Mohawk Paper Company,
Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, President and Director
ELAINE R. SMITH (born 4/25/46)
Independent consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (from August 1990 to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (Investment Adviser), Chairman and Director;
Eastern Enterprises, Director
Address: 10 Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
JOAN S. BATCHELDER,* Vice President (born 4/12/44)
Massachusetts Financial Services Company, Senior Vice President
CYNTHIA M. BROWN,* Vice President (born 6/27/57)
Massachusetts Financial Services Company, Senior Vice President
ROBERT J. MANNING,* Vice President (born 10/20/63)
Massachusetts Financial Services Company, Senior Vice President
BERNARD SCOZZAFAVA,* Vice President (born 1/28/61)
Massachusetts Financial Services Company, Vice President
JAMES T. SWANSON,* Vice President (born 6/12/49)
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September,
1996); Deloitte & Touch LLP, Senior Manager (until September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March, 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994)
- ----------
*"Interested persons" (as defined in the Investment Company Act of 1940 (the
"1940 Act")) of the Adviser, whose address is 500 Boylston Street, Boston,
Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS
affiliates or with certain other funds of which MFS or a subsidiary of MFS is
the investment adviser or distributor. Mr. Brodkin, the Chairman of MFD,
Messrs. Shames and Scott, Directors of MFD and Mr. Cavan, the Secretary of
MFD, hold similar positions with certain other MFS affiliates. Mr. Bailey is a
Director of Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada
(U.S.)"), the corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $3,250 per year plus $165 per meeting and $130 per
committee meeting attended, together with such Trustees' out-of-pocket expenses)
and has adopted a retirement plan for non-interested Trustees and Mr. Bailey.
Under this plan, a Trustee will retire upon reaching age 73 and if the Trustee
has completed at least five years of service, he would be entitled to annual
payments during his lifetime of up to 50% of such Trustee's average annual
compensation (based on the three years prior to his retirement) depending on his
length of service. A Trustee may also retire prior to age 73 and receive reduced
payments if he has completed at least five years of service. Under the plan, a
Trustee (or his beneficiaries) will also receive benefits for a period of time
in the event the Trustee is disabled or dies. These benefits will also be based
on the Trustee's average annual compensation and length of service. There is no
retirement plan provided by the Trust for Messrs. Brodkin, Scott and Shames. The
Fund will accrue its allocable share of compensation expenses each year to cover
current year's service and amortize past service cost.
Set forth below is certain information concerning the cash compensation paid to
the Trustees and benefits accrued, and estimated benefits payable, under the
retirement plan.
TRUSTEE COMPENSATION TABLE
RETIREMENT
BENEFIT TOTAL TRUSTEE
ACCRUED AS ESTIMATED FEES FROM FUND
TRUSTEE FEES PART OF FUND CREDITED YEARS AND FUND
TRUSTEE FROM FUND(1) EXPENSE(1) OF SERVICE(2) COMPLEX(3)
- -----------------------------------------------------------------------------
Richard B. Bailey $5,325 $1,230 8 $247,168
A. Keith Brodkin --0-- --0-- N/A --0--
Peter G. Harwood 5,845 815 5 105,995
J. Atwood Ives 5,455 1,290 17 98,750
Lawrence T. Perera 5,420 2,535 24 98,310
William J. Poorvu 5,680 2,706 24 102,840
Charles W. Schmidt 5,845 2,629 17 105,995
Arnold D. Scott --0-- --0-- N/A --0--
Jeffrey L. Shames --0-- --0-- N/A --0--
David B. Stone 5,975 1,944 11 108,710
Elaine R. Smith 5,845 1,314 27 105,995
- ------------
(1) For fiscal year ended January 31, 1997.
(2) Based on normal retirement age of 73.
(3) Information provided is for calendar year 1996. All Trustees receiving
compensation served as Trustees of 23 funds within the MFS fund complex
(having aggregate net assets at December 31, 1996, of approximately $21.1
billion) except Mr. Bailey, who served as Trustee of 81 funds within the MFS
fund complex (having aggregate net assets at December 31, 1996, of
approximately $38.4 billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
----------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- --------------------------------------------------------------------------------
$4,793 $719 $1,198 $1,677 $2,396
5,149 772 1,287 1,802 2,574
5,505 826 1,376 1,927 2,752
5,861 879 1,465 2,051 2,930
6,217 932 1,554 2,176 3,108
6,573 986 1,643 2,300 3,286
- ------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of April 30, 1997, all Trustees and officers as a group owned less than 1% of
the outstanding shares of the Fund. As of April 30, 1997, Merrill Lynch, Pierce,
Fenner & Smith Inc., P.O. Box 45286, Jacksonville, FL was the record owner of
approximately 14.68% of the total outstanding Class A shares of the Fund, and
was the record owner of approximately 31.22% of the total outstanding Class B
shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to liabilities to the Trust or its shareholders, it is finally adjudicated
that they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect to
any matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined, pursuant to the Declaration of Trust, that such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Prospectus contains information with respect to the management of the
Adviser and other investment companies for which MFS serves as investment
adviser.
The Adviser manages the assets of the Fund pursuant to an Investment Advisory
Agreement, dated September 1, 1993, as amended (the "Advisory Agreement"). Under
the Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. Subject to such policies as the Trustees may determine, the
Adviser makes investment decisions for the Fund. For these services and
facilities, under the Advisory Agreement, the Adviser receives a management fee,
computed and paid monthly, in an amount equal to the sum of 0.30% of the first
$1.3 billion of the Fund's average daily net asset value and 0.25% of the amount
in excess of $1.3 billion plus 4.75% of the Fund's gross income (i.e., income
other than gains from the sale of securities), in each case on an annualized
basis, for the Fund's then-current fiscal year.
For the Fund's fiscal years ended January 31, 1995, 1996 and 1997, management
fees amounted to $6,385,098, $6,996,766 and $7,154,011, equivalent on an
annualized basis to 0.67%, 0.67% and 0.67%, respectively, of the Fund's daily
net assets. In order to comply with the expense limitations of certain state
securities commissions, the Adviser will reduce its management fee or otherwise
reimburse the Fund for any expense, exclusive of interest, taxes and brokerage
commissions, incurred by the Fund in any fiscal year to the extent such expenses
exceed the most restrictive of such state expense limitations. The Adviser will
make appropriate adjustments to such reimbursements in response to any amendment
or rescission of the various state requirements.
The Fund pays all of its expenses (other than those assumed by MFS or MFD),
including: Trustee fees discussed above, governmental fees; interest charges;
taxes; membership dues in the Investment Company Institute allocable to the
Fund; fees and expenses of independent auditors, of legal counsel, and of any
transfer agent, registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares; expenses of preparing, printing and mailing
share certificates, shareholder reports, notices, proxy statements to
shareholders and reports to governmental officers and commissions; brokerage and
other expenses connected with the execution, recording and settlement of
portfolio security transactions; insurance premiums; fees and expenses of State
Street Bank and Trust Company, the Fund's custodian, for all services to the
Fund, including safekeeping of funds and securities and maintaining required
books and accounts; expenses of calculating the net asset value of the Fund's
shares; and expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of the Fund and the preparation,
printing and mailing of prospectuses for such purposes are borne by the Fund
except that the Fund's Distribution Agreement with MFD requires MFD to pay for
prospectuses that are to be used for sales purposes. Expenses of the Trust which
are not attributable to a specific series are allocated among the series in a
manner believed by management of the Trust to be fair and equitable. For a list
of the Fund's expenses, including the compensation paid to the Trustees who are
not officers of MFS, for the fiscal year ended January 31, 1997, see "Statement
of Operations" in the Fund's Annual Report to shareholders incorporated by
reference into this SAI.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing the investments of the Fund, effecting the portfolio
transactions of the Fund and, in general, administering the affairs of the Fund.
The Advisory Agreement will remain in effect until August 1, 1997, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
shares of the Fund (as defined in "Investment Restrictions") and, in either
case, by a majority of the Trustees who are not parties to the Advisory
Agreement or interested persons of any such party. The Advisory Agreement
terminates automatically if assigned and may be terminated without penalty by
vote of a majority of the shares of the Fund (as defined in "Investment
Restrictions") or by either party to the Advisory Agreement on not more than 60
days' nor less than 30 days' written notice. The Advisory Agreement provides
that if MFS ceases to serve as the Adviser to the Fund, the Fund will change its
name so as to delete the initials "MFS". The Advisory Agreement further provides
that MFS may render services to others and may permit fund clients in addition
to the Fund to use the initials "MFS" in their names. The Advisory Agreement
also provides that neither the Adviser nor its personnel shall be liable for any
error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in the execution and management of the
Fund, except for willful misfeasance, bad faith or gross negligence in the
performance of its or their duties or by reason of reckless disregard of its or
their obligations and duties under the Advisory Agreement.
ADMINISTRATOR
MFS provides the Fund with certain administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997. Under this Agreement, MFS
provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee up
to 0.015% per annum of the Fund's average daily net assets, provided that the
administrative fee is not assessed on Fund assets that exceed $3 billion.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and trust
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities, including
repurchase agreements, issued by the Custodian and may deal with the Custodian
as principal in securities transactions. The Custodian also acts as the dividend
disbursing agent of the Fund. The Custodian has contracted with the Adviser to
perform certain accounting functions related to options transactions for which
the Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement, effective August 1, 1985, as amended (the
"Agency Agreement") with the Trust. The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and performing
transfer agent functions, and the keeping of records in connection with the
issuance, transfer and redemption of the shares of each class of the Fund. For
these services, the Shareholder Servicing Agent will receive a fee calculated as
a percentage of the average daily net assets of the Fund at an effective annual
rate of 0.13%. In addition, the Shareholder Servicing Agent will be reimbursed
by the Fund for certain expenses incurred by the Shareholder Servicing Agent on
behalf of the Fund. State Street Bank and Trust Company, the dividend and
distribution disbursing agent of the Fund, has contracted with the Shareholder
Servicing Agent to administer and perform certain dividend and distribution
disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement, dated
January 1, 1995 (the "Distribution Agreement"), with the Trust. Prior to January
1, 1995, MFS Financial Services, Inc. ("FSI"), another wholly owned subsidiary
of MFS, was the Fund's distributor. Where this SAI refers to MFD in relation to
the receipt or payment of money with respect to a period or periods prior to
January 1, 1995, such reference shall be deemed to include FSI, as the
predecessor in interest to MFD. Prior to that date, MFS served as the Fund's
principal underwriter pursuant to a distribution agreement, dated January 18,
1984, with the Fund's predecessor. Except for the periods from March 1, 1989 to
the close of business on March 23, 1989, February 6, 1990 to the close of
business on February 7, 1990, and on June 3, 1994 only shareholders of the Fund
have been permitted to purchase additional Fund shares since June, 1985. As of
the close of business on February 28, 1990, through November 4, 1990, shares of
the Fund were also not available for sale to existing shareholders (except
through the reinvestment of dividends and capital gains of the Fund). On August
5, 1996, Class A shares and Class B shares of the Fund became available for sale
to new shareholders.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of Class A shares of the Fund is their net
asset value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share of the
Fund is calculated by dividing the net asset value of a Class A share by the
difference (expressed as a decimal) between 100% and the sales charge percentage
of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any person, including
members of a family unit (e.g., husband, wife, and minor children) and bona fide
trustees, and also applies to purchases made under the Right of Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs" below). A group
might qualify to obtain quantity sales charge discounts (see "Investment and
Withdrawal Programs" below).
If shares of the Fund are made available for sale, Class A shares may be sold at
their net asset value to certain persons or in certain circumstances as
described in the Prospectus. Such sales are made without a sales charge to
promote good will with employees and others with whom MFS, MFD and/or the Fund
have business relationships, and because the sales effort, if any, involved in
making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of the offering price or as a percentage of the net amount
invested as listed in the Prospectus. In the case of the maximum sales charge,
the dealer retains 4% and MFD retains approximately 3/4 of 1% of the public
offering price. In addition, MFD, on behalf of the Fund, pays a commission to
dealers who initiate and are responsible for purchases of $1 million or more as
described in the Prospectus.
CLASS B SHARES: MFD acts as agent in selling Class B shares of the Fund to
dealers. The public offering price of Class B shares is their net asset value
next computed after the sale (see "Purchases" in the Prospectus).
GENERAL: Neither MFD nor dealers are permitted to delay the placement of orders
to benefit themselves by a price change. On occasion, MFD may obtain brokers
loans from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
For the Fund's fiscal year ended January 31, 1997, gross sales charges on sales
of Class A shares of the Fund amounted to $3,806,205, of which $667,359 was
retained by MFD and $3,138,846 by dealers, banks and certain other financial
institutions. The Fund received $151,098,464, representing the aggregate net
asset value of such shares. For the Fund's fiscal year ended January 31, 1996,
gross sales charges on sales of Class A shares of the Fund amounted to
$3,940,592, of which $670,957 was retained by MFD and $3,269,635 by dealers,
banks and certain other financial institutions. The Fund received $145,062,665,
representing the aggregate net asset value of such shares. For the Fund's fiscal
year ended January 31, 1995, gross sales charges on sales of Class A shares of
the Fund amounted to $9,569,708, of which $1,576,774 was retained by MFD and
$7,992,934 by dealers, banks and certain other financial institutions. The Fund
received $288,599,775, representing the aggregate net asset value of such
shares.
For the Fund's fiscal years ended January 31, 1997, 1996 and 1995 the CDSC
imposed on redemption of Class A shares was $23,523, $61,548 and $-0-,
respectively. For the Fund's fiscal years ended January 31, 1997, 1996 and 1995,
the CDSC imposed on redemption of Class B shares was $190,546, $196,890 and
$57,796, respectively.
The Distribution Agreement will remain in effect until August 1, 1997, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by a
portfolio committee consisting of employees of the Adviser who are appointed and
supervised by its senior officers. Changes in the investments of the Fund are
reviewed by its Board of Trustees. Members of the Fund's portfolio committee may
serve other clients of the Adviser or any subsidiary of the Adviser in a similar
capacity.
The primary consideration in portfolio security transactions for the Fund is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in which, and the broker-dealers through which, it seeks this
result. Municipal Bonds and other debt securities are traded principally in the
over-the-counter market on a net basis through dealers acting for their own
account and not as brokers. The cost of securities purchased from underwriters
includes an underwriter's commission or concession, and the prices at which
securities are purchased and sold from and to dealers include a dealer's mark-up
or mark-down. The Adviser normally seeks to deal directly with the primary
market makers unless, in its opinion, better prices are available elsewhere.
Subject to the requirement of seeking execution at the most favorable price,
securities may, as authorized by the Advisory Agreement, be bought from or sold
to dealers who have furnished statistical, research and other information or
services to the Adviser or who have sold shares of funds for which MFS serves as
investment adviser. At present no arrangements to recapture commission payments
are in effect.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, the Fund believes that its ability to
participate in volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Fund's prospectus. The programs involve no extra charge to
shareholders (other than a sales charge in the case of certain Class A share
purchases) and may be changed or discontinued at any time by a shareholder or
the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with shares of Class B of the Fund or any of the classes
of other MFS Funds or MFS Fixed Fund within a 13-month period (or 36- month
period, in the cases of purchases of $1 million or more), the shareholder may
obtain Class A shares of the Fund at the same reduced sales charge as though the
total quantity were invested in one lump sum by completing the Letter of Intent
section of the Fund's Account Application or filing a separate Letter of Intent
application (available from the Shareholder Servicing Agent) within 90 days of
the commencement of purchases. Subject to acceptance by MFD and the conditions
mentioned below, each purchase will be made at a public offering price
applicable to a single transaction of the dollar amount specified in the Letter
of Intent application. The shareholder or his dealer must inform MFD that the
Letter of Intent is in effect each time shares are purchased. The shareholder
makes no commitment to purchase additional shares, but if his purchases within
13 months (or 36 months in the case of purchases of $1 million or more) plus the
value of shares credited toward completion of the Letter of Intent do not total
the sum specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a person
other than the person signing the Letter of Intent application must be
accompanied by a written statement from the dealer stating that the shares were
paid for by the person signing such Letter. Neither income dividends nor capital
gain distributions taken in additional shares will apply toward the completion
of the Letter of Intent. Dividends and distributions of other MFS Funds
automatically reinvested in shares of the Fund at net asset value pursuant to
the Distribution Investment Program will also not apply toward completion of the
Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month or 36-month period, as applicable), the
shareholder will be notified and the escrowed shares will be released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when that shareholder's new
investment, together with the current offering price value of all holdings of
Class A, B and C shares of that shareholder in the MFS Funds or MFS Fixed Fund
reaches a discount level. See "Purchases" in the Prospectus for the sales
charges on quantity purchases. For example, if a shareholder owns shares valued
at $75,000 and purchases $25,000 of Class A shares of the Fund, the sales charge
for the $25,000 purchase would be at the rate of 4% (the rate applicable to
single transactions of $100,000). A shareholder must provide the Shareholder
Servicing Agent (or his investment dealer must provide MFD) with information to
verify that the quantity sales charge discount is applicable at the time the
investment is made.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of such fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and not subject to any CDSC.
Distributions will be invested at the close of business of the payable date for
distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other MFS fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments, based
upon the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100 except in certain limited circumstances. The
aggregate withdrawals of Class B shares in any year pursuant to a SWP generally
are limited to 10% of the value of the account at the time of establishment of
the SWP. SWP payments are drawn from the proceeds of share redemptions (which
would be a return of principal and, if reflecting a gain, would be taxable).
Redemptions of Class B shares will be made in the following order: (i) to the
extent necessary, any "Free Amount"; (ii) any "Reinvested Shares"; (iii) to the
extent necessary, the "Direct Purchase" subject to the lowest CDSC (as such
terms are defined in "Contingent Deferred Sales Charge" in the Prospectus). The
CDSC will be waived in the case of redemptions of Class B shares pursuant to a
SWP, but will not be waived in the case of SWP redemptions of Class A shares
which are subject to a CDSC. To the extent that redemptions for such periodic
withdrawals exceed dividend income reinvested in the account, such redemptions
will reduce and may eventually exhaust the number of shares in the shareholder's
account. All dividend and capital gain distributions for an account with a SWP
will be reinvested in full and fractional shares of the Fund at the net asset
value in effect as of the close of business on the record date for such
distributions. To initiate this service, shares generally having an aggregate
value of at least $5,000 either must be held on deposit by, or certificates for
such shares must be deposited with, the Shareholder Servicing Agent. With
respect to Class A shares, maintaining a withdrawal plan concurrently with an
investment program would be disadvantageous because of the sales charges
included in share purchases and the imposition of a CDSC on certain redemptions.
The shareholder may deposit into the account additional shares of the Fund,
change the payee or change the dollar amount of each payment. The Shareholder
Servicing Agent may charge the account for services rendered and expenses
incurred beyond those normally assumed by the Fund with respect to the
liquidation of shares. No charge is currently assessed against the account, but
one could be instituted by the Shareholder Servicing Agent on 60 days' notice in
writing to the shareholder in the event that the Fund ceases to assume the cost
of these services. The Fund may terminate any SWP for an account if the value of
the account falls below $5,000 as a result of share redemptions (other than as a
result of a SWP) or an exchange of shares of the Fund for shares of another MFS
Fund. Any SWP may be terminated at any time by either the shareholder or the
Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
GROUP PURCHASES: A bona fide group and all of its members may be treated as a
single purchaser and, under the Right of Accumulation (but not a Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar group; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
other MFS Funds, if available for sale, under the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to six different funds
effective on the seventh day of each month or of every third month, depending
whether monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial exchange will occur
after receipt and processing by the Shareholder Servicing Agent of an
application in good order. Exchanges will continue to be made from a
shareholder's account in any MFS Fund, as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as shares of the Fund are registered; if by telephone --
proper account identification is given by the dealer or shareholder of record).
Each Exchange Change Request (other than termination of participation in the
program) must involve at least $50. Generally, if an Exchange Change Request is
received before the close of business on the last business day of a month, the
Exchange Change Request will be effective for the following month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the exchange privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the
other MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund
and holders of Class A shares of MFS Cash Reserve Fund in the case where such
shares are acquired through direct purchase or reinvested dividends) who have
redeemed their shares have a one-time right to reinvest the redemption proceeds
in the same class of shares of any of the MFS Funds (if shares of the fund are
available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid; however, only shareholders who are
also shareholders of the Fund may reinvest their proceeds in the Fund (if
available for sale). In the case of proceeds reinvested in shares of MFS Money
Market Fund, MFS Government Money Market Fund and Class A shares of MFS Cash
Reserve Fund, the shareholder has the right to exchange the acquired shares for
shares of another MFS Fund at net asset value pursuant to the exchange privilege
described below. Such a reinvestment must be made within 90 days of the
redemption and is limited to the amount of the redemption proceeds. If the
shares credited for any CDSC paid are then redeemed within six years of the
initial purchase for Class B shares (or within 12 months of the initial purchase
of certain Class A shares), a CDSC will be imposed upon redemption. Although
redemptions and repurchases of shares are taxable events, a reinvestment within
a certain period of time in the same fund may be considered a "wash sale" and
may result in the inability to recognize currently all or a portion of any loss
realized on the original redemption for federal income tax purposes. Please see
your tax adviser for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds (if available for sale and if the purchaser is eligible to
purchase the class of shares) at their net asset value. Exchanges will be made
only after instructions in writing or by telephone (an "Exchange Request") are
received for an established account by the Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by telephone --
proper 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) record
keeping system made available by the Shareholder Servicing Agent) or all the
shares in the account. Each exchange involves the redemption of the shares of
the Fund to be exchanged and the purchase at net asset value (i.e., without a
sales charge) of shares of the same class of the other MFS Fund. Any gain or
loss on the redemption of the shares exchanged is reportable on the
shareholder's federal income tax return. No more than five exchanges may be made
in any one Exchange Request by telephone. If an Exchange Request is received by
the Shareholder Servicing Agent prior to the close of regular trading on the
Exchange, the exchange usually will occur on that day if all the requirements
set forth above have been complied with at that time. However, payment of the
redemption proceeds by the Fund, and thus the purchase of shares of the other
MFS Fund, may be delayed for up to seven days if the Fund determines that such a
delay would be in the best interest of all its shareholders. Investment dealers
which have satisfied criteria established by MFD may also communicate a
shareholder's Exchange Request to MFD by facsimile subject to the requirements
set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other MFS Fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds who are shareholders of the Fund (except holders of shares of MFS
Money Market Fund, MFS Government Market Fund, and Class A shares of the Cash
Reserve Fund acquired through direct purchase and dividends reinvested prior to
June 1, 1992) have the right to exchange their shares for Class A shares of the
Fund. subject to the conditions, if any, set forth in their respective
prospectuses. In addition, unitholders of the MFS Fixed Fund have the right to
exchange their units (except units acquired through direct purchases) for shares
of the Fund, subject to the conditions, if any, imposed upon such withholders by
the MFS Fixed Fund.
Any state income tax advantages for investment in state-specific shares of each
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timer accounts (see "Purchases" in the Prospectus).
6. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), by meeting all applicable requirements of
Subchapter M, including requirements as to the nature of the Fund's gross
income, the amount of Fund distributions (as a percentage of both the Fund's
overall income and its tax-exempt income), and the composition and holding
period of the Fund's portfolio assets. Because the Fund intends to distribute
all of its net investment income and net realized capital gains to its
shareholders in accordance with the timing requirements imposed by the Code, it
is not expected that the Fund will be required to pay any federal income or
excise taxes. If the Fund should fail to qualify as a "regulated investment
company" in any year, the Fund would incur a regular corporate federal income
tax upon its taxable income and Fund distributions would generally be taxable as
ordinary dividend income to the shareholders.
The portion of the Fund's distributions of net investment income that is
attributable to interest from tax-exempt securities will be designated by the
Fund as an "exempt-interest dividend" under the Code and will generally be
exempt from federal income tax in the hands of the shareholders so long as at
least 50% of the total value of the Fund's assets consists of tax-exempt
securities at the close of each quarter of the Fund's taxable year.
Distributions of tax-exempt interest earned from certain securities may,
however, be treated as an item of tax preference for shareholders under the
federal alternative minimum tax, and all exempt-interest dividends may increase
a corporate shareholder's alternative minimum tax. The percentage of income
designated as tax-exempt will be applied uniformly to all distributions by the
Fund of net investment income made during each fiscal year of the Fund and may
differ from the percentage of distributions consisting of tax-exempt interest in
any particular month. Shareholders are required to report exempt- interest
dividends received from the Fund on their federal income tax returns.
The Fund may also recognize some net investment income that is not tax-exempt,
as well as capital gains and losses as a result of the disposition of securities
and from certain options and futures transactions. Shareholders of the Fund
normally will have to pay federal income taxes, and any state or local taxes, on
the non exempt-interest dividends and capital gain distributions they receive
from the Fund; however, the Fund does not expect that the non-tax-exempt portion
of its net investment income, if any, will be substantial. That portion of net
investment income distributions not designated as tax-exempt and any
distributions from net short-term capital gains are taxable to shareholders as
ordinary income for federal income tax purposes, whether the distributions are
paid in cash or reinvested in additional shares. Because the Fund expects to
earn primarily tax-exempt interest income, it is expected that no Fund dividends
will qualify for the dividends received deduction for corporations.
Distributions of net capital gains (i.e., the excess of net long-term capital
gains over net short-term capital losses), whether paid in cash or reinvested in
additional shares, are taxable to shareholders as long-term capital gains for
federal income tax purposes, without regard to the length of time the
shareholders have held their shares. Any Fund dividend that is declared in
October, November, or December of any calendar year, that is payable to
shareholders of record in such a month, and that is paid the following January
will be treated as if received by the shareholders on December 31 of the year in
which the dividend is declared. The Fund will notify shareholders regarding the
federal tax status of its distributions after the end of each calendar year.
Any Fund distribution of net capital gains or net short-term capital gains will
have the effect of reducing the per share net asset value of shares in the Fund
by the amount of the distribution. Shareholders purchasing shares shortly before
the record date of any such distribution may thus pay the full price for the
shares and then effectively receive a portion of the purchase price back as a
taxable distribution.
Interest on indebtedness incurred by shareholders to purchase or carry shares of
the Fund will not be deductible for federal income tax purposes. Exempt-
interest dividends are taken into account in calculating the amount of social
security and railroad retirement benefits that may be subject to federal income
tax. Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by private activity bonds should
consult their tax advisors before purchasing shares of the Fund.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss.
However, any loss realized upon a disposition of shares in the Fund held for six
months or less will be disallowed to the extent of any exempt-interest dividends
received with respect to those shares. If not disallowed, any such loss will be
treated as a long-term capital loss to the extent of any distributions of net
capital gain made with respect to those shares. Any loss realized upon a
disposition of shares may also be disallowed under rules relating to wash sales.
Gain may be increased (or loss reduced) upon a redemption of Class A shares of
the Fund within 90 days after their purchase followed by any purchase (including
purchases by exchange or by reinvestment) without payment of an additional sales
charge of Class A shares of the Fund or of another MFS Fund (or any other shares
of an MFS Fund generally sold subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders. Any investment in zero
coupon securities and certain securities purchased at a market discount will
cause the Fund to recognize income prior to the receipt of cash payments with
respect to these securities. In order to distribute this income and avoid a tax
on the Fund, the Fund may be required to liquidate portfolio securities that it
might otherwise have continued to hold, potentially resulting in additional
taxable gain or loss to the Fund.
The Fund's transactions in options and Futures Contracts will be subject to
special tax rules that may affect the amount, timing, and character of Fund
income and distributions to shareholders. For example, certain positions held by
the Fund on the last business day of each taxable year will be marked to market
(i.e., treated as if closed out) on that day, and any gain or loss associated
with the positions will be treated as 60% long-term and 40% short-term capital
gain or loss. Certain positions held by the Fund that substantially diminish its
risk of loss with respect to other positions in its portfolio may constitute
"straddles," and may be subject to special tax rules that would cause deferral
of Fund losses, adjustments in the holding periods of Fund securities, and
conversion of short-term into long-term capital losses. Certain tax elections
exist for straddles that may alter the effects of these rules. The Fund will
limit its activities in options and Futures Contracts to the extent necessary to
meet the requirements of Subchapter M of the Code.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends to
withhold U.S. Federal income tax at the rate of 30% on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower rate may be permitted under an applicable treaty.
Any amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period appropriate
to such claims. Distributions received from the Fund by Non-U.S. Persons may
also be subject to tax under the laws of their own jurisdiction.
The Fund is also required in certain circumstances to apply backup withholding
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a Non-U.S. Person) who does not furnish to the Fund certain
information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments which
have been subject to 30% withholding.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes. The
exemption of exempt-interest dividends for federal income tax purposes does not
necessarily result in exemption under the tax laws of any state or local taxing
authority. Some states do exempt from tax that portion of an exempt- interest
dividend which represents interest received by a regulated investment company on
its holdings of tax-exempt securities of that state and its political
subdivisions and instrumentalities. Therefore, the Fund will report annually to
its shareholders the percentage of interest income earned by the Fund during the
preceding year on Municipal Bonds and will indicate, on a state-by-state basis
only, the source of such income. Each shareholder is advised to consult his own
tax adviser regarding the exemption of exempt- interest dividends under
applicable state and local law.
7. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays or the day on which they are observed: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.) This determination is made once during each
day as of the close of regular trading on the Exchange by deducting the amount
of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding. Debt securities (other than short-term obligations),
including listed issues, are valued on the basis of valuations furnished by
pricing service, which utilizes both dealer-supplied valuations and electronic
data processing techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices, since
such valuations are believed to reflect the fair value of such securities. Use
of the pricing services has been approved by the Board of Trustees. Positions in
listed options, Futures Contracts and Options on Futures Contracts will normally
be valued at the closing settlement price on the exchange on which they are
primarily traded. Short-term obligations with a remaining maturity in excess of
60 days will be valued based upon dealer supplied valuations. Other short-term
obligations are valued at amortized cost, unless the Board of Trustees
determines that this does not constitute fair value. Positions in
over-the-counter options will be valued using dealer supplied valuations.
Portfolio securities for which there are no such valuations are valued at fair
value as determined in good faith by or at the direction of the Board of
Trustees.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
offering price) to reach the value of that investment at the end of the periods.
The Fund may also calculate (i) a total rate of return, which is not reduced by
the CDSC (4% maximum for Class B shares) and therefore may result in a higher
rate of return, (ii) a total rate of return assuming an initial account value of
$1,000, which will result in a higher rate of return since the value of the
initial account will not be reduced by the current maximum sales charge
(currently 4.75%), and/or (iii) total rates of return which represent aggregate
performance over a period or year-by-year performance, and which may or may not
reflect the effect of the maximum or other sales charge or CDSC. The Fund offers
multiple classes of shares which were initially offered for sale to the public
on different dates. The calculation of total rate of return for a class of
shares which initially was offered for sale to the public subsequent to another
class of shares of the Fund is based both on (i) the performance of the Fund's
newer class from the date it initially was offered for sale to the public and
(ii) the performance of the Fund's oldest class from the date it initially was
offered for sale to the public up to the date that the newer class initially was
offered for sale to the public.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest shares (e.g., Rule 12b-1 fees). Therefore, the total
rate of return quoted for a newer class of shares will differ from the return
that would be quoted had the newer class of shares been outstanding for the
entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would have
been quoted had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for the newer
class are higher than the class specific expenses of the oldest class, and the
total rate of return quoted for the newer class will be lower than the return
that would be quoted had the newer class of shares been outstanding for this
entire period if the class specific expenses for the newer class are lower than
the class specific expenses of the oldest class).
Total rate of return quotations for each class are presented in Appendix A
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS: The performance results for Class A shares presented in
Appendix A attached hereto under the heading "Performance Results" assume an
initial investment of $10,000 in Class A shares, and cover the period from
January 1, 1987 to December 31, 1996. It has been assumed that dividends and
capital gain distributions were reinvested in additional shares. These
performance results, as well as any yield, tax-equivalent yield or total rate of
return quotation provided by the Fund, should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and on
changes in the expenses of the Fund. These factors and possible differences in
the methods used to calculate yields, tax-equivalent yields and total rates of
return should be considered when comparing the yield, tax- equivalent yield and
total rate of return of the Fund to yields, tax- equivalent yields and total
rates of return published for other investment companies or other investment
vehicles. Total rate of return reflects the performance of both principal and
income. Current net asset value of shares of the Fund as well as account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
YIELD: Any yield quotation for a class of shares of the Fund is based on the
annualized net investment income per share of that class of the Fund over a
30-day period. The yield for each class of the Fund is calculated by dividing
the net investment income allocated to that class earned during the period by
the maximum offering price per share of that class of the Fund on the last day
of that period. The resulting figure is then annualized. Net investment income
per share of a class is determined by dividing (i) the dividends and interest
allocated to that class during the period, minus accrued expenses of that class
for the period, by (ii) the average number of shares of the class entitled to
receive dividends during the period multiplied by the maximum offering price per
share of such class on the last day of the period. The Fund's yield calculations
for Class A shares assume a maximum sales charge of 4.75%. The yield calculation
for Class B shares assumes no CDSC is paid. Yield quotations for each class of
shares are presented in Appendix A attached hereto under the heading
"Performance Quotations."
TAX-EQUIVALENT YIELD: The Fund's tax-equivalent yield for each class is
calculated by determining the rate of return that would have to be achieved on a
fully taxable investment to produce the after-tax equivalent of the yield for
that class. In calculating tax-equivalent yield, the Fund assumes certain
federal tax brackets for shareholders and does not take into account state
taxes. Tax-equivalent yield quotations for each class of shares are presented in
Appendix A attached hereto under the heading "Performance Quotations."
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the Securities and Exchange Commission, is not indicative of the
amounts which were or will be paid to the Fund's shareholders. Amounts paid to
shareholders of each class are reflected in the quoted "current distribution
rate" for that class. The current distribution rate for a class is computed by
dividing the total amount of dividends per share paid by the Fund to
shareholders of that class during the past twelve months by the maximum public
offering price of that class at the end of such period. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid over the period such policies were in effect,
rather than using the dividends during the past twelve months. The current
distribution rate differs from the yield computation because it may include
distributions to shareholders from sources other than dividends and interest,
such as premium income for option writing, short-term capital gains and return
of invested capital, and is calculated over a different period of time. The
Fund's current distribution rate calculation for Class A shares assumes a
maximum sales charge of 4.75%. The Fund's current distribution rate calculation
for Class B shares assumes no CDSC is paid. Current distribution rate quotations
for each class of shares are presented in Appendix A attached hereto under the
heading "Performance Quotations."
From time to time the Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund performance and operations appearing in
various independent publications, including but not limited to the following:
Money, Fortune, U.S. News and World Report, Kiplinger's Personal Finance, The
Wall Street Journal, Barron's, Investors Business Daily, Newsweek, Financial
World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Securities Corporation, CDA Wiesenberger,
Shearson Lehman and Salomon Bros. Indices, Ibbotson, Business Week, Lowry
Associates, Media General, Investment Company Data, The New York Times, Your
Money, Strangers Investment Advisor, Financial Planning on Wall Street, Standard
and Poor's, Individual Investor, The 100 Best Mutual Funds You Can Buy, by
Gordon K. Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. The Fund may also
quote evaluations mentioned in independent radio or television broadcasts, and
use charts and graphs to illustrate the past performance of various indices such
as those mentioned above and illustrations using hypothetical rates of return to
illustrate the effects of compounding and tax-deferral. The Fund may advertise
examples of the effects of periodic investment plans, including the principle of
dollar cost averaging. In such a program, an investor invests a fixed dollar
amount in a fund at periodic intervals, thereby purchasing fewer shares when
prices are high and more shares when prices are low. While such a strategy does
not assure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
are purchased at the same intervals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks, and similar or related matters.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planningsm program, an inter-generational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; and other
similar or related matters.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established
as the first open-end mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund
to make full public disclosure of its operations in shareholder
reports.
-- 1932 -- One of the first internal research departments is
established to provide in-house analytical capability for an
investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund
to register under the Securities Act of 1933 ("Truth in
Securities Act" or "Full Disclosure
Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund
to allow shareholders to take capital gain distributions either
in additional shares or cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal
bond funds established.
-- 1979 -- Spectrum becomes the first combination fixed/ variable
annuity with no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as
America's first globally diversified fixed/income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end
mutual fund to seek high tax-free income from lower-rated
municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual
fund to target and shift investments among industry sectors for
shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock
Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first
closed-end, multimarket high income fund listed on the New York
Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified
market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first
global balanced fund.
-- 1993 -- MFS World Growth Fund is the first global emerging
markets fund to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard
Trust, the first trust to invest in companies deemed to be
union-friendly by an advisory board of senior labor officials,
senior managers of companies with significant labor contracts,
academics and other national labor leaders or experts.
8. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class B shares (the
"Distribution Plan") pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Rule") after having concluded that there is a reasonable
likelihood that the Distribution Plan would benefit the Fund and each respective
class of shareholders. The provisions of the Distribution Plan are severable
with respect to Class B shares offered by the Fund. The Distribution Plan is
designed to promote sales, thereby increasing the net assets of the Fund
attributable to Class B shares. Such an increase may reduce the Fund's Class B
expense ratio to the extent the Fund's fixed costs are spread over a larger net
asset base. Also, an increase in net assets may lessen the adverse effects that
could result were the Fund required to liquidate portfolio securities to meet
redemptions. There is, however, no assurance that the net assets of the Fund
will increase or that the other benefits referred to above will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: Except in the case of the first year service fee, no service fees
will be paid to any securities dealer who is the holder or dealer of record for
investors who own Class B shares having an aggregate net asset value of less
than $750,000, or such other amount as may be determined from time to time by
MFD (MFD, however, may waive this minimum amount requirement from time to time).
Dealers may from time to time be required to meet certain other criteria in
order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended January 31, 1997, the Fund paid the following Distribution
Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
CLASS OF SHARES BY FUND BY MFD BY DEALERS
- --------------- ------- ------ ----------
Class B Shares $773,776 $676,670 $97,106
GENERAL: The Distribution Plan will remain in effect until August 1, 1997, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the Trustees
shall review, at least quarterly, a written report of the amounts expended (and
purposes therefor) under the Plan. The Distribution Plan may be terminated at
any time by vote of a majority of the Distribution Plan Qualified Trustees or by
vote of the holders of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions"). All agreements relating to the
Distribution Plan entered into between the Fund or MFD and other organizations
must be approved by the Board of Trustees, including a majority of the
Distribution Plan Qualified Trustees. Agreements under the Distribution Plan
must be in writing, will be terminated automatically if assigned, and may be
terminated at any time without payment of any penalty, by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the Class B shares of the Fund (as defined
in "Investment Restrictions") or may not be materially amended in any case
without a vote of the Trustees and a majority of the Distribution Plan Qualified
Trustees. The selection and nomination of Distribution Plan Qualified Trustees
shall be committed to the discretion of the non-interested Trustees then in
office. No Trustee who is not an "interested person" has any financial interest
in the Distribution Plan or in any related agreement.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of the Fund and one other series. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any series of shares into one
or more classes. Pursuant thereto, the Trustees have authorized the issuance of
two classes of shares of the Fund, Class A shares and Class B shares. The
Trust's other series also issues Class C shares and Class I shares. Each share
of a class of the Fund represents an equal proportionate interest in the assets
of the Fund allocable to that class. Upon liquidation of the Fund, shareholders
of each class of the Fund are entitled to share pro rata in the net assets of
the Fund allocable to such class available for distribution to its shareholders.
The Trust reserves the right to create and issue additional classes or series of
shares, in which case the shares of each class or series would participate
equally in the earnings, dividends and assets allocable to that class of the
particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have under certain circumstances the right to remove one or more Trustees in
accordance with the provisions of section 16(c) of the 1940 Act. No material
amendment may be made to the Trust's Declaration of Trust without the
affirmative vote of a majority of the shares of the Trust or by an instrument in
writing without a meeting signed by a majority of Trustees and consented to by
more than 50% of the shares of the Fund. Shares have no pre-emptive or
conversion rights (except as described in "Purchases -- Conversion of Class B
Shares" in the Prospectus). Shares are fully paid and non-assessable. The Trust
may enter into a merger or consolidation, or sell all or substantially all of
its assets (or all or substantially all of the assets belonging to any series of
the Trust), if approved by the vote of the holders of two-thirds of the Trust's
outstanding shares voting as a single class, or of the affected series of the
Trust, as the case may be, except that if the Trustees of the Trust recommend
such merger, consolidation or sale, the approval by vote of the holders of a
majority of the Trust's or the affected series' outstanding shares (as defined
in "Investment Restrictions") will be sufficient. The Trust or any series of the
Trust may also be terminated (i) upon liquidation and distribution of its
assets, if approved by the vote of the holders of two-thirds of its outstanding
shares, or (ii) by the Trustees by written notice to the shareholders of the
Trust or the affected series. If not so terminated the Trust will continue
indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of the Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents covering
possible tort and other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance existed and the Trust itself was unable to
meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS Ernst & Young LLP are the
Fund's independent auditors, providing audit services, tax services, and
assistance and consultation with respect to the preparation of filings with the
SEC.
The Portfolio of Investments and Statement of Assets and Liabilities at January
31, 1997, the Statement of Operations for the year ended January 31, 1997, the
Statement of Changes in Net Assets for each of the two years in the period ended
January 31, 1997, the Notes to the Financial Statements and the Independent
Auditors' Report, each of which is included in the Annual Report to shareholders
of the Fund, are incorporated by reference into this SAI in reliance upon the
report of Ernst & Young LLP, independent auditors, given upon their authority as
experts in accounting and auditing. A copy of the Annual Report accompanies this
SAI.
<PAGE>
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
<TABLE>
<CAPTION>
PERFORMANCE RESULTS -- CLASS A SHARES
- -------------------------------------------------------------------------------------------------------------------------------
VALUE OF VALUE OF VALUE OF
INITIAL $10,000 CAP. GAIN REINVESTED TOTAL
DATE INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
------ ------- ------ ----- --
<S> <C> <C> <C> <C>
12/31/87 $8,788 $ 29 $ 713 $ 9,530
12/31/88 8,733 106 1,560 10,399
12/31/89 8,834 162 2,513 11,509
12/31/90 8,376 153 3,343 11,872
12/31/91 8,504 156 4,453 13,113
12/31/92 8,458 155 5,549 14,162
12/31/93 8,605 157 6,777 15,539
12/31/94 7,743 142 7,201 15,086
12/31/95 8,366 153 9,009 17,528
12/31/96 8,110 148 10,001 18,259
- ------------
Explanatory Notes: The results in the table assume that income dividends and capital gain distributions were invested in
additional shares. The results also assume that the initial investment in Class A shares was reduced by the current maximum
applicable sales charge. No adjustment has been made for income taxes, if any, payable by shareholders.
</TABLE>
PERFORMANCE QUOTATIONS
All performance quotations are for the fiscal year ended January 31, 1997.
<TABLE>
<CAPTION>
TAX EQUIVALENT
30-DAY YIELD
ACTUAL (WITHOUT ANY
30-DAY 30-DAY WAIVERS)-TAX
AVERAGE ANNUAL TOTAL RETURNS YIELD YIELD BRACKETS:
---------------------------- (INCLUDING (WITHOUT ------------------- CURRENT
LIFE OF ANY ANY DISTRIBUTION
1 YEAR 5 YEAR FUND WAIVERS) WAIVERS) 28% 31% RATE
------ ------ ---- -------- -------- --- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Shares with sales charge .... -1.96% 5.63% 6.13% N/A 6.40% 8.89% 9.28% 6.92%
Class A Shares without sales charge . 2.87% 6.66% 6.65% N/A N/A N/A N/A N/A
Class B Shares with CDSC ............ -1.87% 5.65%(1) 6.29%(1) N/A N/A N/A N/A N/A
Class B Shares without CDSC ......... 1.96% 5.95%(1) 6.29%(1) N/A 5.64% 7.83% 8.17% 6.26%
(1) Class B share performance includes the performance of the Fund's Class A shares for periods prior to the commencement of
offering of Class B shares on September 7, 1993. Sales charges, expenses and expense ratios, and therefore performance, for
Class A and Class B shares differ. Class B share performance has been adjusted to reflect that Class B shares generally are
subject to a CDSC (unless the performance quotation does not give effect to the CDSC) whereas Class A shares generally are
subject to an initial sales charge. Class B share performance has not, however, been adjusted to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for Class A shares.
</TABLE>
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street, Boston, MA 02116
MFS(R)
MUNICIPAL HIGH
INCOME FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MMH-13-6/97/525 25/225
<PAGE>
<PAGE>
[LOGO] M F S(SM) Annual Report
INVESTMENT MANAGEMENT for Year Ended
January 31, 1997
- --------------------------------------------------------------------------------
MFS(R) MUNICIPAL HIGH INCOME FUND
- --------------------------------------------------------------------------------
[Graphic Omitted]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman ................................................... 1
A Discussion with the Portfolio Manager .................................... 2
Portfolio Manager's Profile ................................................ 4
Fund Facts ................................................................. 5
Performance Summary ........................................................ 5
Portfolio of Investments ................................................... 8
Financial Statements .......................................................21
Notes to Financial Statements ..............................................27
Independent Auditors' Report ...............................................32
Trustees and Officers ......................................................33
HIGHLIGHTS
o FOR THE YEAR ENDED JANUARY 31, 1997, CLASS A SHARES OF THE FUND PROVIDED
A TOTAL RETURN AT NET ASSET VALUE OF 2.87%, WHILE CLASS B SHARES
RETURNED 1.96%.
o SINCE THE FUND WAS REOPENED TO NEW INVESTORS IN AUGUST, MONEY HAS BEEN
COMING INTO THE FUND AT A NET RATE OF APPROXIMATELY $10 MILLION PER
MONTH, A COMFORTABLE PLAN THAT HAS LET US KEEP UP WITH SUPPLY.
o THE SECOND HALF OF 1996 BROUGHT A HEFTY SUPPLY OF NEW ISSUES, AS A
STRONG AND RELATIVELY STABLE ECONOMY GAVE MANY NEW ISSUERS ACCESS TO THE
HIGH-INCOME MARKET.
o AN IMPROVING ECONOMY HAS ALSO BENEFITED MANY LOCAL AND STATE
GOVERNMENTS, GIVING THEM INCREASED SALES AND INCOME TAX REVENUES, WHICH
HAS HELPED THEIR BALANCE SHEETS AND THEIR ABILITY TO MEET DEBT PAYMENTS.
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of A. Keith Brodkin]
Dear Shareholders:
After more than six years of expansion, the U.S. economy appears headed toward
another year of at least moderate growth in 1997, although a few signs point to
the possibility of a modest rise in inflation during the year. On the positive
side, the pattern of moderate growth and inflation set over the past few years
now seems fairly well entrenched in the economy and, short of a major
international or domestic crisis, appears to have enough momentum to remain on
track for some time. Also, recent gains in such important sectors as housing,
automobiles, industrial production, and exports indicate a fair amount of
underlying strength in the economy. However, some reason for caution can be seen
in the continuing high level of consumer debt and the attendant rise in personal
bankruptcies, as well as in the modestly disappointing level of holiday sales.
Also, the ongoing tightness in labor markets, and price rises in such important
sectors as energy, could add some inflationary pressures to the economy. Given
these somewhat conflicting indicators, we expect real (inflation-adjusted)
growth to revolve around 2% in 1997, which would represent a modest decline from
1996.
In the bond markets, conflicting signals over the strength of the economy have
created near-term volatility, while comments by Federal Reserve Chairman Alan
Greenspan in late 1996 and in February of this year created some uncertainty
over the Federal Reserve Board's next move. However, we expect the Fed to
maintain its anti-inflationary stance should signs of more rapid economic growth
and, particularly, of higher inflation resurface. While inflationary forces
largely remained in check in 1996, the continued strength in the labor market
and rising energy prices mean that a pickup in inflation is still possible. At
the same time, the U.S. budget deficit continues to decline and, as a percentage
of gross domestic product, is now less than 2%, which we consider a positive
development for the bond markets. Although interest rates may move higher over
the coming months, we believe that, at current levels, fixed-income markets
remain equitably valued.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
February 12, 1997
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
[Photo of Cynthia M. Brown]
Cynthia M. Brown
For the year ended January 31, 1997, Class A shares of the Fund provided a total
return of 2.87%, while Class B shares returned 1.96%. These returns, which
include the reinvestment of distributions but exclude the effects of any sales
charges, compare to a 3.84% return for the Lehman Brothers Municipal Bond Index
(the Lehman Index). While the Fund underperformed the Lehman Index over the same
period, it is important to note that this is an unmanaged index of
investment-grade municipal bonds rated "Baa" or higher, while the Fund primarily
invests in lower-quality municipal issues rated "Baa" or below or which are
unrated.
Q. WHAT DO YOU SEE AS SOME OF THE REASONS FOR THIS PERFORMANCE?
A. The lower-rated securities in which we invest have high coupon rates relative
to the market. This is consistent with the Fund's investment objective of
providing a high level of current tax-exempt income through generally
lower-rated or unrated securities. However, while these securities are generally
less price sensitive in a volatile interest rate environment and provide less
price fluctuation during these periods, in a falling interest rate environment
this coupon structure could cause the Fund's performance to lag somewhat.
Q. IN GENERAL, HOW WOULD YOU DESCRIBE THE FIXED-INCOME ENVIRONMENT OVER THE
PAST YEAR?
A. Volatility was very high because of concerns over inflation, and the market
continued to receive conflicting economic signals while hoping to find some
direction, either up or down. At the beginning of 1996, interest rates on
long-term Treasuries hovered at around 6%, then climbed as high as 7.20% before
declining to 6.50% by the end of the year. Meanwhile, demand for tax-exempt
funds was anemic because of concerns over the many different flat-tax proposals
spun prior to the election. Although major tax-reform talk has faded from the
front pages of the newspapers, investor interest in tax-exempt fixed-income
products has not been renewed. The fixed-income markets in general are competing
with the strong returns of the equity market.
Q. AND WHAT ABOUT THE MUNICIPAL HIGH-INCOME ENVIRONMENT? HAS IT SEEN ANY MAJOR
DEVELOPMENTS?
A. The second half of the year brought a hefty supply of new issues, which is
why the Fund was reopened to new investors. A strong and relatively stable
economy helped give many of these new issues access to the high-income market
because of their financial viability in this economic environment.
Q. WE HAD A FEW HIGHLY PUBLICIZED MUNICIPAL DEFAULTS A FEW YEARS AGO. WHAT'S
THE DEFAULT PICTURE LOOK LIKE NOW?
A. The cities of Miami and Washington, D.C. remain in difficult financial
straits and the outcome for these cities is still uncertain at this time.
However, with the overall improvement in the economy, many local and state
budgets have seen the benefits of increased sales and income tax revenues. As a
result, several issuers have improved their balance sheets, as well as their
ability to meet their debt payments. For example, airline and airport debt is
more highly valued today due to strong earnings and increased passenger load.
Q. YOU MENTIONED THAT THE FUND WAS REOPENED TO NEW INVESTORS. THIS HAPPENED ON
AUGUST 5, 1996. WHY WAS THE FUND REOPENED AND WHY DID YOU DECIDE TO OPEN IT AT
THAT PARTICULAR TIME?
A. The supply of what we regard as bonds that are appropriate to our objective
had increased and could be purchased without dilution to existing shareholders.
We believe the Fund benefits from an injection of new money because it helps us
to be a continual participant in new issues and to stay involved in this market.
Q. SINCE THEN, HAS THE NEW MONEY BEEN COMING IN AT A COMFORTABLE PACE,
RELATIVE TO THE INVESTMENT OPPORTUNITIES AVAILABLE?
A. Money has been coming into the Fund at a net rate of approximately $10
million per month. This has been a very comfortable flow and has let us keep up
with supply, even though the fourth quarter of 1996 was the heaviest period for
new issues on record.
Q. WOULD YOU CONSIDER CLOSING THE FUND AGAIN?
A. If the amount of new money coming into the Fund exceeds what we believe are
the number of suitable investments available for us to purchase, we would
consider closing the Fund again. We might also consider closing the Fund if
interest rates were to drop very dramatically and very quickly -- which we see
as very unlikely -- thereby having a dilutive effect on the Fund's income.
Q. HAVE SOME SEGMENTS OF THE HIGH-YIELD BOND MARKETS PERFORMED AS WELL AS OR
BETTER THAN YOU EXPECTED?
A. The corporate-backed bonds in the portfolio, such as those issued by the
airline industry, have done very well. However, we will monitor our
corporate-backed holdings in the event of any sustained economic slowdown. We
believe we are late into the economic expansion cycle and that profits for many
corporations have peaked. At the same time, single-family mortgage revenue bonds
have held up very well against the bond market's volatility. Because of the
zigzagging of interest rates, mortgage pre-payments have been low, keeping the
risk of calls, or early redemptions, down as well.
Q. NOW, WHAT ABOUT SOME SEGMENTS OF THIS MARKET, OR PARTICULAR HOLDINGS, THAT
MAY NOT HAVE PERFORMED AS WELL AS YOU EXPECTED?
A. The one area would be the paper industry. Despite the good economy, paper
prices started to decline toward the end of 1995 and have yet to rebound. This
has been one of the longest periods of depressed paper prices in recent history.
One of our holdings, Maryland Energy Financing Administration Solid Waste
Disposal, has been affected by this sustained downturn in paper prices. We
expect paper prices to remain soft through 1997, which is one reason we cut our
exposure to this industry by 50% in 1996.
Q. AS YOU LOOK AHEAD, WHAT CHANGES DO YOU SEE IN THE OVERALL MARKET OR ECONOMIC
ENVIRONMENT, PARTICULARLY AS IT RELATES TO THE FUND, AND HOW ARE YOU POSITIONING
THE FUND TO TRY AND TAKE ADVANTAGE OF THOSE CHANGES?
A. Because of investor worries about inflation, higher-yielding, higher-coupon
bonds have been in great demand, thereby causing spreads, or yield
differentials, to narrow relative to investment-grade bonds. We will continue to
monitor this spread relationship and will avoid situations where we do not
believe we are being adequately compensated for any added risk resulting from
the narrowing of spreads.
Respectfully,
/s/ Cynthia M. Brown
Cynthia M. Brown
Portfolio Manager
PORTFOLIO MANAGER'S PROFILE
CYNTHIA M. BROWN BEGAN HER CAREER AT MFS IN 1984 IN THE FIXED INCOME
DEPARTMENT. A GRADUATE OF BOSTON UNIVERSITY, SHE WAS NAMED INVESTMENT
OFFICER IN 1986, ASSISTANT VICE PRESIDENT IN 1987, VICE PRESIDENT IN
1989 AND SENIOR VICE PRESIDENT IN 1994. IN ADDITION TO MANAGING MFS(R)
MUNICIPAL HIGH INCOME FUND, SHE OVERSEES MFS(R) MUNICIPAL INCOME TRUST.
MS. BROWN IS A MEMBER OF THE BOSTON MUNICIPAL ANALYSTS GROUP.
<PAGE>
FUND FACTS
STRATEGY: THE FUND'S INVESTMENT OBJECTIVE IS TO PROVIDE HIGH
CURRENT INCOME EXEMPT FROM FEDERAL INCOME TAXES BY
INVESTING PRIMARILY IN DEBT SECURITIES, THE INTEREST
ON WHICH IS EXEMPT FROM FEDERAL INCOME TAX.
COMMENCEMENT OF
INVESTMENT OPERATIONS: FEBRUARY 24, 1984
SIZE: $1.1 BILLION IN NET ASSETS AS OF JANUARY 31, 1997
PERFORMANCE SUMMARY
The information below and on the following page illustrates the historical
performance of MFS Municipal High Income Fund-Class A shares in comparison to
various market indicators. Class A share performance results reflect the
deduction of the 4.75% maximum sales charge; benchmark comparisons are unmanaged
and do not reflect any fees or expenses. The performance of other share classes
will be greater than or less than the line shown, based on the differences in
loads and fees paid by shareholders investing in the different classes. It is
not possible to invest in an index. All results are historical and assume the
reinvestment of dividends and capital gains.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-Year Period Ended January 31, 1997)
MFS Lehman Consumer
Municipal Brothers Price
High Income Municipal Index -
Date Fund - Class A Bond Index U.S.
- ---- -------------- ---------- --------
2/92 9525.0 10000.0 10000.0
1/93 10384.0 10983.0 10326.0
1/94 11339.0 12330.0 10587.0
1/95 11221.0 11891.0 10883.0
1/96 12783.0 13681.0 11174.0
1/97 13151.0 14207.0 11484.0
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-Year Period Ended January 31, 1997)
MFS Lehman Consumer
Municipal Brothers Price
High Income Municipal Index -
Date Fund - Class A Bond Index U.S.
- ---- -------------- ---------- --------
2/87 9523.0 10000.0 10000.0
1/89 10406.0 10888.0 11078.0
1/91 11787.0 12102.0 13076.0
1/93 14179.0 12821.0 15928.0
1/95 15322.0 13513.0 17245.0
1/97 17956.0 14259.0 20603.0
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Municipal High Income Fund (Class A)
including 4.75% sales charge -1.96% +3.37% +5.63% +6.13%
- --------------------------------------------------------------------------------------------------------------------------------
MFS Municipal High Income Fund (Class A)
at net asset value +2.87% +5.07% +6.66% +6.65%
- --------------------------------------------------------------------------------------------------------------------------------
MFS Municipal High Income Fund (Class B) with CDSC -1.87% +3.15% +5.65% +6.29%
- --------------------------------------------------------------------------------------------------------------------------------
MFS Municipal High Income Fund (Class B) without CDSC +1.96% +4.02% +5.95% +6.29%
- --------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index+ +3.84% +4.83% +7.28% +7.50%
- --------------------------------------------------------------------------------------------------------------------------------
Consumer Price Index*+ +2.77% +2.75% +2.81% +3.61%
- --------------------------------------------------------------------------------------------------------------------------------
*The Consumer Price Index measures the cost of living (inflation) and is published by the U.S. Bureau of Labor Statistics.
+Source: CDA/Wiesenberger.
</TABLE>
Investment return and principal value will fluctuate, and shares, when redeemed,
may be worth more or less than their original cost. Past performance is no
guarantee of future results.
Class B results reflect the applicable contingent deferred sales charge (CDSC),
which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class B
shares, have higher annual fees and expenses than Class A shares.
Class B share performance includes the performance of the Fund's Class A shares
for periods prior to the commencement of offering of Class B shares on September
7, 1993. Sales charges and operating expenses for Class A and Class B shares
differ. The Class A share performance, which is included within the Class B
share performance, including the CDSC, has been adjusted to reflect the CDSC
generally applicable to Class B shares rather than the initial sales charge
generally applicable to Class A shares. Class B share performance has not been
adjusted, however, to reflect differences in operating expenses (e.g., Rule
12b-1 fees), which generally are lower for Class A shares.
Fund results reflect any applicable expense subsidies and waivers, without which
the performance results would have been less favorable. Subsidies and waivers
may be rescinded at any time. See the prospectus for details.
LARGEST SECTORS
Municipal Bonds 98.0%
Short Term Obligations 1.8%
Other 0.2%
TAX FORM SUMMARY
In January 1997, a Tax Form Summary was mailed to shareholders reporting the
federal tax status of all distributions paid during the calendar year 1996.
For federal income tax purposes, approximately 99.2% of the total dividends
paid by the Fund from net investment income during the year ended January 31,
1997, is designated as an exempt-interest dividend.
<PAGE>
PORTFOLIO OF INVESTMENTS - January 31, 1997
<TABLE>
<CAPTION>
Municipal Bonds - 98.0%
- ----------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
General Obligation - 2.3%
Cook County, IL, (Markham), 9s, 2012 $ 2,685 $ 2,865,029
Jefferson County, OH, 7.125s, 2019 8,660 9,142,882
New York City, NY, 6.125s, 2025 5,000 4,931,050
New York City, NY, 6.875s, 2003 1,000 1,078,090
New York City, NY, 7.1s, 2011 1,000 1,075,080
New York City, NY, 7s, 2022 1,700 1,854,700
Texas Veteran Housing Assistance Program, 7s, 2025 1,330 1,411,968
Virgin Islands Public Financing Authority, 7.25s, 2018 2,000 2,126,220
West Warwick, RI, 7.3s, 2008 200 211,428
West Warwick, RI, 7.45s, 2013 570 591,301
--------------
$ 25,287,748
- ----------------------------------------------------------------------------------------------
State and Local Appropriation - 0.6%
District of Columbia, Certificates of Participation,
7.3s, 2013 $ 2,500 $ 2,585,975
South Tucson, AZ, Municipal Property Corp., 8.75s, 2010 865 932,928
Troy, NY, Certificates of Participation,
Recreational Facilities Rev., 9.75s, 2010*(+) 2,715 271,500
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 1997 70 70,380
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 1998 75 76,659
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 1999 80 82,204
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2000 85 87,357
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2001 95 97,336
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2002 115 117,574
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2003 130 132,291
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2004 150 152,663
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2005 165 167,534
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2010 235 238,027
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2011 250 252,603
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2013 290 292,305
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2015 335 337,663
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2016 360 362,862
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2017 390 393,100
--------------
$ 6,650,961
- ----------------------------------------------------------------------------------------------
Airlines - 7.1%
Chicago, IL, O'Hare International Airport, Special
Facilites Rev. (United Airlines), 8.5s, 2018 $ 4,500 $ 4,929,615
Chicago, IL, O'Hare International Airport, Special
Facilites Rev. (United Airlines), 8.4s, 2018 2,680 2,904,129
Chicago, IL, O'Hare International Airport, Special
Facilites Rev. (United Airlines), 8.85s, 2018 5,965 6,710,088
Cleveland, OH, Airport Special Facilities Rev.
(United Airlines), 9s, 2019 9,120 9,899,304
Dallas-Fort Worth, TX, International Airport
Facility Improvement Corp. (Delta), 7.625s, 2021 4,500 4,863,600
Denver, CO, City & County Airport Rev.
(United Airlines), 6.875s, 2032 7,130 7,361,725
Hillsborough County, FL, Aviation Authority Rev.
(USAir), 8.6s, 2022 4,255 4,639,141
Kenton County, KY, Airport Board Special
Facilities (Delta Airlines), 7.5s, 2020 16,570 17,892,783
Tulsa, OK, Municipal Airport Trust Rev.
(American Airlines), 7.6s, 2030 14,210 15,252,730
Tulsa, OK, Municipal Airport Trust Rev.
(American Airlines), 7.375s, 2020 4,000 4,252,920
--------------
$ 78,706,035
- ----------------------------------------------------------------------------------------------
Airport and Port Revenue - 1.8%
Denver, CO, City & County Airport Rev., 8.75s, 2023 $ 5,770 $ 6,808,715
Denver, CO, City & County Airport Rev., 8.5s, 2023 2,950 3,374,210
Denver, CO, City & County Airport Rev., 8s, 2025 1,140 1,284,449
Denver, CO, City & County Airport Rev., 8.875s, 2012 5,000 5,926,450
Denver, CO, City & County Airport Rev., 7.75s, 2021 2,050 2,263,918
--------------
$ 19,657,742
- ----------------------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 7.5%
Clark County, NV (Nevada Power), FGIC, 6.7s, 2022 $ 4,000 $ 4,226,400
Midland, MI, Environmental Development Authority,
9.5s, 2009 4,500 4,908,645
Montana Board of Investment Resources Recovery
Rev. (Yellowstone Energy), 7s, 2019 10,495 10,188,021
Municipal Electric Authority, GA, Project #1,
0s, AMBAC, 7.903s, 2022(++) 9,900 10,173,042
New Jersey Economic Development Authority
(Vineland Cogeneration), 7.875s, 2019 3,000 3,237,570
New York Research and Development Authority,
Electrical Facilities Rev. (Consolidated
Edison), AMBAC, 7.5s, 2026 4,750 5,130,997
New York Research and Development Authority,
Electrical Facilities Rev. (Long Island
Lighting), 7.15s, 2022 6,050 6,487,052
New York Research and Development Authority,
Electrical Facilities Rev. (Long Island
Lighting), 7.15s, 2019 1,650 1,769,196
Ohio Water Development Pollution Control Rev.
(Cleveland Electric), 8s, 2023 4,700 5,093,813
Palm Beach County, FL, Solid Waste Development,
6.95s, 2022 7,650 6,528,663
Palm Beach County, FL, Solid Waste Development,
6.85s, 2014 3,000 2,593,290
Pennsylvania Economic Development Financing
Authority, Resources Recovery Rev., 6.6s, 2019 5,000 4,924,400
Pittsylvania County, VA, Industrial Development
Authority, 7.55s, 2019 10,000 10,427,600
Southern California Public Power Authority,
Transmission Project Rev., RIBS, 7.812s, 2012(++) 1,350 1,404,932
West Feliciana Parish, LA, Pollution Control Rev.
(Gulf States Utilities Co.), 9s, 2015 2,500 2,770,725
West Feliciana Parish, LA, Pollution Control Rev.
(Gulf States Utilities Co.), 8s, 2024 4,000 4,287,120
--------------
$ 84,151,466
- ----------------------------------------------------------------------------------------------
Health Care Revenue - 16.1%
Arkansas Development Finance Authority, Economic
Development Rev., 10.8s, 2018 $ 955 $ 996,886
Bell County, TX, Health Facilities Authority
(Kings Daughters Hospital), 9.25s, 2008 1,200 1,307,352
Bell County, TX, Health Facilities Authority
(Living Tech), 10.5s, 2018 2,870 2,296,000
Bell County, TX, Health Facilities Authority
(Living Tech), 10.5s, 2018 2,365 1,892,000
Berlin, MD, Hospital Rev. (Atlantic General
Hospital), 8.375s, 2022 1,360 1,407,002
Brevard County, FL, Health Facilities Authority
(Beverly Enterprises), 10s, 2010 1,350 1,493,383
Cambria County, PA, Industrial Development
Authority (Beverly Enterprises), 10s, 2012 1,140 1,427,098
Cheneyville, LA, Westside Habilitation Center,
8.375s, 2013 6,300 6,381,396
Chester County, PA, Industrial Development
Authority (RHA/PA Nursing Home, Inc.), 10.125s, 2019 1,958 2,034,186
Colorado Health Facilities Authority Rev.
(Gericare/Denver), 10.5s, 2019* 5,000 3,443,750
Colorado Health Retirement Facilities (Liberty
Heights), 0s, 2024 29,295 4,613,084
Colorado Health Retirement Facilities (Liberty
Heights), 0s, 2022 6,850 1,234,233
Connecticut Health & Educational Facilities
(Johnson Evergreen), 8.5s, 2014 1,350 1,444,932
Daphne, AL, Special Care Facilities Financing
Authority (Westminster Village), 8.25s, 2026+ 12,500 10,821,625
District of Columbia, Hospital Rev. (Hospital for
Sick Children), 8.875s, 2021 960 1,021,613
District of Columbia, Hospital Rev. (Washington
Hospital), 7.125s, 2019 1,750 1,819,370
Doylestown, PA, Hospital Authority (Doylestown
Hospital), 7.2s, 2023 2,200 2,266,968
Fairfax, Fauquier & Loudoun Counties, VA, Health
Center Commission, Nursing Home Rev., 9s, 2020 1,885 1,972,916
Grand Junction, CO, Hospital Rev. (Community
Hospital), 6.9s, 2017 2,900 2,684,617
Hobbs County, NM, Health Facilities Rev.
(Nemecal Associates), 9.625s, 2014 1,725 1,821,289
Illinois Health Facilities Rev. (Memorial
Hospital-Woodstock), 7.25s, 2022 1,500 1,580,535
Jacksonville, FL, Health Facilities Authority
(National Benevolent), 7s, 2022 1,000 1,043,850
Jacksonville, FL, Industrial Development Rev.
(Beverly Enterprises), 0s, 9.75s, 2011 945 1,028,992
Jefferson County, KY, Health Facilities Rev.
(Beverly Enterprises), 10.125s, 2008 2,200 2,393,424
Jenks Township, PA, Municipal Authority Rev.,
8s, 2018 4,545 4,514,503
Kansas City, MO, Industrial Development Authority,
Retirement Facilities (Kingswood), 9s, 2013 5,250 5,717,460
Lee County, FL, Industrial Development Authority
(Beverly Enterprises), 10s, 2010 900 1,006,218
Louisiana Public Facilities Authority (Southwest
Medical Center), 11s, 2006 1,428 538,735
Luzerne County, PA, Industrial Development
Authority (Beverly Enterprises), 10.125s, 2008 1,275 1,402,143
Martin County, FL, Industrial Development
Authority (Beverly Enterprises), 9.8s, 2010 2,750 2,995,135
Massachusetts Health & Education Facilities
Authority (Fairview Extended Care Facility),
10.25s, 2021 3,000 3,391,080
Massachusetts Health & Education Facilities
Authority (St. Memorial Medical Center), 6s, 2023 5,640 4,757,848
Massachusetts Health & Education Facilities
Authority Rev. (St. Anne's Hospital), 9.375s, 2014 5,000 4,981,350
Massachusetts Industrial Finance Agency (GF
Revere), 8.875s, 2025 7,780 8,138,813
Massachusetts Industrial Finance Agency
(Glenmeadow Retirement Community), 8.375s, 2018 2,300 2,281,761
Massachusetts Industrial Finance Agency
(Glenmeadow Retirement Community), 8.625s, 2026 3,520 3,534,608
Massachusetts Industrial Finance Agency (Martha's
Vineyard Long-Term Care Facility), 9.25s, 2022* 3,410 2,412,575
Michigan Strategic Fund Ltd., Obligation Rev.
(River Valley Recovery Center), 12.875s, 2015 1,020 1,049,951
Montgomery County, PA, Higher Education & Health
Authority Rev. (AHF/Montgomery), 10.5s, 2020 2,480 2,625,998
Nebraska Investment Finance Authority (Centennial
Park), 10.5s, 2016 2,200 2,276,934
New Hampshire Industrial Development Authority
(Tall Pines), 11.25s, 2016 2,400 2,603,976
New Jersey Economic Development Authority
(Burnt Tavern Convalescent Center), 9s, 2013 1,700 1,799,059
New Jersey Economic Development Authority
(Courthouse Convalescent Center), 8.7s, 2014 1,350 1,420,159
New Jersey Economic Development Authority
(Geriatric Medical Services), 9.625s, 2004 470 525,234
New Jersey Economic Development Authority
(Geriatric Medical Services), 9.625s, 2022 1,350 1,493,357
New Jersey Economic Development Authority
(Gerimed), 10.5s, 2020 3,000 3,199,110
New Jersey Economic Development Authority
(Greenwood Health Care), 9.75s, 2011 3,035 3,141,286
New Jersey Economic Development Authority
(Wanaque Convalescent Center), 8.5s, 2009 700 720,818
New Jersey Economic Development Authority
(Wanaque Convalescent Center), 8.6s, 2011 1,000 1,029,630
North Carolina Medical Care Commission, Hospital
Rev. (Valdese General Hospital), 8.75s, 2016 1,905 2,141,449
North Central, TX, Health Facilities Development
Corp. (Baylor University Medical Center),
9.968s, 2016(++) 4,300 5,180,253
Okaloosa County, FL, Retirement Rental Housing
Rev. (Beverly Enterprises), 10.75s, 2003 2,715 2,858,433
Osceola County, FL, Industrial Development Rev.,
Community Pooled Loan, 7.75s, 2017 2,700 2,773,413
Portsmouth, VA, Industrial Development Authority
(Beverly Enterprises), 0s, 10s, 2011 2,020 2,273,348
Reedley, CA, Certificates of Participation, 7.5s, 2026 5,500 5,492,300
Rochester, MN, Health Care Facilities Rev.
(Mayo Medical Foundation), FIRS, 8.176s, 2021(S) 2,000 2,039,640
San Francisco, CA, City & County (Coventry Park),
8.5s, 2026 9,435 9,360,558
Santa Fe, NM, Industrial Development Rev.
(Casa Real Nursing Home), 9.75s, 2013 1,860 1,986,908
Seminole County, FL, Industrial Development
Authority (Friendly Village), 10s, 2011 855 882,300
St. Charles County, MO, Industrial Development
Authority (Garden View Care Center), 10s, 2016 1,740 1,770,711
St. Petersburg, FL, Health Facilities Rev.
(Swanholm Nursing), 10s, 2022 1,525 1,728,755
Suffolk County, NY, Industrial Development Agency
(APPLE), 9.75s, 2015 3,680 3,128,000
Tyler, TX, Health Facilities Development Corp.
(Park Place), 8.5s, 2018 4,815 4,824,293
Vincennes, IN, Economic Development Authority
(Lodge of the Wabash), 12.5s, 2015 2,025 1,984,500
Waterford Township, MI, Economic Development Rev.
(Canterbury Health Care), 8.375s, 2023 3,100 3,268,640
Westerville, OH, Industrial Development Rev.
(1st Mortgage Health Care), 10s, 2008 515 524,749
Wilkins Area, PA, Industrial Development Authority
(Beverly Enterprises), 10s, 2011 1,100 1,239,810
--------------
$ 179,442,302
- ----------------------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 17.7%
Baltimore County, MD, Pollution Control
(Bethlehem Steel), 7.55s, 2017 $ 1,000 $ 1,058,430
Burns Habor, IN, Solid Waste Disposal Facilities,
8s, 2024 10,455 11,408,078
Butler, AL, Industrial Developement, 8s, 2028 4,500 5,046,165
Cambria County, PA, Industrial Development
Authority (Beverly Enterprises), 7.5s, 2015 2,950 3,115,731
Courtland , AL, Industrial Development Board Solid
Waste, 6.375s, 2029 7,500 7,492,425
Dayton, OH, Special Facilities Rev, 12.5s, 2009 950 1,069,339
DeQueen, AR, Industrial Development Board
(Weyerhaeuser Co.), 9s, 2006 1,000 1,022,380
Eastern Band of Cherokee Indian Community, NC,
(Carolina Mirror Co.), 10.25s, 2009+ 3,270 3,269,248
Eastern Band of Cherokee Indian Community, NC,
(Carolina Mirror Co.), 11s, 2012+ 950 949,820
Florence County, SC, Industrial Development Rev.
(Stone Container), 7.375s, 2007 2,840 2,963,994
Hernando County, FL, Industrial Development Rev.
(Florida Crushed Stone), 8.5s, 2014 8,555 9,493,569
Hodge Village , LA, Utilities Rev., 9s, 2010 6,800 7,336,316
Hunt County, TX, Industrial Development Rev.
(Household Manufacturing), 10.236s, 2003 6,000 6,022,320
Indiana Development Finance Authority, 7.25s, 2011 10,000 10,443,400
Lawrenceburg, TN, Industrial Development Board
(Tridon), 9.625s, 2006 2,800 2,926,196
Maine Finance Authority (Bowater), 7.75s, 2022 8,500 9,286,760
Massachusetts Industrial Financing Agency, Solid
Waste Disposal Rev. (Molten Metal Technology),
8.25s, 2014 4,000 4,255,280
McMinn County, TN, Industrial Development Board
(Bowater), 7.4s, 2022 7,000 7,531,370
Mesa County, CO, (Joy Technologies), 8.5s, 2006 1,350 1,483,623
New Hampshire Business Authority Sewer & Solid
Waste Disposal (Crown Paper), 7.875s, 2026 3,000 3,150,270
New Jersey Economic Development Authority Rev.,
8.4s, 2015 4,000 4,163,440
New Jersey Economic Development Authority Rev.,
8.6s, 2017 8,000 8,324,240
Ohio Solid Waste Rev. (Republic Engineered Steel),
9s, 2021 8,000 8,140,000
Ohio Solid Waste Rev. (Republic Engineered Steel),
8.25s, 2014 7,000 7,052,500
Owyhee County, ID, Industrial Development Rev.,
8.25s, 2002 4,000 4,228,080
Perry County, KY, Solid Waste Disposal Resources
(TJ International), 7s, 2024 11,000 11,374,440
Philadelphia, PA, Industrial Development Rev.,
7.75s, 2017 2,000 2,120,400
Port New Orleans, LA, Industrial Development,
Refunding Continental Grain Company Project,
6.5s, 2017 5,000 4,995,300
Port of New Orleans, LA (Avondale Industries),
8.5s, 2014 23,050 26,572,962
Port of New Orleans, LA (Continental Grain), 7.5s, 2013 2,000 2,137,860
Riverdale, IL, Enviromental Improvement Rev.
(Acme Metals), 7.9s, 2024 2,500 2,612,325
Sweetwater County, WY, Solid Waste Disposal Rev.,
7s, 2024 2,000 2,119,840
Sweetwater County, WY, Solid Waste Disposal Rev.,
6.9s, 2024 3,000 3,162,150
Texas Special Alliance Airport Authority
(Federal Express), 6.375s, 2021 3,000 3,009,990
Walton, GA, Industrial Development Rev.
(Ultima Rubber Products), 10s, 2010 4,405 4,679,520
Wierton, WV, Pollution Control Rev. (Weirton
Steel), 8.625s, 2014 3,630 3,767,976
--------------
$ 197,785,737
- ----------------------------------------------------------------------------------------------
Insured Health Care Revenue - 2.0%
Clermont County, OH, Hospital Facilities Rev.
(Mercy Health Systems), AMBAC, 9.641s, 2021(++) $ 1,300 $ 1,481,675
Desert Hospital District, CA, Insured Hospital Rev.
(Desert Hospital Corp.), 8.904s, 2020(++) 4,000 4,258,240
Illinois Health Facilities Authority Rev. (Sisters
of Mercy), 0s, MBIA, 9.567s, 2015(++) 5,200 5,972,616
Montana Health Facility Authority (Deaconess
Hospital), AMBAC, RIBS, 9.367s, 2016(++) 4,000 4,430,560
North Central, TX, Health Facilities Development
Corp. (Presbytarian Health Care Systems), MBIA,
9.595s, 2021(++) 4,000 4,738,360
Salt Lake City, UT, Hospital Rev. (Intermountain
Health Care), 0s, AMBAC, 9.718s, 2020(++) 1,250 1,418,687
--------------
$ 22,300,138
- ----------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 2.1%
Alexandria, VA, Redevelopment & Housing Finance
Authority (Jefferson Village Apartments), 9s, 2018 $ 2,000 $ 2,056,840
Dallas, TX, Housing Finance Corp., 8.5s, 2011 3,245 3,339,851
Florida Multi-Family Housing Finance Agency Rev.
(Center Court Apartments), 8.5s, 2018 2,000 2,029,760
Florida Multi-Family Housing Finance Agency Rev.
(South Lake Apartments), 8.7s, 2021 3,500 3,247,475
Maplewood, RI, Housing Development Corp.
(Terrace Apartments), 6.9s, 2025 4,020 4,158,730
Massachusetts Housing Finance Agency, 8.5s, 2020 15 15,304
Memphis, TN, Health, Education & Housing
Facilities Board (Wesley Highland Terrace),
12.75s, 2015++ 6,300 5,355,000
Texas Housing & Community Board (Harbors &
Plumtree), 10s, 2026 1,775 1,771,415
Virginia Housing & Development Authority, Multi-
Family, 0s, 2017 6,530 1,130,604
--------------
$ 23,104,979
- ----------------------------------------------------------------------------------------------
Refunded - 13.7%
Austin, TX, Utilities System Rev., 10.75s, 2015 $ 1,780 $ 2,115,281
Daphne, AL, Special Care Facilities Financing
Authority (1st Mortgage Rev.), 0s, 2028 89,975 48,025,056
Daphne, AL, Special Care Facilities Financing
Authority (2nd Mortgage Rev.), 0s, 2028 4,500 2,401,920
Daphne, AL, Special Care Facilities Financing
Authority (Presbyterian), 0s, 2018 48,475 7,299,365
Fairfax County, VA, Redevelopment & Housing
Authority (Little River Glen), 8.95s, 2020 2,020 2,077,065
Hannibal, MO, Industrial Development Authority
(Hannibal Regional Healthcare), 9.5s, 2022+ 3,000 3,735,870
Illinois Development Finance Authority, Retirement
Housing (Regency Park), 0s, 2025 7,550 1,111,511
Maine Health & Higher Education Facilities
Authority (St. Mary's General Hospital), 8.625s, 2022 5,140 5,747,908
Massachusetts Industrial Finance Agency, Tunnel
Rev. (Mass. Turnpike), 9s, 2020 11,045 12,889,736
Meridian, MI, Economic Development Corp.
(Burcham Hills), 9.625s, 2019 2,360 2,488,313
Mesa County, CO, Residual Rev., 0s, 2012 25,125 8,015,880
Mississippi Hospital Equipment & Facilities
Authority Rev. (Rush Medical Foundation), 8.75s, 2016 2,800 3,170,496
New Lenox, IL, Community Park District, 8.25s, 2014 4,205 5,122,825
New York Local Government Assistance Corp., 7s, 2021 800 889,880
Prince William County,VA, Industrial Development
Authority, Residential Care, 10s, 2022 3,500 4,350,990
South Carolina Public Service Authority (Santee
Coop), 7.1s, 2021 2,000 2,242,740
Spirit Lake, IA, Industrial Development Rev.
(Crystal Tips, Inc.), 0s, 2016 3,973 5,356,700
Telluride, CO, Real Estate Transfer Assessment,
11.5s, 2012 3,685 5,756,965
Texas Turnpike Authority (Houston Ship Channel
Bridge), 0s, 12.625s, 2020 21,090 29,186,240
Washington Public Power Supply System Rev.
(Nuclear Project #1), 14.375s, 2001 1,000 1,233,040
--------------
$ 153,217,781
- ----------------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 0.3%
Denver, CO, Urban Renewal Tax (Musicland), 8.5s, 2017 $ 950 $ 947,521
Denver, CO, Urban Renewal Tax Increment (Downtown
Denver), 7.25s, 2017 1,250 1,316,125
Denver, CO, Urban Renewal Tax Increment (Downtown
Denver), 8.5s, 2013 1,380 1,376,398
--------------
$ 3,640,044
- ----------------------------------------------------------------------------------------------
Single-Family Housing Revenue - 7.2%
Arkansas Housing Development Agency, Residential
Mortgage Rev., 0s, 2015 $ 9,150 $ 1,297,287
Berkeley, Brookes, & Fayette Counties, WV, Single
Family Mortgage Rev., MBIA, 0s, 2016 22,285 2,679,994
California Housing Finance Authority Rev., 7.4s, 2026 14,285 15,086,103
California Housing Finance Authority Rev., 0s, 2023 12,950 1,701,241
Chicago, IL, Capital Appreciation, Single Family
Mortgage Rev., 0s, 2017 11,980 1,246,998
Colorado Housing Finance Authority, 8s, 2016 3,000 3,038,790
Cook County, IL, Single Family Housing Rev., 0s, 2015 3,550 469,417
Corpus Christi, TX, Housing Finance Corp., MBIA,
0s, 2011 3,395 825,596
Delaware Single Family Housing Authority Rev.,
6.75s, 2024 2,715 2,813,202
Denver, CO, Single Family Mortgage Rev., 0s, 2015 1,185 133,692
East Baton Rouge, LA, Capital Appreciation Rev.,
0s, 2010 15,140 3,454,040
El Paso, TX, Housing Finance Corp., Single Family
Mortgage Rev., 8.75s, 2011 845 911,459
Florida Housing Finance Agency Rev. (South Lake
Apartments), 0s, 2012 230 46,984
Florida Housing Finance Agency Rev., 0s, 2016 10,800 1,544,292
Georgia Housing & Finance Authority Rev., 0s, 2031 84,705 6,859,411
Harris County, TX, Housing Finance Corp., 9.875s, 2014 715 715,565
Jefferson County, CO, Single Family Mortgage Rev.,
MBIA, 8.875s, 2013 390 412,710
Jefferson County, TX, Housing Finance Corp.,
Single Family Mortgage Rev., MBIA, 0s, 2015 4,710 630,057
Maine Housing Authority, Mortgage Purchase Rev.,
8.2s, 2019 755 774,335
Maine Housing Authority, Mortgage Purchase Rev.,
8.2s, 2022 5,980 6,133,148
Mississippi Home Corp., Single Family Senior
Housing Rev., 9.25s, 2012 235 252,155
Nevada Housing Division, Single Family Mortgage
Rev., 0s, 2015 3,119 493,191
New Castle County, DE, Single Family Mortgage Rev.,
0s, 2016 1,330 177,422
New Hampshire Housing Finance Authority, Single
Family Mortgage Rev., 8.5s, 2014 3,730 3,890,017
New Hampshire Housing Finance Authority, Single
Family Mortgage Rev., 0s, 2011 95 20,873
New Mexico Mortgage Finance Authority, Single
Family Mortgage Rev., 6.9s, 2024 3,120 3,238,186
North Dakota Housing Finance Agency, 6.8s, 2023 950 982,404
North Dakota Single Family Mortgage Rev., 8.3s, 2012 415 429,189
Ohio Housing Finance Agency, Single Family
Mortgage Rev., GNMA, RIBS, 9.922s, 2031(++) 1,700 1,850,960
Reno County, KS, Single Family Morgage Rev., 0s, 2014 5,725 780,375
Texas Housing & Development Agency, Residential
Mortgage Rev., 8.4s, 2020 1,775 1,853,419
Texas Housing & Development Agency, Single Family
Mortgage Rev., 8.2s, 2016 725 743,314
Utah Housing Finance Agency, Single Family
Mortgage Rev., 0s, 2016 3,835 522,488
Vermont Housing Finance Agency, Single Family Home
Mortgage Purchase, 8.1s, 2022 1,510 1,570,793
Virginia Housing & Development Authority, 7.125s,
2022 9,505 9,846,039
Wisconsin Housing & Economic Development
Authority, Home Ownership Rev., 2016 1,985 284,192
Wisconsin Housing & Economic Development
Authority, Home Ownership Rev., RIBS, 10.209s, 2022(++) 2,150 2,280,527
--------------
$ 79,989,865
- ----------------------------------------------------------------------------------------------
Solid Waste Revenue - 5.0%
Maryland Energy Financing Administration
(Solid Waste), 9s, 2016 $ 28,300 $ 15,848,000
Massachusetts Industrial Finance Agency (Solid
Waste Disposal), 12s, 2016 3,600 540,000
Michigan Strategic Fund. Ltd. Obligation Rev.
(Blue Water Fiber), 8s, 2012 2,000 1,450,000
Pennsylvania Economic Development Finance
Authority, 9.25s, 2022 25,000 22,634,500
Port Walla Walla, WA, Solid Waste Recycling Rev.
(Ponderosa Fibres), 9.125s, 2026 17,000 15,511,310
--------------
$ 55,983,810
- ----------------------------------------------------------------------------------------------
Special Assessment District - 0.2%
Indianapolis, IN, Public Improvement Bond Rev.,
6.5s, 2022 $ 2,000 $ 2,028,960
- ----------------------------------------------------------------------------------------------
Student Loan Revenue - 1.0%
Arizona Student Loan Acquisition Authority, "C",
7.625s, 2010 $ 4,610 $ 5,089,716
Arizona Student Loan Acquisition Authority, "D",
7.25s, 2010 2,970 3,081,583
Pennsylvania Higher Education Assistance Agency,
RIBS, AMBAC, 8.462s, 2022(++) 2,700 2,686,419
--------------
$ 10,857,718
- ----------------------------------------------------------------------------------------------
Turnpike Revenue - 9.6%
Arapahoe County, CO, Capital Improvement
(Highway Rev.), 0s, 2015 $ 76,375 $ 22,070,084
Arapahoe County, CO, Capital Improvement
(Highway Rev.), 0s, 2026 105,000 12,837,300
Florida Mid-Bay Bridge Authority Rev., 8.5s, 2022 2,500 2,782,425
Foothill/Eastern Transportation Corridor Agency,
CA, Toll Road Rev., 0s, 2022 30,835 6,445,132
Foothill/Eastern Transportation Corridor Agency,
CA, Toll Road Rev., 0s, 2018 44,190 12,002,888
Foothill/Eastern Transportation Corridor Agency,
CA, Toll Road Rev., 0s, 2021 25,000 5,565,250
Foothill/Eastern Transportation Corridor Agency,
CA, Toll Road Rev., 0s, 2023 5,765 1,131,439
Foothill/Eastern Transportation Corridor Agency,
CA, Toll Road Rev., 0s, 2024 72,045 13,275,732
Foothill/Eastern Transportation Corridor Agency,
CA, Toll Road Rev., 0s, 2030 14,935 1,854,329
Foothill/Eastern Transportation Corridor Agency,
CA, Toll Road Rev., 0s, 1s, 2013 5,000 3,272,750
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2007 4,000 2,091,360
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2008 5,400 2,630,664
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2028 13,450 1,558,721
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2001 9,100 7,155,694
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2011 13,400 5,285,228
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2005 1,500 900,675
Telluride, CO, Real Estate Transfer Assessment Rev.,
9s, 2016 2,510 2,441,226
Telluride, CO, Real Estate Transfer Assessment
Rev., 11.5s, 2012 2,315 2,736,052
West Virginia Parkways, Economic Development &
Tourism Authority, RIBS, FGIC, 7.829s, 2019(++) 1,200 1,187,400
--------------
$ 107,224,349
- ----------------------------------------------------------------------------------------------
Universities - 1.0%
Islip, NY, Community Developoment Agency
(New York Institiute of Technology), 7.5s, 2026 $ 6,000 $ 6,115,620
Massachusetts Industrial Finance Agency (Curry
College), 8s, 2014 1,480 1,501,712
Massachusetts Industrial Financing Agency
(Emerson College), 8.9s, 2018 3,000 3,294,540
--------------
$ 10,911,872
- ----------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 0.2%
Detroit, MI, Sewage Disposal Rev., FGIC, 7.695s, 2023(++) $ 2,000 $ 1,902,000
- ----------------------------------------------------------------------------------------------
Other - 2.6%
Brush, CO, Industrial Development Rev. (Priority
Training Centers), 12s, 2015 $ 4,615 $ 5,112,820
Brush, CO, Industrial Development Rev. (Training
Centers International), 12s, 2015 4,349 4,818,127
Danville, VA, Industrial Development Authority
Rev. (Piedmont Mall), 8s, 2017 8,280 8,274,369
District of Columbia (National Public Radio),
7.7s, 2023 3,500 3,635,555
Harris County, TX, Cultural Education Facility,
9.25s, 2023 70 67,912
Martha's Vineyard, MA, Land Bank (Land
Acquisition), 8.125s, 2011 2,900 2,979,634
Massachusetts Health & Education Facilities
Authority (Learning Center for Deaf Children),
9.25s, 2014 900 955,152
St. Louis County, MO, Industrial Development
Authority (Eagle Golf Enterprises), 10s, 2005 2,200 2,420,814
St. Louis County, MO, Industrial Development
Authority (Keil Center Arena), 7.875s, 2024 1,000 1,072,370
--------------
$ 29,336,753
- ----------------------------------------------------------------------------------------------
Short-Term Obligations - 1.8%
- ----------------------------------------------------------------------------------------------
Burke County, GA, Development Authority Pollution
Rev. (Bethlehem Steel), due 1997 $ 1,200 $ 1,200,000
Harris County, TX, Health Facilities Hospital, due 1997 100 100,000
Harris County, TX, Industrial Development Corp.
(Exxon), due 1997 300 300,000
Jackson County, MS, Pollution Control Rev.
(Chevron), due 1997 2,600 2,600,000
Lincoln County, WY, "A" (Exxon), due 1997 200 200,000
Lincoln County, WY, "B" (Exxon), due 1997 1,000 1,000,000
Lincoln County, WY, "D" (Exxon), due 1997 200 200,000
Lincoln County, WY, Pollution Control Rev., due 1997 500 500,000
Massachusetts State Health & Education Facility,
due 1997 2,500 2,500,000
New York City, NY, City Municipal Finance Authority,
due 1997 800 800,000
New York City, NY, City Municipal Water Finance
Authority, due 1997 2,400 2,400,000
Uinta County, WY, Pollution Control Rev., due 1997 8,150 8,150,000
- ----------------------------------------------------------------------------------------------
Total Short-Term Obligations (Identified Cost, $19,950,000) $ 19,950,000
- ----------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,064,738,280) $1,112,130,260
Other Assets, Less Liabilities - 0.2% 2,018,257
- ----------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,114,148,517
- ----------------------------------------------------------------------------------------------
*Non-income producing security - in default.
(S)Indexed security.
(+)Security valued by or at the direction of the Trustees.
(++)Inverse floating rate security.
+Restricted security.
++Security accruing partial interest - in default.
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------------------
January 31, 1997
- ------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $1,064,738,280) $1,112,130,260
Cash 39,399
Receivable for investments sold 2,528,689
Receivable for Fund shares sold 5,927,230
Interest receivable 15,876,194
Other assets 11,653
--------------
Total assets $1,136,513,425
==============
Liabilities:
Distributions payable $ 3,808,069
Payable for investments purchased 13,039,959
Payable for Fund shares reacquired 1,631,343
Payable to affiliates -
Management fee 19,551
Distribution fee 2,568
Shareholder servicing agent fee 3,947
Accrued expenses and other liabilities 3,859,471
--------------
Total liabilities $ 22,364,908
--------------
Net assets $1,114,148,517
==============
Net assets consist of:
Paid-in capital $1,197,896,807
Unrealized appreciation on investments 47,391,980
Accumulated net realized loss on investments (131,758,565)
Accumulated undistributed net investment income 618,295
--------------
Total $1,114,148,517
==============
Shares of beneficial interest outstanding 127,560,211
===========
Class A shares:
Net asset value and redemption price per share
(net assets of $988,177,785 / 113,148,629 shares of beneficial
interest outstanding) $8.73
=====
Offering price per share (100 / 95.25 of net asset value per share) $9.17
=====
Class B shares:
Net asset value and offering price per share
(net assets of $125,970,732 / 14,411,582 shares of beneficial
interest outstanding) $8.74
=====
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares.
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Operations
- ---------------------------------------------------------------------------------
Year Ended January 31, 1997
- ---------------------------------------------------------------------------------
<S> <C>
Net investment income:
Interest income - $ 83,622,285
------------
Expenses -
Management fee $ 7,154,011
Trustees' compensation 60,901
Shareholder servicing agent fee (Class A) 1,202,653
Shareholder servicing agent fee (Class B) 175,755
Shareholder servicing agent fee (Common) 121,510
Distribution and service fee (Class B) 773,776
Custodian fee 373,204
Workout Expenditures 184,400
Postage 117,318
Printing 69,300
Auditing fees 36,000
Legal fees 27,533
Miscellaneous 446,559
------------
Total expenses $ 10,742,920
Fees paid indirectly (137,496)
------------
Net expenses $ 10,605,424
------------
Net investment income $ 73,016,861
------------
Realized and unrealized loss on investments:
Realized loss (identified cost basis) on investment transactions $(22,959,311)
Change in unrealized depreciation on investments (20,906,221)
------------
Net realized and unrealized loss on investments $(43,865,532)
------------
Increase in net assets from operations $ 29,151,329
============
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------
Year Ended January 31, 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 73,016,861 $ 71,045,295
Net realized loss on investments (22,959,311) (24,859,595)
Net unrealized gain (loss) on investments (20,906,221) 88,864,128
--------------- ---------------
Increase in net assets from operations $ 29,151,329 $ 135,049,828
--------------- ---------------
Distributions declared to shareholders -
From net investment income (Class A) $ (70,123,751) $ (69,946,556)
From net investment income (Class B) (5,579,841) (4,150,972)
--------------- ---------------
Total distributions declared to shareholders $ (75,703,592) $ (74,097,528)
--------------- ---------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 205,275,625 $ 158,313,624
Net asset value of shares issued to shareholders in
reinvestment of distributions 27,979,659 27,605,848
Cost of shares reacquired (159,393,535) (135,750,588)
--------------- ---------------
Increase in net assets from Fund share transactions $ 73,861,749 $ 50,168,884
--------------- ---------------
Total increase in net assets $ 27,309,486 $ 111,121,184
Net assets:
At beginning of year 1,086,839,031 975,717,847
--------------- ---------------
At end of year (including undistributed net
investment income of $319,135 and $3,005,866,
respectively) $ 1,114,148,517 $ 1,086,839,031
=============== ===============
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------
Year Ended January 31, 1997 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning
of period $ 9.12 $ 8.60 $ 9.38 $ 9.26 $ 9.22 $ 9.09
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.61 $ 0.61 $ 0.64 $ 0.77 $ 0.73 $ 0.73
Net realized and
unrealized gain (loss)
on investments (0.36) 0.59 (0.75) 0.05 0.06 0.17
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.25 $ 1.20 $(0.11) $ 0.82 $ 0.79 $ 0.90
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.64) $(0.68) $(0.67) $(0.70) $(0.75) $(0.77)
From net realized gain on
investments -- -- -- -- -- --
From paid-in capital -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders $(0.64) $(0.68) $(0.67) $(0.70) $(0.75) $(0.77)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 8.73 $ 9.12 $ 8.60 $ 9.38 $ 9.26 $ 9.22
====== ====== ====== ====== ====== ======
Total return(+) 2.87% 13.92% (1.04)% 9.19% 9.02% 10.34%
Ratios (to average net assets)/Supplemental data:
Expenses## 0.93% 0.93% 1.04% 1.10% 1.00% 1.03%
Net investment income 6.96% 6.83% 7.27% 7.15% 7.95% 7.96%
Portfolio turnover 17% 20% 32% 18% 10% 21%
Net assets at end of period
(000 omitted) $988,178 $1,009,031 $920,043 $809,957 $731,968 $648,043
#Per share data for the periods subsequent to January 31, 1995 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge (except for reinvested dividends prior to
October 1, 1989). If the charge had been included, the results would have been lower.
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------
Year Ended January 31, 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 9.45 $ 9.55 $ 9.68 $10.38
------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.74 $ 0.85 $ 0.88 $ 0.84
Net realized and unrealized gain (loss) on
investments (0.32) (0.09) (0.12) (0.67)
------ ------ ------ ------
Total from investment operations $ 0.42 $ 0.76 $ 0.76 $ 0.17
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.78) $(0.81) $(0.82) $(0.84)
From net realized gain on investments -- (0.04) (0.07) (0.03)
From paid-in capital -- (0.01) -- --
------ ------ ------ ------
Total distributions declared to
shareholders $(0.78) $(0.86) $(0.89) $(0.87)
------ ------ ------ ------
Net asset value - end of period $ 9.09 $ 9.45 $ 9.55 $ 9.68
====== ====== ====== ======
Total return(+) 4.65% 8.24% 8.32% 1.87%
Ratios (to average net assets)/Supplemental data:
Expenses 1.05% 1.02% 0.65% 1.03%
Net investment income 8.17% 8.90% 9.27% 8.54%
Portfolio turnover 41% 21% 23% 16%
Net assets at end of period (000 omitted) $638,185 $485,037 $325,044 $349,655
(+)Total returns for Class A shares do not include the applicable sales charge (except for reinvested dividends
prior to October 1, 1989). If the charge had been included, the results would have been lower.
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------
Year Ended January 31, 1997 1996 1995 1994*
- -----------------------------------------------------------------------------------------------------------
Class B
- -----------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 9.12 $ 8.60 $ 9.38 $ 9.40
------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.52 $ 0.52 $ 0.57 $ 0.32
Net realized and unrealized gain (loss) on
investments (0.35) 0.59 (0.78) (0.14)
------ ------ ------ ------
Total from investment operations $ 0.17 $ 1.11 $(0.21) $ 0.18
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.55) $(0.59) $(0.57) $(0.20)
------ ------ ------ ------
Total distributions declared to
shareholders $(0.55) $(0.59) $(0.57) $(0.20)
------ ------ ------ ------
Net asset value - end of period $ 8.74 $ 9.12 $ 8.60 $ 9.38
====== ====== ====== ======
Total return 1.96% 12.78% (2.13)% 1.89%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.86% 1.91% 2.10% 2.04%+
Net investment income 6.00% 5.84% 6.32% 5.43%+
Portfolio turnover 17% 20% 32% 18%
Net assets at end of period (000 omitted) $125,971 $77,808 $55,675 $1
*For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
#Per share data for the periods subsequent to January 31, 1995 is based on average shares outstanding.
+Annualized.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Municipal High Income Fund (the Fund) is a non-diversified series of MFS
Series Trust III (the Trust). The Trust is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended, as
an open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues, are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Securities
for which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Trustees.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Interest
payments received in additional securities are recorded on the ex-interest date
in an amount equal to the value of the security on such date.
The Fund may invests up to 100% of its portfolio in high-yield securities rated
below investment grade. Investments in high-yield securities involve greater
degrees of credit and market risk than investments in higher-rated securities,
and tend to be more sensitive to economic conditions.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded
ratably by the Fund at a constant yield to maturity. Legal fees and other
related expenses incurred to preserve and protect the value of a security owned
are added to the cost of the security; other legal fees are expensed. Capital
infusions, which are generally non-recurring, incurred to protect or enhance the
value of high-yield debt securities, are reported as an addition to the cost
basis of the security. Costs that are incurred to negotiate the terms or
conditions of capital infusions or that are expected to result in a plan of
reorganization are reported as realized losses. Ongoing costs incurred to
protect or enhance an investment, or costs incurred to pursue other claims or
legal actions, are reported as operating expenses.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the Fund.
This amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided. The Fund files a tax return annually
using tax accounting methods required under provisions of the Code which may
differ from generally accepted accounting principles, the basis on which these
financial statements are prepared. Accordingly, the amount of net investment
income and net realized gain reported on these financial statements may differ
from that reported on the Fund's tax return and, consequently, the character of
distributions to shareholders reported in the financial highlights may differ
from that reported to shareholders on Form 1099-DIV.
Distributions paid by the Fund from net interest received on tax-exempt
municipal bonds are not includable by shareholders as gross income for federal
income tax purposes because the Fund intends to meet certain requirements of the
Code applicable to regulated investment companies, which will enable the Fund to
pay exempt-interest dividends. The portion of such interest, if any, earned on
private activity bonds issued after August 7, 1986 may be considered a
tax-preference item to shareholders. Distributions to shareholders are recorded
on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended January 31, 1997, accumulated undistributed net
investment income was increased by $299,160, accumulated net realized loss on
investments was decreased by $77,637, and paid in capital was decreased by
$376,797, due to differences between book and tax accounting for pension
expense, defaulted bonds, and market discount. This change had no effect on the
net assets or net asset value per share. At January 31, 1997, the Fund, for
federal income tax purposes, had a capital loss carryforward of $125,591,055,
which may be applied against any net taxable realized gains of each succeeding
year until the earlier of its utilization or expiration on January 31, 1998
($1,041,407), January 31, 1999 ($2,433,909), January 31, 2000 ($4,786,449),
January 31, 2001 ($5,199,093), January 31, 2002 ($28,166,887), January 31, 2003
($27,178,217), January 31, 2004 ($30,637,034) and January 31, 2005
($26,148,057).
Multiple Classes of Shares of Beneficial Interest - The Fund offers both Class A
and Class B shares. The two classes of shares differ in their respective
distribution and service fees. All shareholders bear the common expenses of the
Fund pro rata based on the average daily net assets of each class, without
distinction between share classes. Dividends are declared separately for each
class. No class has preferential dividend rights; differences in per share
dividend rates are generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an effective annual rate of
0.30% of average daily net assets and 4.75% of investment income.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain officers and Trustees of the
Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and MFS
Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan for
all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $17,011 for the year ended
January 31, 1997.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$667,359 for the year ended January 31, 1997, as its portion of the sales charge
on sales of Class A shares of the Fund. The Trustees have adopted a distribution
plan for Class B shares pursuant to Rule 12b-1 of the Investment Company Act of
1940 as follows:
The Fund's distribution plan provides that the Fund will pay MFD a distribution
fee of 0.75% per annum, and a service fee of up to 0.25% per annum, of the
Fund's average daily net assets attributable to Class B shares. MFD will pay to
securities dealers that enter into a sales agreement with MFD all or a portion
of the service fee attributable to Class B shares. Except in the case of the
0.25% per annum Class B service fee paid by the sale of Class B shares, payment
of the Class B service fee will be suspended until such date as the Trustees of
the Trust may determine. The service fee is intended to be additional
consideration for services rendered by the dealer with respect to Class B
shares. Fees incurred under the distribution plans during the year ended January
31, 1997 were 0.90% of average daily net assets attributable to Class B shares
on an annualized basis.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within 12 months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
MFD receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the year ended January 31, 1997 were $23,523 and $190,546
for Class A and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the fund's average daily net assets at an effective annual rate of
0.13%. Prior to January 1, 1997, the fee was calculated as a percentage of the
average daily net assets of each class of shares at an effective annual rate of
up to 0.15% up to 0.22% attributable to Class A and Class B shares,
respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than short-term obligations,
aggregated $226,617,363 and $176,781,600, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $1,064,738,660
==============
Gross unrealized appreciation $ 80,197,008
Gross unrealized depreciation (32,805,408)
--------------
Net unrealized appreciation $ 47,391,600
==============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares
Year Ended January 31, 1997 Year Ended January 31, 1996
---------------------------------- ----------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Shares sold 16,594,610 $ 145,833,348 15,092,575 $ 134,162,658
Shares issued to shareholders in
reinvestment of distributions 2,943,909 25,881,400 2,921,213 25,867,385
Shares reacquired (17,043,700) (149,563,593) (14,380,028) (128,112,173)
---------- ------------- ---------- -------------
Net increase 2,494,819 $ 22,151,155 3,633,760 $ 31,917,870
========== ============= ========== =============
<CAPTION>
Class B Shares
Year Ended January 31, 1997 Year Ended January 31, 1996
---------------------------------- ----------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Shares sold 6,763,017 $ 59,442,277 2,715,689 $ 24,150,966
Shares issued to shareholders in
reinvestment of distributions 238,469 2,098,259 196,030 1,738,463
Shares reacquired (1,121,560) (9,829,942) (856,621) (7,638,415)
---------- ------------- ---------- -------------
Net increase 5,879,926 $ 51,710,594 2,055,098 $ 18,251,014
========== ============= ========== =============
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $400 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended January 31,
1997 was $11,010.
(7) Restricted Securities
The Fund may invest not more than 15% of its total assets in securities which
are subject to legal or contractual restrictions on resale. At January 31, 1997,
the Fund owned the following restricted securities (constituting 1.69% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933 (the 1933 Act). The Fund does not have the right to demand that such
securities be registered. The value of these securities is determined by
valuations supplied by a pricing service or brokers or, if not available, in
good faith by or at the direction of the Trustees.
<TABLE>
<CAPTION>
Date of
Description Acquisition Par Amount Cost Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Daphne, AL, Special Care Facilities
Financing Authority, 8.25s, 2026 10/28/88 $12,500,000 $12,504,655 $10,821,625
Eastern Band Cherokee Indian
Community, NC, 10.25s, 2009 11/25/86 3,270,000 3,366,458 3,269,248
Eastern Band Cherokee Indian
Community, NC, 11s, 2012 09/19/86 950,000 862,500 949,820
Hannibal, MO, Industrial Development
Authority, 9.5s, 2022 03/23/92 3,000,000 2,971,113 3,735,870
-----------
$18,776,563
===========
</TABLE>
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees of MFS Series Trust III and Shareholders of MFS Municipal High
Income Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Municipal High Income Fund, including the schedule of portfolio investments, as
of January 31, 1997, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and financial highlights for each of the three years in the
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for each of the seven years in the period
ending January 31, 1994 for Class A shares, and for the period September 7, 1993
(commencement of operation) to January 31, 1994 for Class B shares, were audited
by other auditors whose report dated March 16, 1994 expressed an unqualified
opinion on those statements and financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of January 31, 1997, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Municipal High Income Fund at January 31, 1997, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the three
years in the period then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 7, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) MUNICIPAL HIGH INCOME FUND
<TABLE>
<C> <C>
TRUSTEES AUDITORS
A. Keith Brodkin* - Chairman and President Ernst & Young LLP
Richard B. Bailey* - Private Investor; INVESTOR INFORMATION
Former Chairman and Director (until 1991), For MFS stock and bond market outlooks, call
Massachusetts Financial Services Company; toll free: 1-800-637-4458 anytime from a
Director, Cambridge Bancorp; Director, touch-tone telephone.
Cambridge Trust Company
For information on MFS mutual funds, call
Peter G. Harwood - Private Investor your financial adviser or, for an information
kit, call toll free: 1-800-637-2929 any
J. Atwood Ives - Chairman and Chief business day from 9 a.m. to 5 p.m. Eastern
Executive Officer, Eastern Enterprises time (or leave a message anytime).
Lawrence T. Perera - Partner, INVESTOR SERVICE
Hemenway & Barnes MFS Service Center, Inc.
P.O. Box 2281
William J. Poorvu- Adjunct Professor, Boston, MA 02107-9906
Harvard University Graduate School of
Business Administration For general information, call toll free:
1-800-225-2606 any business day from
Charles W. Schmidt - Private Investor 8 a.m. to 8 p.m. Eastern time.
Arnold D. Scott* - Senior Executive Vice For service to speech- or hearing-impaired,
President, Director and Secretary, call toll free: 1-800-637-6576 any business
Massachusetts Financial Services Company day from 9 a.m. to 5 p.m. Eastern time. To
use this service, your phone must be equipped
Jeffrey L. Shames* - President and Director, with a Telecommunications Device for the Deaf.
Massachusetts Financial Services Company
For share prices, account balances, and
Elaine R. Smith - Independent Consultant exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
David B. Stone - Chairman, North American telephone.
Management Corp. (investment advisers)
WORLD WIDE WEB
INVESTMENT ADVISER www.mfs.com
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
Cynthia M. Brown*
[DALBAR For the third year in a row,
TREASURER LOGO] MFS earned a #1 ranking in
W. Thomas London* TOP RATED DALBAR, Inc. Broker/Dealer
SERVICE Survey, Main Office Operations
ASSISTANT TREASURER Service Quality Category. The
James O. Yost* firm achieved a 3.48 overall score on a
scale of 1 to 4 in the 1996 survey. A total
SECRETARY of 110 firms responded, offering input on the
Stephen E. Cavan* quality of service they received from 29
mutual fund companies nationwide. The survey
ASSISTANT SECRETARY contained questions about service quality in
James R. Bordewick, Jr.* 15 categories, including "knowledge of phone
service contacts," "accuracy of transaction
CUSTODIAN processing," and "overall ease of doing
State Street Bank and Trust Company business with the firm."
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
-------------
MFS(R) MUNICIPAL [DALBAR LOGO: #1 BULK RATE
HIGH INCOME FUND TOP RATED SERVICE] U.S. POSTAGE
PAID
PERMIT #55638
BOSTON, MA
-------------
500 Boylston Street
Boston, MA 02116
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MHI-2 3/97 93M 18/218/318
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
MFS HIGH INCOME FUND
(A) FINANCIAL STATEMENTS INCLUDED IN PART A:
For each of the years in the ten-year period ended
January 31, 1997:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At January 31, 1997:
Statement of Assets and Liabilities*
Portfolio of Investments*
For the year ended January 31, 1997:
Statement of Operations*
For the two years ended January 31, 1997:
Statement of Changes in Net Assets*
MFS MUNICIPAL HIGH INCOME FUND
(A) FINANCIAL STATEMENTS INCLUDED IN PART A:
For each of the years in the ten-year period ended
January 31, 1997.
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At January 31, 1997:
Statement of Assets and Liabilities**
Portfolio of Investments**
For the year ended January 31, 1997:
Statement of Operations**
For the two years ended January 31, 1997:
Statement of Changes in Net Assets**
- -----------------------------
* Incorporated herein by reference to the Fund's Annual Report to
shareholders dated January 31, 1997, filed via EDGAR with the SEC on April
8, 1997.
** Incorporated herein by reference to the Fund's Annual Report to
shareholders dated January 31, 1997, filed via EDGAR with the SEC on April
3, 1997.
(B) EXHIBITS:
1 (a) Amended and Restated Declaration of Trust, dated
February 17, 1995. (1)
(b) Amendment to Declaration of Trust to add Class P
Shares, dated June 20, 1996. (8).
(c) Amendment to Declaration of Trust dated December
19, 1996 to redesignate Class P Shares as Class
I Shares; filed herewith.
2 Amended and Restated By-Laws, dated December 21,
1994. (1)
3 Not Applicable.
4 Form of Share Certificate for Classes of
Shares. (7)
5 (a) Investment Advisory Agreement for MFS High
Income Fund, dated May 20, 1987. (1)
(b) Investment Advisory Agreement for MFS Municipal
High Income Fund dated September 1, 1993. (5)
(c) Amendment to Investment Advisory Agreement for
MFS Municipal High Income Fund, dated August 1,
1995. (6)
6 (a) Dealer Agreement between MFS Fund Distributors,
Inc. ("MFD"), and a dealer and the Mutual Fund
Agreement between MFD and a bank or NASD
affiliate, as amended on April 11, 1997; filed
herewith.
(b) Distribution Agreement, dated January 1, 1995.
(1)
7 Retirement Plan for Non-Interested Person
Trustees, dated February 1, 1991. (5)
8 (a) Custodian Agreement, dated May 24, 1988. (5)
(b) Amendment to Custodian Agreement, dated May 24,
1988. (5)
(c) Amendment to Custodian Agreement, dated October
1, 1989. (5)
(d) Amendment to Custodian Agreement, dated
September 17, 1991. (5)
9 (a) Shareholder Servicing Agent Agreement, dated
August 1, 1985. (5)
(b) Amendment to the Shareholder Servicing Agreement
dated January 1, 1997 to amend Fee Schedule;
filed herewith.
(c) Exchange Privilege Agreement, dated February 8,
1989 as amended and restated through and
including January 1, 1997. (9)
(d) Loan Agreement by and among the Banks named
therein, the MFS Funds named therein, and The
First National Bank of Boston, dated as of
February 21, 1995. (3)
(e) Dividend Disbursing Agency Agreement, dated
February 1, 1986. (2)
(f) Master Administrative Services Agreement, dated
March 1, 1997. (10)
10 Consent and Opinion of Counsel filed with
Registrant's Rule 24f-2 Notice for the
fiscal year ended January 31, 1997 on March
26, 1997.
11 (a) Consent of Deloitte & Touche, LLP - MFS High
Income Fund; filed herewith.
(b) Consent of Ernst & Young, LLP - MFS Municipal
High Income Fund; filed herewith.
12 Not Applicable.
13 Not Applicable.
14 (a) Forms for Individual Retirement Account
Disclosure Statement as currently in effect. (4)
(b) Forms for MFS 403(b) Custodial Account Agreement
as currently in effect. (4)
(c) Forms for MFS Prototype Paired Defined
Contribution Plans and Trust Agreement as
currently in effect. (4)
15 Master Distribution Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940,
effective January 1, 1997 and amended thereto on
April 10, 1997. (11).
16 Schedule of Computation for Performance
Quotations - Yield, Distribution Rate, Total
Rate of Return - MFS High Income Fund; and
Yield, Distribution Rate, Tax-Equivalent Yield
and Total Return - MFS Municipal High Income
Fund. (2)
17 Financial Data Schedules for each class of each
series; filed herewith.
18 Plan pursuant to Rule 18f-3(d) under the
Investment Company Act of 1940. (7).
Power of Attorney, dated September 21, 1994. (1)
- -----------------------------
(1) Incorporated by reference to the Registrant's Post-Effective Amendment No.
20 filed with the SEC via EDGAR on May 31, 1995.
(2) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915
and 811-4096) Post-Effective Amendment No. 28 filed with the SEC via EDGAR
on July 28, 1995.
(3) Incorporated by reference to Amendment No. 8 on Form N-2 for MFS Municipal
Income Trust (File No. 811-4841) filed with the SEC via EDGAR on February
28, 1995.
(4) Incorporated by reference to MFS Series Trust IX (File Nos. 2-50409 and
811-2464) Post-Effective Amendment No. 32 filed with the SEC via EDGAR on
August 28, 1995.
(5) Incorporated by reference to the Registrant's Post-Effective Amendment No.
21 filed with the SEC via EDGAR on October 13, 1995.
(6) Incorporated by reference to the Registrant's Post-Effective Amendment No.
22 filed with the SEC via EDGAR on May 29, 1996.
(7) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 25 filed with the SEC via EDGAR on
August 27, 1996.
(8) Incorporated by reference to Registrant's Post-Effective Amendment No. 23
filed with the SEC via EDGAR on August 27, 1996.
(9) Incorporated by reference to MFS Series Trust VIII (File Nos. 33-37972 and
811-5262) Post-Effective Amendment No. 13 filed with the SEC via EDGAR on
February 27, 1997.
(10) Incorporated by reference to MFS/Sun Life Series Trust (File Nos. 2-83616
and 811-3732) Post-Effective Amendment No. 19 filed with the SEC via EDGAR
on March 18, 1997.
(11) Incorporated by reference to MFS Government Limited Maturity Fund (File
Nos. 2-96738 and 811-4253) Post-Effective Amendment No. 18 filed with the
SEC via EDGAR on April 29, 1997.
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
FOR MFS HIGH INCOME FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 33,122
(without par value) (as of April 30, 1997)
Class B Shares of Beneficial Interest 14,298
(without par value) (as of April 30, 1997)
Class C Shares of Beneficial Interest 911
(without par value) (as of April 30, 1997)
Class I Shares of Beneficial Interest 3
(without par value) (as of April 30, 1997)
FOR MFS MUNICIPAL HIGH INCOME FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 27,835
(without par value) (as of April 30, 1997)
Class B Shares of Beneficial Interest 3,522
(without par value) (as of April 30, 1997)
ITEM 27. INDEMNIFICATION
Reference is hereby made to (a) Article V of Registrant's Amended and
Restated Declaration of Trust, incorporated by reference to Post-Effective
Amendment No. 20, filed with the SEC on May 31, 1995 and (b) Section 9 of the
Shareholder Servicing Agent Agreement, incorporated by reference to Registrant's
Post-Effective Amendment No. 21 filed with the SEC via EDGAR on October 13,
1995.
The Trustees and Officers of the Registrant and the personnel of the
Registrant's investment adviser and principal underwriter are insured under an
errors and omissions liability insurance policy. The Registrant and its officers
are also insured under the fidelity bond required by Rule 17g-1 under the
Investment Company Act of 1940.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds: Massachusetts Investors Trust, Massachusetts
Investors Growth Stock Fund, MFS Growth Opportunities Fund, MFS Government
Securities Fund, MFS Government Limited Maturity Fund, MFS Series Trust I (which
has thirteen series: MFS Managed Sectors Fund, MFS Cash Reserve Fund, MFS World
Asset Allocation Fund, MFS Aggressive Growth Fund, MFS Research Growth and
Income Fund, MFS Core Growth Fund, MFS Equity Income Fund, MFS Special
Opportunities Fund, MFS Convertible Securities Fund, MFS Blue Chip Fund, MFS New
Discovery Fund, MFS Science and Technology Fund and MFS Research International
Fund), MFS Series Trust II (which has four series: MFS Emerging Growth Fund, MFS
Capital Growth Fund, MFS Intermediate Income Fund and MFS Gold & Natural
Resources Fund), MFS Series Trust III (which has two series: MFS High Income
Fund and MFS Municipal High Income Fund), MFS Series Trust IV (which has four
series: MFS Money Market Fund, MFS Government Money Market Fund, MFS Municipal
Bond Fund and MFS OTC Fund), MFS Series Trust V (which has two series: MFS Total
Return Fund and MFS Research Fund), MFS Series Trust VI (which has three series:
MFS World Total Return Fund, MFS Utilities Fund and MFS World Equity Fund), MFS
Series Trust VII (which has two series: MFS World Governments Fund and MFS Value
Fund), MFS Series Trust VIII (which has two series: MFS Strategic Income Fund
and MFS World Growth Fund), MFS Series Trust IX (which has three series: MFS
Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited Maturity Fund),
MFS Series Trust X (which has four series: MFS Government Mortgage Fund,
MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign & Colonial
International Growth Fund and MFS/Foreign & Colonial International Growth and
Income Fund), and MFS Municipal Series Trust (which has 16 series: MFS Alabama
Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS California Municipal
Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia Municipal Bond Fund, MFS
Maryland Municipal Bond Fund, MFS Massachusetts Municipal Bond Fund, MFS
Mississippi Municipal Bond Fund, MFS New York Municipal Bond Fund, MFS North
Carolina Municipal Bond Fund, MFS Pennsylvania Municipal Bond Fund, MFS South
Carolina Municipal Bond Fund, MFS Tennessee Municipal Bond Fund, MFS Virginia
Municipal Bond Fund, MFS West Virginia Municipal Bond Fund and MFS Municipal
Income Fund) (the "MFS Funds"). The principal business address of each of the
MFS Funds is 500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following no-load,
open-end Funds: MFS Institutional Trust ("MFSIT") (which has seven series), MFS
Variable Insurance Trust ("MVI") (which has twelve series) and MFS Union
Standard Trust ("UST"). The principal business address of each of the
aforementioned funds is 500 Boylston Street, Boston, Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL"), Money Market Variable Account, High Yield Variable Account, Capital
Appreciation Variable Account, Government Securities Variable Account, World
Governments Variable Account, Total Return Variable Account and Managed Sectors
Variable Account. The principal business address of each of the aforementioned
funds is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company organized
under the laws of Bermuda and a subsidiary of MFS, whose principal business
address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves as
investment adviser to and distributor for MFS American Fund (which has six
portfolios: MFS American Funds-U.S. Equity Fund, MFS American Funds-U.S.
Emerging Growth Fund, MFS American Funds-U.S. High Yield Bond Fund, MFS American
Funds - U.S. Dollar Reserve Fund, MFS American Funds-Charter Income Fund and MFS
American Funds-U.S. Research Fund) (the "MIL Funds"). The MIL Funds are
organized in Luxembourg and qualify as an undertaking for collective investments
in transferable securities (UCITS). The principal business address of the MIL
Funds is 47, Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for MFS
Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund, MFS Meridian World Total
Return Fund, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund and MFS
Emerging Markets Debt Fund (collectively the "MFS Meridian Funds"). Each of the
MFS Meridian Funds is organized as an exempt company under the laws of the
Cayman Islands. The principal business address of each of the MFS Meridian Funds
is P.O. Box 309, Grand Cayman, Cayman Islands, British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose current
address is 4 John Carpenter Street, London, England ED4Y 0NH, is involved
primarily in marketing and investment research activities with respect to
private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned subsidiary of
MFS, serves as distributor for certain life insurance and annuity contracts
issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS,
serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT, MVI and UST.
MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned subsidiary of
MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of
MFS, markets MFS products to retirement plans and provides administrative and
record keeping services for retirement plans.
MFS
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D.
Scott, Donald A. Stewart and John D. McNeil. Mr. Brodkin is the Chairman, Mr.
Shames is the President, Mr. Scott is a Senior Executive Vice President and
Secretary, Bruce C. Avery, William S. Harris, William W. Scott, Jr., and
Patricia A. Zlotin are Executive Vice Presidents, Stephen E. Cavan is a Senior
Vice President, General Counsel and an Assistant Secretary, Robert T. Burns is a
Senior Vice President, Associate General Counsel and an Assistant Secretary of
MFS, and Thomas B. Hastings is a Vice President and Treasurer of MFS.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST X
MFS GOVERNMENT LIMITED MATURITY FUND
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice President of
MFS, is the Assistant Treasurer, James R. Bordewick, Jr., Senior Vice President
and Associate General Counsel of MFS, is the Assistant Secretary.
MFS SERIES TRUST II
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg,
Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg,
Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST III
A. Keith Brodkin is the Chairman and President, James T. Swanson,
Robert J. Manning, Cynthia M. Brown and Joan S. Batchelder, Senior Vice
Presidents of MFS, and Bernard Scozzafava, Vice President of MFS, are Vice
Presidents, Sheila Burns-Magnan, Assistant Vice President of MFS, and Daniel E.
McManus, Vice President of MFS, are Assistant Vice Presidents, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
A. Keith Brodkin is the Chairman and President, Robert A. Dennis and
Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS SERIES TRUST VII
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg and
Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice Presidents, Stephen
E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is
the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST VIII
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames,
Leslie J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D. Laupheimer,
Jr., Vice President of MFS, are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and
Robert A. Dennis are Vice Presidents, David B. Smith, Geoffrey L. Schechter and
David R. King, Vice Presidents of MFS, are Vice Presidents, Daniel E. McManus,
Vice President of MFS, is an Assistant Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS VARIABLE INSURANCE TRUST
MFS UNION STANDARD TRUST
MFS INSTITUTIONAL TRUST
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and
Robert J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, is the Assistant Treasurer and
James R. Bordewick, Jr., is the Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg and
James T. Swanson are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, Vice President of MFS, is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SPECIAL VALUE TRUST
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames and
Robert J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, is the Assistant Treasurer and
James R. Bordewick, Jr., is the Assistant Secretary.
MFS/SUN LIFE SERIES TRUST
John D. McNeil, Chairman and Director of Sun Life Assurance Company of
Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James O. Yost, is the Assistant Treasurer and James R. Bordewick,
Jr., is the Assistant Secretary.
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
WORLD GOVERNMENTS VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
John D. McNeil is the Chairman, Stephen E. Cavan is the Secretary, and
James R. Bordewick, Jr., is the Assistant Secretary.
MIL
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott and
Jeffrey L. Shames are Directors, Ziad Malek, Senior Vice President of MFS, is
the President, Thomas J. Cashman, Jr., a Senior Vice President of MFS, is a
Senior Vice President, Stephen E. Cavan is a Director, Senior Vice President and
the Clerk, James R. Bordewick, Jr. is a Director, Vice President and an
Assistant Clerk, Robert T. Burns is an Assistant Clerk, Joseph W. Dello Russo,
Senior Vice President and Chief Financial Officer of MFS, is the Treasurer and
Thomas B. Hastings is the Assistant Treasurer.
MIL-UK
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott,
Jeffrey L. Shames, and James R. Bordewick, Jr., are Directors, Stephen E. Cavan
is a Director and the Secretary, Ziad Malek is the President, James E. Russell
is the Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL FUNDS
A. Keith Brodkin is the Chairman, President and a Director, Richard B.
Bailey, John A. Brindle, Richard W. S. Baker and William F. Waters are
Directors, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the
Assistant Secretary, and Ziad Malek is a Senior Vice President.
MFS MERIDIAN FUNDS
A. Keith Brodkin is the Chairman, President and a Director, Richard B.
Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott, Jeffrey L. Shames
and William F. Waters are Directors, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James R. Bordewick, Jr., is the Assistant
Secretary, James O. Yost is the Assistant Treasurer, and Ziad Malek is a Senior
Vice President.
MFD
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, William W. Scott, Jr., an Executive Vice
President of MFS, is the President, Stephen E. Cavan is the Secretary, Robert T.
Burns is the Assistant Secretary, Joseph W. Dello Russo is the Treasurer, and
Thomas B. Hastings is the Assistant Treasurer.
CIAI
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Cynthia Orcott is President, Bruce C. Avery is
the Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings
is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and Robert T.
Burns is the Assistant Secretary.
MFSC
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Joseph A. Recomendes, a Senior Vice President
of MFS, is Vice Chairman and a Director, Janet A. Clifford is the Executive Vice
President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, Stephen E. Cavan is the Secretary, and Robert T. Burns is
the Assistant Secretary.
MFSI
A. Keith Brodkin is the Chairman and a Director, Jeffrey L. Shames, and
Arnold D. Scott are Directors, Thomas J. Cashman, Jr., is the President and a
Director, Leslie J. Nanberg is a Senior Vice President, a Managing Director and
a Director, George F. Bennett, Carol A. Corley, John A. Gee, Brianne Grady and
Kevin R. Parke are Senior Vice Presidents and Managing Directors, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer and
Robert T. Burns is the Secretary.
RSI
William W. Scott, Jr. and Bruce C. Avery are Directors, Arnold D. Scott
is the Chairman and a Director, Joseph W. Dello Russo is the Treasurer, Thomas
B. Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary,
Robert T. Burns is the Assistant Secretary and Sharon A. Brovelli and Martin E.
Beaulieu are Senior Vice Presidents.
In addition, the following persons, Directors or officers of MFS, have
the affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance Company of
Canada (U.S.), One Sun Life Executive
Park, Wellesley Hills, Massachusetts
Director, Sun Life Insurance and Annuity
Company of New York, 67 Broad Street, New
York, New York
Donald A. Stewart President and a Director, Sun Life
Assurance Company of Canada, Sun Life
Centre, 150 King Street West, Toronto,
Ontario, Canada (Mr. Stewart is also an
officer and/or Director of various
subsidiaries and affiliates of Sun Life)
John D. McNeil Chairman, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King Street
West, Toronto, Ontario, Canada (Mr.
McNeil is also an officer and/or Director
of various subsidiaries and affiliates of
Sun Life)
Joseph W. Dello Russo Director of Mutual Fund Operations, The
Boston Company, Exchange Place, Boston,
Massachusetts (until August, 1994)
ITEM 29. DISTRIBUTORS
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above; the principal business
address of each of these persons is 500 Boylston Street, Boston, Massachusetts
02116.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
NAME ADDRESS
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
(principal underwriter) Boston, MA 02116
State Street Bank and Trust Company State Street South
(custodian) 5-West
North Quincy, MA 02171
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS
(a) Not Applicable.
(b) Not Applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of its latest annual report to shareholders upon
request and without charge.
(d) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the provisions set forth in Item 27 of
this Part C, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the Securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 29th day of May, 1997.
MFS SERIES TRUST III
By: JAMES R. BORDEWICK, JR.
-----------------------
Name: James R. Bordewick, Jr.
Title: Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities indicated on May 29, 1997.
SIGNATURE TITLE
--------- -----
Chairman, President (Principal
A. KEITH BRODKIN* Executive Officer) and Trustee
- ----------------------------
A. Keith Brodkin
Treasurer (Principal Financial Officer
W. THOMAS LONDON* and Principal Accounting Officer)
- ----------------------------
W. Thomas London
RICHARD B. BAILEY* Trustee
- ----------------------------
Richard B. Bailey
PETER G. HARWOOD* Trustee
- ----------------------------
Peter G. Harwood
J. ATWOOD IVES* Trustee
- ----------------------------
J. Atwood Ives
<PAGE>
LAWRENCE T. PERERA* Trustee
- ----------------------------
Lawrence T. Perera
WILLIAM J. POORVU* Trustee
- ----------------------------
William J. Poorvu
CHARLES W. SCHMIDT* Trustee
- ----------------------------
Charles W. Schmidt
ARNOLD D. SCOTT* Trustee
- ----------------------------
Arnold D. Scott
JEFFREY L. SHAMES* Trustee
- ----------------------------
Jeffrey L. Shames
ELAINE R. SMITH* Trustee
- ----------------------------
Elaine R. Smith
DAVID B. STONE* Trustee
- ----------------------------
David B. Stone
*By: JAMES R. BORDEWICK, JR.
-----------------------
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr.
on behalf of those indicated pursuant
to a Power of Attorney dated
September 21, 1994, incorporated by
reference to the Registrant's
Post-Effective Amendment No. 20 filed
with the Securities and Exchange
Commission via EDGAR on May 31, 1995.
<PAGE>
MFS SERIES TRUST III
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
----------- ---------------------- --------
1 (c) Amendment to Declaration of Trust dated December
19, 1996 to redesignate Class P Shares as Class I
Shares.
6 (a) Dealer Agreement between MFS Fund Distributors,
Inc. ("MFD"), and a dealer and the Mutual Fund
Agreement between MFD and a bank or NASD
affiliate, as amended on April 11, 1997.
9 (b) Amendment to the Shareholder Servicing Agent
Agreement dated January 1, 1997 to amend Fee
Schedule.
11 (a) Consent of Deloitte & Touche, LLP - MFS High
Income Fund.
(b) Consent of Ernst & Young, LLP - MFS Municipal
High Income Fund.
17 Financial Data Schedules for each class of
each series.
<PAGE>
EXHIBIT NO. 99.1(c)
MFS SERIES TRUST III
CERTIFICATION OF AMENDMENT
TO THE DECLARATION OF TRUST
REDESIGNATION
OF CLASS P SHARES AS CLASS I SHARES
The undersigned, being a majority of the Trustees of MFS Series Trust
III (the "Trust"), a business trust organized under the laws of The Commonwealth
of Massachusetts pursuant to an Amended and Restated Declaration of Trust dated
February 15, 1995 as amended (the "Declaration"), acting pursuant to Section
6.10 of the Declaration, do hereby redesignate the shares previously designated
as Class P shares of each series of the Trust as Class I shares.
IN WITNESS WHEREOF, a majority of the Trustees of the Trust have executed
this amendment, in one or more counterparts, all constituting a single
instrument, as an instrument under seal in The Commonwealth of Massachusetts, as
of this 18th day of December, 1996.
A. KEITH BRODKIN CHARLES W. SCHMIDT
- --------------------------- ---------------------------
A. Keith Brodkin Charles W. Schmidt
76 Farm Road 63 Claypit Hill Road
Sherborn, MA 01770 Wayland, MA 01778
RICHARD B. BAILEY ARNOLD S. SCOTT
- --------------------------- ---------------------------
Richard B. Bailey Arnold D. Scott
63 Atlantic Avenue 20 Rowes Wharf
Boston, MA 02110 Boston, MA 02110
PETER G. HARWOOD
- --------------------------- ---------------------------
Peter G. Harwood Jeffrey L. Shames
211 Lindsay Pond Road 36 Lake Avenue
Concord, MA 01742 Newton, MA 02159
J. ATWOOD IVES ELAINE R. SMITH
- --------------------------- ---------------------------
J. Atwood Ives Elaine R. Smith
1 Bennington Road 75 Scotch Pine Road
Lexington, MA 02173 Weston, MA 02193
LAWRENCE T. PERERA DAVID B. STONE
- --------------------------- ---------------------------
Lawrence T. Perera David B. Stone
18 Marlborough Street 282 Beacon Street
Boston, MA 02116 Boston, MA 02116
WILLIAM J. POORVU
- ---------------------------
William J. Poorvu
975 Memorial Drive
Cambridge, MA 02138
<PAGE>
EXHIBIT NO. 99.6(a)
MFS FUND DISTRIBUTORS, INC.
500 BOYLSTON STREET o BOSTON o MASSACHUSETTS 02116
617 o 954-5000
DEALER AGREEMENT
Dear Sirs:
We are the distributor of the shares of each of the funds from time to
time in the MFS Family of Funds (collectively, the "Funds"). Shares are offered
pursuant to the then current prospectus, including any supplements or amendments
thereto, of each of the Funds (the "Prospectus"). To the extent that a
Prospectus contains provisions that are inconsistent with the terms of this
agreement, the terms of the Prospectus shall be controlling. We have the
exclusive right to distribute shares of the Funds (the "Shares"). In addition,
we are the distributor of the units of participation (the "Units") of the MFS
Fixed Fund, a bank collective investment fund (the "MFS Fixed Fund"). The Units
are offered pursuant to the then-current Description of the MFS Fixed Fund,
including any supplements or amendments thereto (the "Description"). All offers
for sale of the Units shall be subject to the terms of, and effected in
accordance with, the terms of the Description. To the extent that the
Description contains provisions that are inconsistent with the terms of this
agreement, the terms of the Description shall be controlling. As agent for the
Funds and the MFS Fixed Fund, we hereby offer to sell Shares of the Funds and
make available the Units to you, acting as principal (in the case of the Funds)
or as agent (in the case of the MFS Fixed Fund) and not as broker or agent for,
or employee of, us or any of the Funds or the MFS Fixed Fund, upon the following
terms and conditions:
1. In all sales of the Shares to the public, you shall act as dealer
for your own account.
2. We will not accept from you any conditional orders for the purchase,
sale or redemption of Shares or Units. All orders to purchase Shares received
from you will be accepted by us only based on the public offering price
applicable to each order, as established by the Prospectus of the Fund for whose
Shares the order is placed. All orders to purchase Units received from you will
be received by us and accepted by SEI Trust Company ("SEI"), as trustee of the
MFS Fixed Fund, only based on the Unit Value applicable to each order, as
established by the Description. The procedure relating to the handling of orders
shall be subject to instructions which we shall forward from time to time to
you. All orders are subject to acceptance or rejection by us in our sole
discretion and, in the case of the Units, by SEI in its sole discretion.
3. On the purchase by you through us to cover a single transaction
involving Shares of the Funds, the applicable offering price and dealer discount
therefrom or commission, as applicable, which you will receive will be
determined in accordance with the provisions of the Prospectus of the applicable
Fund. In addition, certain of the Funds have adopted Distribution Plans pursuant
to which we, on behalf of each such Fund, will pay a service fee to dealers in
accordance with the provisions of such Funds' Distribution Plans. (The service
fee is paid to you as additional consideration for all personal services and/or
account maintenance services provided by you to shareholders of the applicable
Fund.) The provisions and terms of these Funds' Distribution Plans are described
in their respective Prospectuses, and you hereby agree that we have made no
representations to you with respect to the Distribution Plans of such Funds in
addition to, or conflicting with, the description set forth in their respective
Prospectuses. No dealer discount or commission is applicable to Shares
representing reinvested dividends and distributions. No interest will accrue on
amounts represented by uncashed dealer discount, commission or service fee
checks.
You acknowledge and agree that you shall not be entitled to receive any
such service fees unless: (i) you are the holder or dealer of record for
accounts in the applicable Fund, or all Funds together, having an aggregate net
asset value of at least the minimum amount established by us from time to time
in accordance with the terms of the Funds' Distribution Plans or (ii) you
satisfy each of the following conditions, as determined from time to time by us
in our sole discretion: (a) you include all Funds on your product list and, as
requested by us from time to time, one or more of the Funds on your "approved",
"preferred" or other similar product list; provided, however, that the MFS Fixed
Fund shall be included only on such product lists as are specifically directed
to eligible qualified retirement plans described in the Description; (b) you
grant reasonable requests from time to time for visits to your offices
(including branch offices) by our sales and marketing representatives; (c) you
provide satisfactory product, marketing and sales support, as requested by us
from time to time; and (d) you assign one of your registered representatives to
each Fund shareholder account on your records and reassign the Fund account
should that representative leave your firm; provided, however, that you will not
be paid any service fee in any event if the redemption levels of Fund
shareholder accounts for which you are the holder or dealer of record are above
normal as compared to other dealers, as determined by us from time to time in
our sole discretion. In addition, you acknowledge and agree that (y) you shall
not be paid any service fee with respect to a specific time period unless and
until we are in receipt of the service fee from the Fund for such period and (z)
our liability to you for the payment of any such service fee is limited solely
to the amount of the applicable Fund's service fee received by us.
4. You agree that all purchases of Shares or Units through us shall be
made only to cover orders already received by you.
5. All sales of the Shares to your customers shall be at the public
offering price as established by the Prospectus and shall comply with all such
multiple class pricing guidelines as we may from time to time furnish to you.
All sales of the Units to your customers shall be at the Unit Value and upon the
terms established by the Description.
6. You shall not withhold placing orders received from your customers
so as to profit yourself as a result of such withholding.
7. If any Shares sold to you by us under the terms of this agreement
are repurchased by the issuer or by us as agent for the issuer or are tendered
for redemption within seven business days after the date of your original
purchase, it is agreed that you shall forfeit your right to any discount or
commission received by or allowed to you on such Shares hereunder.
We will notify you of any such repurchase or redemption within ten days
from the date on which a stock power or letter of instructions, if no
certificate has been issued, or the certificate is delivered to us or to the
issuer, and you shall forthwith refund to us the full discount or commission
received by or allowed to you.
8. Payment for Shares or Units ordered from us shall be in New York or
Boston clearinghouse funds received by us by the later of: (i) the end of the
third business day following your receipt of the customer's order to purchase
such Shares or Units or (ii) the end of one business day following your receipt
of the customer's payment for such Shares or Units, but in no event later than
the end of the sixth business day following your receipt of the customer's
order. If such payment is not received by us, we reserve the right, without
notice, forthwith to cancel the sale, or, in the case of Shares, at our option,
to sell the Shares ordered back to the issuer, in which case we may hold you
responsible for any loss, including loss of profit, suffered by us resulting
from your failure to make payment as aforesaid.
9. You agree to provide all necessary information to comply properly
with all federal, state and local reporting requirements and backup and
nonresident alien withholding requirements for your customer accounts including,
without limitation, those requirements that apply by treating Shares issued by
the Funds as readily tradable instruments. You represent and agree that all
Taxpayer Identification Numbers ("TINS") provided are certified, and that no
account which requires a certified TIN will be established without such
certified TIN. You agree to perform all federal, state and local tax reporting
with respect to sales of Shares through the National Securities Clearing
Corporation ("NSCC") Fund/Serv program, including without limitation redemptions
and exchanges.
10. In connection with purchases by you as principal of Shares of any
of the Funds from others, you agree that you will pay to the seller a price
which is not less than the net asset value next quoted by us as agent for the
Fund. Nothing in this agreement shall prevent you from selling Shares for the
account of a record owner to the issuer at the net asset value next quoted by us
as agent for the issuer and charging your customer a fair commission for
handling the transaction.
11. Shares sold by us to you hereunder shall be available to you for
delivery against payment at the office of our agent, MFS Service Center, Inc.
("MFSC"), 500 Boylston Street, Boston, Massachusetts 02116, unless other
arrangements are made with us for delivery and payment.
12. No person is authorized to make any representations concerning
Shares except those contained in the Prospectus and in such printed information
and information stored on computer diskettes (illustrating hypothetical
investments in the Funds) as issued by us for use as information supplemental to
the Prospectus. Supplemental information relating to hypothetical investments
may be used only in one-on-one presentations. In purchasing Shares from us, you
shall rely solely on the representations contained in the Prospectus and in the
above-mentioned supplemental information. Qualification of Shares in the various
states, including the filing of any state or further state notices respecting
such Shares, and any printed information or information stored on computer
diskettes which we furnish you other than the Prospectuses and periodic reports
are our sole responsibility and not the responsibility of the respective Funds,
and you agree that the Funds shall have no liability or responsibility to you in
these respects. No person is authorized to make any representations concerning
the Units except those contained in the Description and in such printed
information as issued by us for use as information supplemental to the
Description. In offering Units for sale, you shall rely solely on the
representations contained in the Description and in the above-mentioned
supplemental information.
13. Additional copies of any Prospectus or the Description and any
printed information or information stored on computer diskettes issued
supplementing the Prospectus or the Description will be supplied by us in
reasonable quantities upon request; provided, however, that we reserve the right
to charge a nominal fee, disclosed in advance, for computer diskettes.
14. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of Shares or Units entirely. Except as provided
in paragraph 15, each party hereto has the right to cancel this agreement upon
ten days' notice to the other party. We reserve the right to amend this
agreement, or to assign this agreement to an affiliate, at any time and you
agree that an order to purchase Shares of any one of the Funds or of the Units
placed by you after notice of any such amendment or assignment has been sent to
you shall constitute your agreement to any such amendment or assignment.
15. You represent that you are a member in good standing of the
National Association of Securities Dealers, Inc. (the "NASD"). You agree that
you will not make available Shares of any Fund or the Units in any state or
other jurisdiction in which we inform you that such Shares or Units may not be
lawfully offered for sale. You agree (notwithstanding the provisions of
paragraph 14 hereof) that this agreement shall automatically terminate without
notice upon your: (a) filing of a petition in bankruptcy or a petition seeking
any reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future bankruptcy,
reorganization, insolvency or similar statute, law or regulation; or (b) seeking
the appointment of any trustee, conservator, receiver, custodian or liquidator
for you or for all or substantially all of your properties. Likewise, you agree
(notwithstanding the provisions of paragraph 14 hereof) that: (w) if a
proceeding is commenced against you seeking relief or an appointment of a type
described in the immediately preceding two sentences; or (x) if a trustee,
conservator, receiver, custodian or liquidator is appointed for you or for all
or substantially all of your properties; or (y) if an application for a
protective decree under the provisions of the Securities Investor Protection Act
of 1970 shall have been filed against you; or (z) if you are a registered
broker-dealer and (i) the Securities and Exchange Commission (the "SEC") shall
revoke or suspend your registration as a broker-dealer, (ii) any national
securities exchange or national securities association shall revoke or suspend
your membership, or (iii) under any applicable net capital rule of the SEC or of
any national securities exchange, your aggregate indebtedness shall exceed
1,000% of your net capital, this agreement shall automatically terminate. You
agree that you will immediately advise us of any such proceeding, appointment,
application, revocation, suspension or indebtedness level. You further agree
that if you are a foreign dealer (a) you are registered under the Securities
Exchange Act of 1934 and you agree that in making sales of Shares to purchasers
within the United States you will conform to the Conduct Rules, including the
Interpretation with Respect to Free-Riding and Withholding, of the NASD, or (b)
if you are not so registered, you will make sales of Shares only outside of the
jurisdiction of the United States to persons who are not citizens or residents
of the United States. You also represent that you have complied, and will
continue to comply, with any other state or federal registration requirements
(and any other applicable securities, tax and other laws) related to the offer
and sale of the Shares of any of the Funds or the offer for sale of the Units.
16. You may send exchange requests to MFSC via facsimile, subject to
the following requirements: (a) All exchange transactions must be received, and
confirmed by a telephone call from you to MFSC, by 4:00 p.m. Boston time in
order to receive the day's closing price. Transactions received after 4:00 p.m.
will be processed the following business day. If the impact of processing
exchange transactions received from all sources is deemed to be injurious to one
of the Funds or the MFS Fixed Fund, we in our sole discretion may elect to delay
the purchase side of the transaction for up to seven days. In such a
circumstance, the exchange redemption would be made at the price or Unit Value
in effect on the first day and the exchange purchase would use the price or Unit
Value of a date not more than seven days later. This arrangement will be
governed by and superseded by changes in the Prospectuses or the Description
without terminating this arrangement. All exchange transactions involving the
MFS Fixed Fund are subject to the terms of the Description. (b) All exchange
transactions must be sent by facsimile machine to MFSC at (617) 954-6636 or
(617) 954-6637 and confirmed by telephone at (617) 954-4628. No other medium of
delivery will be acceptable, except as provided by the Prospectuses or the
Description. (c) You hereby warrant that each exchange transaction which you
initiate will have been authorized by the shareholder or Unitholder prior to
initiation, and that each such shareholder has received, read and understood the
Prospectus for each Fund to be purchased. (d) We or MFSC may terminate your
participation in the transactions contemplated by this paragraph at any time if
either of us believes or has reason to believe that you have failed or may fail
to comply with any of the conditions set forth herein, or, in any event, with 10
days' written notice. Such termination will not affect your responsibilities
under paragraph 27 with respect to such transactions.
17. We agree to accept orders, including wire orders, placed by you for
the purchase of Shares for MFS (Prototype) Individual Retirement Account Plans
("IRA Plan"), subject to the following:
(a) We will provide you with IRA Adoption Agreements and/or
Applications ("IRA Agreements") solely for the purpose of allowing you
to accept initial and subsequent contributions (other than trustee to
trustee transfers) from any individual who has created an IRA Plan by
execution of such IRA Agreement, invested in shares of a Fund and
designated by the individual, provided that the IRA Plan investment is
permitted under the terms of the Fund Prospectus.
(b) You hereby represent and warrant to us, The First National
Bank of Boston (the "Trustee") and each Fund that you are fully
informed and knowledgeable as to the requirements imposed under the
Internal Revenue Code of 1986, as amended (the "Code"), and the rules,
regulations and rulings adopted pursuant thereto, on and in respect to
individual retirement accounts ("IRAs"), as defined under the Code. You
further represent that for all IRA Plan orders placed hereunder, you:
(a) will require receipt of a properly completed and signed IRA
Agreement before placing such order; (b) will deliver to the
participant the appropriate MFS IRA Trust and Disclosure Statement
before placing such order; and (c) will ensure that the contribution
from the participant is properly designated as to the year of
contribution. Your placement of an order under this paragraph 17 shall
serve as a warranty that such order complies with all such rules,
regulations, rulings and procedures.
(c) You shall promptly upon the receipt of any IRA Plan
contribution from a participant, and only if in possession of an IRA
Agreement signed by the participant, place an order with us through
MFSC for shares of a Fund in accordance with the instructions of the
participant. If the order placed by you represents a new account, you
shall furnish us with an executed IRA Agreement promptly after the
order is placed.
(d) You understand that we, MFSC, the Trustee and the Funds
shall not be responsible for monitoring orders placed by you with
regard to compliance with Internal Revenue Service (the "IRS") and
other rules and regulations, including, but not limited to, those
related to over-contributions, eligibility, income restrictions,
timeliness of contribution, or any other matters related to the status
of any IRA Plan, nor for your compliance with procedures established by
us or our agents with respect to such IRA orders.
(e) We, for ourself and our agents, and the Trustee reserve the
right, at each of our sole option, and without liability or obligation
so to act, to cancel or re-register any trade or not to settle any
trade which does not comply with the terms of this paragraph 17 or the
procedures established by us or our agents. We will use reasonable
efforts to notify you of such actions.
(f) The remittance of the annual service fee cannot be combined
with or made via a wire order purchase. Wire redemption requests will
not be accepted. Any purchase hereunder must be made in accordance with
the terms of the pertinent Prospectus.
(g) We may terminate your participation in the transactions
contemplated by this paragraph at any time if you fail to comply with
any of the conditions set forth herein, or, in any event, with 10 days'
written notice. Such termination will not affect your responsibilities
under paragraph 27 with respect to such transactions.
18. You may enter via a remote terminal, and we will accept, the
following clerical changes and corrections relating to any account of your
customers: dividend and/or capital gain distribution election as to cash or
reinvestment; TINs; account executive's number and/or name; branch office city,
state and related dealer branch number; and shareholder address changes, subject
to the following: (a) You hereby represent and warrant to us, MFSC and the
Fund(s) that each change made pursuant to this paragraph has been authorized by
your customer prior to its initiation and that you have internal procedures in
place to assure that the changes described herein are authorized only by
appropriate persons. (b) This arrangement will be governed by and subject to
rules and procedures established by us and MFSC for effecting such changes. (c)
We or MFSC may terminate your participation in the transactions contemplated by
this paragraph at any time if either of us believes or has reason to believe
that you have failed or may fail to comply with any of the conditions set forth
herein or, in any event, with 10 days' prior written notice. Such termination
will not affect your responsibilities under paragraph 27 with respect to such
transactions.
19. You may settle redemptions of shares of the Funds held in
individual accounts of your customers or in accounts registered in your name,
via NSCC Fund/Serv and without a guaranteed endorsement on the certificates
representing such shares, or, if no certificates for such shares have been
issued, without a guaranteed endorsement, and we agree to allow such redemptions
subject to the following: (a) The wire order redemption request is placed
through NSCC Fund/Serv. (b) In the case of certificated shares, the appropriate
certificate(s) are received as settlement and the reverse of such certificate(s)
is not completed or signed in a manner deemed inconsistent by MFSC in its sole
judgment. (c) You hereby warrant to us, MFSC and the Fund(s) that each
redemption has been authorized by your customer prior to initiation and that you
have internal procedures in place to assure that the instructions described
herein are authorized only by appropriate persons. (d) This arrangement will be
governed by and subject to rules and procedures established by us and MFSC for
effecting such transactions. (e) We or MFSC may terminate your participation in
the transactions described in this paragraph at any time if either of us
believes or has reason to believe that you have failed or may fail to comply
with any of the conditions set forth herein or, in any event, with 24 hours'
notice. Such termination shall not affect your responsibilities under paragraph
27 with respect to such transactions.
20. Should we agree to participate with you in the NSCC program known
as "Networking" in one or more of its "Matrix Levels," which agreement will be
evidenced by the execution by us and you of an agreement, we thereby agree to
accept from you electronically through MFSC and through Networking channels and
Fund/Serv without supporting documentation from shareholders in the Funds for
whom you are the dealer of record or with respect to which you are the clearing
broker to the dealer of record ("originating firm") which is in turn a party to
a Dealer or Mutual Fund Agreement with us (your "client"), the instructions,
communication and actions specified in such agreement, subject to and in
reliance upon the following requirements and representations.
A. Requirements. 1. You will provide all necessary, requested, updating
and reconciling information to ensure the accuracy of records and to enable MFSC
to create and maintain an accurate cross-reference file between client records
and the Fund account records that shall remain the official records of all Fund
shareholder accounts. You agree that MFSC will not be responsible for changes to
the file until a reasonable time after receipt thereof. 2. You will provide in a
timely fashion all necessary and relevant information regarding adverse claims,
governmental and legal inquiries and correspondence to us, MFSC, the Fund or its
adviser, as appropriate, in connection with its handling of and responding to
such notices, inquiries, correspondence and claims, which may include its or
their placing restrictions on the redemption, transfer or exchange of Shares and
disclosing that you control accounts pursuant to this paragraph. 3. You will, on
behalf of each Fund, report to your clients, all information which is required
to be reported by the Fund on Shareholder confirmations or otherwise under any
applicable statute, rule or regulation or under the terms of the Prospectus, or
which is provided by us, MFSC, the Fund or the Fund's adviser to you and other
shareholders of the Fund and such information shall be complete, accurate and
timely. 4. You will ensure that cash distributions are accurately paid to your
client at the time specified by the Fund, and, as among the Funds, MFSC, you and
us, you shall be solely responsible for any liabilities arising from payments
reported by clients as lost, stolen or forged.
B. Representations and Warranties. You represent and warrant to, and
agree with us, MFSC and the Funds that: you have and will continue to have the
necessary facilities, equipment and personnel to allow you to perform, and that
you will so perform, all duties, functions, procedures or responsibilities
described herein and in the Networking agreement between you and us, each as
from time to time in effect, in a businesslike and competent manner, in
conformance with all applicable laws, rules and regulations (including without
limitation, all rules and requirements of the IRS and the Code, with respect to
tax reporting; with Rule 10b-10 under the Securities Exchange Act of 1934, with
respect to confirmation statements; and with all rules applicable to registered
transfer agents, with respect to duties generally hereunder), with the
Prospectuses and with all applicable rules and procedures of the NSCC and NASD
Regulation, Inc.; you or the originating firm has the prior sufficient consent
of each client whose account is to be placed in or transferred to a Networking
account, having first informed each such client in writing of all material facts
relating to such arrangement; all your instructions, communications and actions
regarding Networked accounts, including all transfers, will be rightful, will
have been duly and sufficiently authorized by your client, will be accurate and
complete and will be in the appropriate NSCC/DST Systems, Inc. format; if you
are acting as a clearing broker, you have obtained the prior written consent of
each originating firm to your entering into, and to all the terms of, this
paragraph and the Networking agreement and that all actions taken hereunder will
have been approved in advance by the applicable originating firm; the taking of
any action as to which MFSC normally requires a signature guarantee shall be
deemed to constitute your guarantee in proper order of your client's signature;
you will obtain and maintain, and upon request provide to MFSC, for each
Networking account all forms, applications, waivers, exemptions, certifications
or other documents or information required by applicable laws, rules or
regulations including, without limitation, state and federal securities and tax
laws, rules and regulations; you do not act as our agent under this paragraph;
and you have and will maintain adequate insurance coverage as is appropriate for
your duties and obligations hereunder, and will, upon request, provide us or
MFSC with a certificate of insurance evidencing your compliance.
Nothing herein shall prohibit us, any Fund, the advisers of the Funds
or MFSC from mailing or otherwise distributing to Shareholders any material
concerning the Funds or other funds or services now or hereafter offered by any
of us. We may terminate your participation in the transactions contemplated by
this paragraph and the Networking agreement at any time if you fail to comply
with any of the conditions set forth herein or, with respect to accounts of an
originating firm, the termination of our Dealer or Mutual Fund Agreement with
such firm, or in any event, or with respect to any accounts, with 30 days' prior
written notice. Such termination will not affect your responsibilities under
paragraph 27 with respect to such transactions.
21. You may purchase shares of the Funds for sale to your clients
(including without limitation Bank Trust Department clients) in a fee-based
program made available by you to your clients (the "Fee-Based Program"), and
afford your fee-based clients the opportunity to purchase such shares at net
asset value, subject to the following terms and conditions:
A. You must first notify us of your desire to include the Funds in the
Fee-Based Program and to institute the necessary operational procedures and
requirements as established by us from time to time.
B. You may, in connection with the Fee-Based Program, sell shares of
any Funds made available by us, from time to time, at net asset value to your
bona fide clients participating in the Fee-Based Program. You will receive no
discount, commission or other concession with respect to any such sale, but will
be entitled to receive any service fees otherwise payable with respect thereto
to the extent provided from time to time in the applicable Funds' Prospectuses
and in this Agreement.
C. For any Fee-Based Program customer eligible to purchase Fund shares
at net asset value, you shall charge an annual fee to such customer of not more
than 2.50% of such customer's average net assets included in the Fee-Based
Program, nor less than 0.50% of such assets. You shall send to us upon request
from time to time the then-current standard fee schedule for the Fee-Based
Program. Brochures, written materials or advertising relating to the Fee-Based
Program may refer to the Funds as available at net asset value if the fees and
expenses of the Fee-Based Program are given at least equal prominence.
D. You will (i) provide us with continuous reasonable access to your
offices, representatives and mutual fund and Fee-Based Program sales support
personnel, to meetings, including national and regional sales conferences and
training programs, of your representatives and sales personnel, and include our
representatives on your internal sales lines and conference calls on a regular
basis, (ii) include descriptions of all Funds offered through the Fee-Based
Program in internal sales materials and electronic information displays used in
conjunction with the Fee-Based Program, (iii) use reasonable efforts to motivate
your representatives to recommend suitable Funds for clients of the Fee-Based
Program, (iv) provide us with sales information in reasonable Fund-by-Fund
detail, including identification of offices and representatives that account for
the most significant sales of shares of the Funds through the Fee-Based Program,
and (v) include the Funds on any approved, preferred or other similar list of
mutual fund products offered through the Fee-Based Program.
E. You may maintain with the Funds' shareholder servicing agent either
(I) one or more omnibus accounts solely for the clients of your Fee-Based
Program or (ii) separate accounts for each client of your Fee-Based Program. If
one or more omnibus accounts are maintained, you shall, among other things, be
responsible for forwarding proxies, annual and semi-annual reports and other
materials to each beneficial owner in a timely manner.
F. We are not endorsing, recommending or otherwise involved in
providing any investment product of yours, including but not limited to the
Fee-Based Program. We are merely affording you the opportunity to use shares of
the Funds as an investment medium for the Fee-Based Program. You acknowledge and
agree that you are solely responsible for the Fee-Based Program, and you hereby
authorize and instruct us, the Funds and our respective affiliates to accept,
rely upon and carry out instructions received from you or your affiliates with
respect to any purchase, redemption (including any redemption to pay fees),
exchange, account maintenance, request for information, or other matter
concerning any accounts maintained by you in connection with the Fee-Based
Program. You represent and warrant that all such instructions will be rightful
and will have been duly and sufficiently authorized by your clients.
22. Units of the MFS Fixed Fund may be offered for sale by you only to
retirement plans which have been determined by the IRS to be qualified for tax
exemption under sections 401 and 501 of the Code, to governmental plans within
the meaning of section 414(d) of the Code or to financial institutions which are
acting as trustee, custodian or agent for any such plan, excluding, however,
certain retirement plans which cover individuals some or all of whom are
self-employed, as further described in the Description (such eligible investors
are collectively referred to as "Qualified Investors"). With respect to Units
offered for sale by you to Qualified Investors, we will pay to you a periodic
distribution fee as described in the Description. No dealer discount or
commission is applicable to sales of the Units. All offers and sales of the
Units shall be subject to the terms of the Description. You agree that we have
made no representation to you with respect to the Units or the MFS Fixed Fund in
addition to, or conflicting with, the description set forth in the Description.
We may terminate your ability to purchase and sell the Units at any time if we
believe or have reason to believe that you have failed or may fail to comply
with any of the conditions set forth herein or, in any event, upon 10 days'
prior written notice. Such termination will not affect your responsibilities
under paragraph 27 with respect to any transactions affecting the Units.
23. We and you agree that all disputes between us of whatever subject
matter, whether existing on the date hereof or arising hereafter, shall be
submitted to arbitration in accordance with the Code of Arbitration Procedure of
the NASD, or similar rules or code, in effect at the time of the submission of
any such dispute.
24. All communications to us should be sent to the above address. Any
notice to you shall be duly given if mailed, telegraphed or sent by facsimile
machine to you at the address specified by you below. This agreement shall be
governed by and construed in accordance with the internal laws of The
Commonwealth of Massachusetts.
25. This agreement shall become effective upon receipt by us of your
acceptance hereof and supersedes any prior agreement between us with respect to
the sale of Shares of any of the Funds or the Units or any other subject covered
by this agreement.
26. You appoint MFSC, the transfer agent for each Fund, as your agent
to execute the purchase transactions of Shares of such Fund in accordance with
the terms and provisions of any account, program, plan or service established or
used by your customers and to confirm each purchase to your customers on your
behalf, except as modified in writing by the transfer agent, and you represent
and guarantee to us, the Fund and the MFS Fixed Fund the legal capacity of your
customers purchasing such Shares or Units (including the satisfaction of the
eligibility requirements in the Description) and any other person in whose name
the Shares or Units are to be registered.
27. You agree that you shall indemnify and hold harmless us, MFSC, the
Funds, the MFS Fixed Fund and our and their affiliates, SEI (individually and as
trustee of the MFS Fixed Fund), Dwight Asset Management Company ("Dwight")
(individually and as investment adviser to the MFS Fixed Fund), and our and
their affiliates, officers, trustees, directors, employees, shareholders and
agents (collectively, the "Indemnitees") from and against any claims, losses,
costs or liabilities, including attorneys' fees, that may be assessed against,
or suffered or incurred by any of them, howsoever they arise, and as they are
incurred, which relate in any way to: (1) any use of supplemental hypothetical
information provided on computer diskettes other than in one-on-one
presentations or any misuse of or alteration to any supplemental information;
provided, however, that the addition of the name of a customer or other
identifying or variable information expressly authorized by us within such
supplemental information which calls for the addition of such information is
expressly permitted; (2) any transactions or other activity processed through
NSCC programs, including: the automated mutual fund order entry, settlement and
registration verification system known as Fund/Serv; if an agreement has been
signed by you and us so to permit, the program known as Networking; and the
redemption of shares pursuant to paragraph 19; (3) any exchange requests
initiated by you via facsimile; (4) any contribution accepted or order placed by
you pursuant to paragraph 17 hereof, including, but not limited to, any claims,
losses or liabilities relating to the loss of favorable tax status of an IRA
Plan or contribution, any IRA revocation by an individual in connection with an
IRA Plan, and any failed trades for IRA Plans hereunder, or any contribution
accepted in violation of the terms of paragraph 17 hereof (the indemnification
provided under this subparagraph (4) will extend to the Trustee as well as the
parties listed above); (5) any account established by your firm, or for which
your firm is broker-dealer of record, with a "transfer on death," "payable on
death" or other similar registration; (6) improper compliance with federal,
state or local reporting requirements or backup or nonresident alien withholding
requirements, including losses resulting from omitted, incorrect or uncertified
TINS or the failure to provide an accurate tax residence status; (7) any account
changes made pursuant to paragraph 18 thereof; (8) the Fee-Based Program,
including without limitation any brochures, written materials or advertising in
any form that refers to the Funds or the Fee-Based Program, and any Indemnitee's
acceptance, reliance upon or carrying out of instructions received from you or
your affiliates in connection with the Fee-Based Program; and (9) any breach of
your representations or warranties, or failure to comply with your obligations,
set forth in this agreement, in any event whether such action, failure, error,
omission, misconduct, or breach is committed by you or by your employee, agent
or clearing broker, whether or not acting within the scope of his employment,
agency or authority (the indemnification provided under this subparagraph (9)
will extend to the Trustee as well as the parties listed above).
You agree to notify us within a reasonable time of any claim against
you or any person who controls you within the meaning of Section 15 of the
Securities Act of 1933 with respect to securities offered hereunder.
<PAGE>
Nothing in this paragraph 27 shall be deemed to preclude the
Indemnitees and the Trustee (with respect to subparagraph (4) or (9) above) from
seeking monetary damages and/or injunctive relief in connection with such
claims, losses and liabilities. This paragraph 27 will survive termination of
this agreement or any provision hereof.
MFS FUND DISTRIBUTORS, INC.
Dated: By: ----------------------------
WILLIAM W. SCOTT, JR.,
President
The undersigned hereby accepts the offer set forth in the above letter
Firm: ------------------------ Address: -----------------------
By: -------------------------- --------------------------------
Authorized Representative
<PAGE>
MFS FUND DISTRIBUTORS, INC.
500 BOYLSTON STREET o BOSTON o MASSACHUSETTS 02116
617 o 954-5000
MUTUAL FUND AGREEMENT
(for use by Banks or their affiliated NASD member firms)
1. MFS Fund Distributors, Inc., or its successors or assigns, offers to
make available to your customers shares of each of the funds from time to time
in the MFS Family of Funds (collectively, the "Funds"), for which MFS Fund
Distributors, Inc. is the distributor and from which MFS Fund Distributors, Inc.
has the exclusive right to distribute shares (the "Shares"). Shares are offered
pursuant to the then current prospectus, including any supplements or amendments
thereto, of each of the Funds (the "Prospectus"). To the extent that a
Prospectus contains provisions that are inconsistent with the terms of this
Agreement the terms of the Prospectus shall be controlling. In addition, MFS
Fund Distributors, Inc. is the distributor of the units of participation (the
"Units") of the MFS Fixed Fund, a bank collective investment fund (the "MFS
Fixed Fund"). The Units are offered pursuant to the then-current Description of
the MFS Fixed Fund, including any supplements or amendments thereto (the
"Description"). All offers for sale of the Units shall be subject to the terms
of, and effected in accordance with, the terms of the Description. To the extent
that the Description contains provisions that are inconsistent with the terms of
this Agreement, the terms of the Description shall be controlling. MFS Fund
Distributors, Inc. offers to make the Units available to your customers. In all
transactions covered by this Agreement you shall act only as agent for your
customers and in no transaction shall you have authority to act as agent for any
Fund, the MFS Fixed Fund, MFS Fund Distributors, Inc., or any representative
agent thereof.
2. Orders to purchase Shares received from you will be accepted by us
only at the public offering price applicable to each order, as established by
the Prospectus. Orders to purchase Units received from you will be received by
us and accepted by SEI Trust Company ("SEI"), as trustee of the MFS Fixed Fund,
only at the Unit Value applicable to each order, and upon the terms established
by the Description. Upon receipt from you of any order to purchase Shares we
will send a written confirmation of such trade (indicating that the trade was on
a fully disclosed basis and accompanied by an appropriate Prospectus in the case
of any initial purchase of Shares) to your customer. All orders are subject to
acceptance or rejection at our Boston office in our sole discretion, and, in the
case of the Units, by SEI in its sole discretion, and all orders for Shares
which are accepted by us will be deemed to have been consummated in our Boston
office. We will not accept from you any conditional orders for Shares or Units.
It is agreed and understood that, whether Shares or Units are registered in the
purchaser's name, in your name or in the name of your nominee (in the case of
Shares), the customer will have full beneficial ownership of the Shares or
Units, as applicable.
3. On the purchase by you through us to cover a single transaction
involving Shares of the Funds, the applicable offering price and agency
commission therefrom which you will receive will be determined in accordance
with the terms of the Prospectus of the applicable Fund. In addition, certain of
the Funds have adopted Distribution Plans pursuant to which we, on behalf of
each such Fund, will pay a service fee to dealers in accordance with the
provisions of such Funds' Distribution Plans. (The service fee is paid to you as
additional consideration for all personal services and/or account maintenance
services provided by you to shareholders of me applicable Fund.) The provisions
and terms of these Funds' Distribution Plans are described in their respective
Prospectuses, and you hereby agree that we have made no representations to you
with respect to the Distribution Plans of such Funds in addition to, or
conflicting with, the description set forth in their respective Prospectuses. No
dealer discount or commission is applicable to Shares representing reinvested
dividends and distributions. No interest will accrue on amounts represented by
uncashed agency commission or service fee checks.
You acknowledge and agree that you shall not be entitled to receive any
such service fees unless: (i) you are the holder or dealer of record for
accounts in the applicable Fund, or all Funds together, having an aggregate net
asset value of at least the minimum amount established by us from time to time
in accordance with the terms of the Funds' Distribution Plans or (ii) you
satisfy each of the following conditions, as determined from time to time by us
in our sole discretion: (a) you include all Funds on your product list and, as
requested by us from time to time, one or more of the Funds on your "approved",
"preferred" or other similar product lists; provided, however, that the MFS
Fixed Fund shall be included only on such product lists as are specifically
directed to eligible qualified retirement plans described in the Description;
(b) you grant reasonable requests from time to time for visits to your offices
(including branch offices) by our sales and marketing representatives; (c) you
provide satisfactory product, marketing and sales support, as requested by us
from time to time; and (d) you assign one of your registered representatives to
each Fund shareholder account on your records and reassign the Fund account
should that representative leave your firm; provided; however, that you will not
be paid any service fee in any event if the redemption levels of Fund
shareholder accounts for which you are the holder or dealer of record are above
normal as compared to other dealers, as determined by us from time to time in
our sole discretion. In addition, you acknowledge and agree that (y) you shall
not be paid any service fee with respect to a specific time period unless and
until we are in receipt of the service fee from the Fund for such period and (z)
our liability to you for the payment of any such service fee is limited solely
to the amount of the applicable Fund's service fee received by us.
4. By accepting this Agreement, you agree:
(a) That you will order Shares of the Funds or Units for your
customers only through us.
(b) That you will order Shares of the Funds or Units for your
customers through us only to cover purchase orders already
received from your customers.
(c) That you will not withhold placing orders received from your
customers so as to profit yourself as a result of such
withholding, and you will place orders for purchases and
redemptions promptly upon receipt from your customers.
(d) That you shall comply with all such multiple class pricing
guidelines as we may from time to time furnish to you.
5. Payment for Shares or Units ordered by you shall be in New York or
Boston clearing house funds and must be received by us by the later of (i) the
end of the third business day following your receipt of the customer's order to
purchase such Shares or Units or (ii) the end of one business day following
receipt of the customer's payment for such Shares or Units, but in no event
later than the end of the sixth business day following your receipt of the
customer's order. If such payment is not received by us, we reserve me right,
without notice, forthwith to cancel the sale or, in the case of Shares, at our
option, to sell the Shares ordered back to the issuer, in which case we may hold
you responsible for any loss, including loss of profit, suffered by us resulting
from your failure to make payment as aforesaid.
6. You agree to provide all necessary information to comply properly
with all federal, state and local reporting requirements and backup and
nonresident alien withholding requirements for your customer accounts including
without limitation, those requirements that apply by treating Shares issued by
the Funds as readily tradable instruments. You represent and agree that all
Taxpayer Identification Numbers ("TINS") provided are certified, and that no
account which requires a certified TIN will be established without such
certified TIN. You agree to perform all federal, state and local tax reporting
with respect to sales of Shares through the National Securities Clearing
Corporation ("NSCC") Fund/Serv program, including without limitation redemptions
and exchanges.
7. Shares sold through you hereunder shall be available to you for
delivery against payment at the office of our agent, MFS Service Center, Inc.
("MFSC"), 500 Boylston Street, Boston, Massachusetts 021 16, unless other
arrangements are made with us for delivery and payment.
8. If any Shares confirmed to you and your customer under the terms of
this Agreement are repurchased by the issuing Fund, or are tendered to a Fund
for redemption or repurchase, within seven (7) business days after the date of
your original purchase, you shall forthwith refund to us the full agency
commission paid or allowed to you on such Shares. We will notify you of any such
repurchase or redemption within ten days from the date on which a stock power or
letter of instruction, if no certificate has been issued, or the certificate is
delivered to us or to the issuer, and you shall forthwith refund to us the full
agency commission received by or allowed to you.
9. No person is authorized to make any representations concerning
Shares of any Fund except those contained in the Prospectus of such Fund and in
printed information and information stored on computer diskettes (illustrating
hypothetical investments in the Funds) as issued by us for use as information
supplemental to the Prospectus. Supplemental information relating to
hypothetical investments may be used only in one-on-one presentations. In
purchasing Shares from us, you shall rely solely on the representations
contained in the Prospectus and in the above-mentioned supplemental information.
We will furnish additional copies of each Fund's Prospectus and sales literature
and other information issued by it, in reasonable quantities upon request,
provided, however, that we reserve the right to charge a nominal fee, disclosed
in advance, for computer diskettes. If you are exempt from registration under
the Securities Exchange Act of 1934 and you wish to use your own advertising
with respect to the Funds, all such advertising must be submitted to us for
review and approval prior to use, we shall file Fund advertising material with
the National Association of Securities Dealers, Inc. (the "NASD") and the
Securities and Exchange Commission (the "SEC") as required; you will, however,
be responsible for any required filing of such material with other regulatory
authorities. Qualifications of Shares in the various states, including the
filing of any state or further state notices respecting such Shares, and any
printed information or information stored on computer diskettes which we furnish
you other than the Prospectuses and periodic reports are our sole responsibility
and not me responsibility of me respecting Funds, and you agree that the Funds
shall have no liability or responsibility to you in these respects. No person is
authorized to make any representations concerning the Units except those
contained in the Description and in such printed information as issued by us for
use as information supplemental to the Description. In offering Units for sale,
you shall rely solely on the representations contained in the Description and in
the above-mentioned supplemental information. We will furnish additional copies
of the Description and sales literature, in reasonable quantities upon request.
10. We reserve the right, in our discretion, without notice, to suspend
sales or withdraw the offering of Shares or Units entirely. Except as provided
in paragraph 11, each party hereto has the right to cancel this Agreement upon
ten days' notice to the other party. We reserve the right to amend this
Agreement, or to assign this Agreement to an affiliate, at any time and you
agree that an order to purchase Shares of any one of the Funds or of the Units
placed by you after notice of any such amendment or assignment has been sent to
you shall constitute your agreement to any such amendment or assignment. This
Agreement shall supersede any prior Agreement between us regarding the Shares,
the Units or any other subject covered by this Agreement.
11. Your acceptance of this Agreement constitutes a representation (i)
that you are a securities broker/dealer registered with the SEC and a member in
good standing of the NASD, and you agree to comply with the Conduct Rules of the
NASD or that you are exempt from registration under the Securities Exchange Act
of 1934; (ii) that you will maintain adequate records with respect to your
customers; (iii) that such transactions are without recourse against you by your
customers; and (iv) that you have been duly authorized to enter into this
Agreement and perform your obligations hereunder. You likewise agree that you
will not make available Shares of any Fund or the Units in any state or other
jurisdiction in which we inform you such Shares or Units may not lawfully be
offered for sale. You also representthat you have complied, and will continue to
comply, with any other state or federal registration requirements (and any other
applicable securities, tax and other laws) related to the offer and sale of the
Shares of any of the Funds or the offer for sale of the Units. You agree
(notwithstanding the provisions of paragraph 10 hereof) that this Agreement
shall automatically terminate without notice upon your: (a) filing of a petition
in bankruptcy or a petition seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
present or future bankruptcy, reorganization, insolvency or similar statute, law
or regulation; or (b) seeking the appointment of any trustee, conservator,
receiver, custodian or liquidator for you or for all or substantially all of
your properties. Likewise, you agree (notwithstanding the provisions of
paragraph 10 hereof) that: (w) if a proceeding is commenced against you seeking
relief or an appointment of a type described in the immediately preceding two
sentences; or (x) if a trustee, conservator, receiver, custodian or liquidator
is appointed for you or for all or substantially all of your properties; or (y)
if an application for a protective decree under the provisions of the Securities
Investor Protection Act of 1970 shall have been filed against you; or (z) if you
are a registered broker-dealer and (i) me SEC shall revoke or suspend your
registration as a broker-dealer, (ii) any national securities exchange or
national securities association shall revoke or suspend your membership, or
(iii) under any applicable net capital rule of the SEC or of any national
securities exchange, your aggregate indebtedness shall exceed 1,000% of your net
capital, this Agreement shall automatically terminate. You further agree that
you will immediately advise us of any such proceeding, appointment, application,
revocation, suspension or indebtedness level.
12. You may send exchange requests to MFSC via facsimile, subject to
the following requirements: (a) All exchange transactions must be received, and
confirmed by a telephone call from you to MFSC, by 4:00 p.m. Boston time in
order to receive the day's closing price. Transactions received after 4:00 p.m.
will be processed the following business day. If the impact of processing
exchange transactions received from all sources is deemed to be injurious to one
of the Funds or the MFS Fixed Fund we in our sole discretion may elect to delay
the purchase side of-the transaction for up to seven days. In such a
circumstance, the exchange redemption would be made at the price or Unit Value
in effect on the first day and the exchange purchase would use the price or Unit
Value of a date not more than seven days later. This arrangement will be
governed by and superseded by changes in me Prospectuses or the Description
without terminating this arrangement. All exchange transactions involving the
MFS Fixed Fund are subject to the terms of the Description. (b) Ail exchange
transactions must be sent by facsimile machine to MFSC at (617) 954-6636 or
(617) 954-6637 and confirmed by telephone at (617) 954-4628. No other medium of
delivery will be acceptable, except as provided by the Prospectuses or the
Description. (c) You hereby warrant that each exchange transaction which you
initiate will have been authorized by the shareholder or Unitholder prior to
initiation, and that each such shareholder has received, read and understood the
Prospectus for each Fund to be purchased. (d) We may terminate your
participation in the transactions contemplated by this paragraph at any time if
you fail to comply with any of the conditions set forth herein, or, in any
event, with 10 days' written notice. Such termination will not affect your
responsibilities under paragraph 24 with respect to such transactions.
13. We agree to accept orders including wire orders placed by you for
the purchase of Shares for MFS (Prototype) Individual Retirement Account Plans
("IRA Plan"), subject to the following:
(a) We will provide you with IRA Adoption Agreements and
Applications ("IRA Agreements") solely for the purpose of allowing you
to accept initial and subsequent contributions (other than trustee to
trustee transfers) from any individual who has created an IRA Plan by
execution of such IRA Agreement, invested in shares of a Fund and
designated by the individual, provided that the IRA Plan investment is
permitted under the terms of the Fund Prospectus.
(b) You hereby represent and warrant to us, The First National
Bank of Boston (the "Trustee") and each Fund that you are fully
informed and knowledgeable as to the requirements imposed under the
Internal Revenue Code of 1986, as amended (the "Code") and the rules,
regulations and rulings adopted pursuant thereto, on and in respect to
individual retirement accounts, as defined under the Code. You further
represent that for all IRA Plan orders placed hereunder, you will
require: (a) receipt of a properly completed and signed IRA Agreement
before placing such order; (b) that the participant has received the
appropriate MFS IRA Trust and Disclosure Statement; and (c) that the
contribution from the participant is properly designated as to the year
of contribution. Your placement of an order under this paragraph 13
shall serve as a warranty that such order complies with all such rules,
regulations, rulings and procedures.
(c) You shall promptly upon the receipt of any IRA Plan
contribution from a participant, and only if in possession of an IRA
Agreement signed by the participant, place an order with us through
MFSC for shares of a Fund in accordance with the instructions of the
participant. If the order placed by you represents a new account, you
shall furnish us with an executed IRA Agreement promptly after the
order is placed.
(d) You understand that we, MFSC, the Trustee and the Funds
shall not be responsible for monitoring orders placed by you with
regard to compliance with Internal Revenue Service (the "IRS") and
other rules and regulations, including, but not limited to, those
related to over-contributions, eligibility, income restrictions,
timeliness of contribution, or any other matters related to the status
of any IRA Plan, nor for your compliance with procedures established by
us or our agents with respect to such IRA orders.
(e) We, for ourself and our agents, and the Trustee reserve the
right, at each of our sole option, and without liability or obligation
so to act, to cancel or re-register any trade or not to settle any
trade which does not comply with the terms of this paragraph 13 or the
procedures established by us or our agents. We will use reasonable
efforts to notify you of such actions.
(f) The remittance of the annual service fee cannot be combined
with or made via a wire order purchase. Wire redemption requests will
not be accepted. Any purchase hereunder must be made in accordance with
the terms of the pertinent Prospectus.
(g) We may terminate your participation in the transactions
contemplated by this paragraph at any time if you fail to comply with
any of the conditions set forth herein, or, in any event, with 10 days'
written notice. Such termination will not affect your responsibilities
under paragraph 24 with respect to such transactions.
14. You may enter via a remote terminal, and we will accept, the
following clerical changes and corrections relating to any account of your
customers: dividend and/or capital gain distribution election as to cash or
reinvestment, TINS; account executive's number and/or name; branch office city,
state and related dealer branch number, and shareholder address changes, subject
to the following: (a) You hereby represent and warrant to us, MFSC and the
Fund(s) that each change made pursuant to this paragraph has been authorized by
your customer prior to its initiation and that you have internal procedures in
place to assure mat the changes described herein are authorized only by
appropriate persons. (b) This arrangement will be governed by and subject to
rules and procedures established by us and MFSC for effecting such changes. (c)
We or MFSC may terminate your participation in the transactions contemplated by
this paragraph at any time if either of us believes or has reason to believe
that you have failed or may fail to comply with any of the conditions set forth
herein or, in any event, with 10 days' prior written notice. Such termination
will not affect your responsibilities under paragraph 24 with respect to such
transactions.
15. You may settle redemptions of shares of the Funds held in
individual accounts of your customers or in accounts registered in your name,
via NSCC Fund/Serv and without a guaranteed endorsement on the certificates
representing such shares, or, if no certificates for such shares have been
issued, without a guaranteed endorsement, and we agree to allow such redemptions
subject to the following: (a) The wire order redemption request is placed
through NSCC Fund/Serv. (b) In the case of certificated shares, the appropriate
certificate(s) are received as settlement and the reverse of such certificate(s)
is not completed or signed in a manner deemed inconsistent by MFSC in its sole
judgment. (c) You hereby warrant to us, MFSC and the Fund(s) that each
redemption has been authorized by your customer prior to initiation and that you
have internal procedures in place to assure that the instructions described
herein are authorized only by appropriate persons. (d) This arrangement will be
governed by and subject to ruses and procedures established by us and MFSC for
effecting such transactions. (e) We or MFSC may terminate your participation in
the transactions described in this paragraph at any time if either of us
believes or has reason to believe that you have failed or may fail to comply
with any of the conditions set forth herein or, in any event, with 24 hours
notice. Such termination shall not affect your responsibilities under paragraph
24 with respect to such transactions.
16. Should we agree to participate with you in the NSCC program known
as "Networking" in one or more of its "Matrix Levels," which agreement will be
evidenced by the execution by us and you of an agreement, we thereby agree to
accept from you electronically through MFSC and through Networking channels and
Fund/Serv without supporting documentation from shareholders in the Funds for
whom you are the dealer of record or with respect to which you are the clearing
broker to the dealer of record ("originating firm") which is in turn a party to
a Dealer or Mutual Fund Agreement with us (your "client"), the instructions
communication and actions specified in such agreement, subject to and in
reliance upon the following requirements and representations.
A. Requirements. 1. You will provide all necessary, requested, updating
and reconciling information to ensure the accuracy of records and to enable MFSC
to create and maintain an accurate cross-reference file between client records
and the Fund account records that shall remain the official records of all Fund
shareholder accounts. You agree that MFSC will not be responsible for changes to
the file until a reasonable time after receipt thereof. 2. You will provide in a
timely fashion all necessary and relevant information regarding adverse claims,
governmental and legal inquiries and correspondence to us, MFSC, the Fund or its
adviser, as appropriate, in connection with its handling of and responding to
such notices, inquiries, correspondence and claims, which may include its or
their placing restrictions on the redemption, transfer or exchange of Shares and
disclosing that you control accounts pursuant to this paragraph. 3. You will, on
behalf of each Fund, report to your clients all information which is required to
be-reported by the Fund on Shareholder confirmations or otherwise under any
applicable statute, rule or regulation or under the terms of the Prospectus, or
which is provided by us, MFSC, the Fund or the Fund's adviser to you and other
shareholders of the Fund and such information shall be complete, accurate and
timely. 4. You will ensure that cash distributions are accurately paid to your
client at the time specified by the Fund, and, as among the Funds, MFSC, you and
us you shall be solely responsible for any liabilities arising from payments
reported by clients as lost, stolen or forged.
B. Representations and Warranties. You represent and warrant to, and
agree with us, MFSC and the Funds that: you have and will continue to have the
necessary facilities, equipment and personnel to allow you to perform, and that
you will so perform all duties, functions, procedures or responsibilities
described herein and in the Networking agreement between you and us, each as
from time to time in effect, in a businesslike and competent manner, in
conformance with all applicable laws, rules and regulations (including without
limitation, all rules and requirements of the IRS and the Code, with respect to
tax reporting; with Rule 10b-10 under the Securities Exchange Act of 1934, with
respect to confirmation statements; and with all rules applicable to registered
transfer agents, with respect to duties generally hereunder), with the
Prospectuses and with all applicable rules and procedures of the NSCC and NASD
Regulation, Inc.; you or the originating firm has the prior sufficient consent
of each client whose account is to be placed in or transferred to a Networking
account, having first informed each such client in writing of all material facts
relating to such arrangement; all your instructions, communications and actions
regarding Networked accounts, including all transfers, will be rightful, will
have been duly and sufficiently authorized by your client, will be accurate and
complete and will be in the appropriate NSCC/DST Systems, Inc. format; if you
are acting as a clearing broker, you have obtained the prior written consent of
each originating firm to your entering into, and to all the terms of, this
paragraph and the Networking agreement and that all actions taken hereunder will
have been approved in advance by the applicable originating firm; the taking of
any action as to which MFSC normally requires a signature guarantee shall be
deemed to constitute your guarantee in proper order of your client's signature;
you will obtain and maintain, and upon request provide to MFSC, for each
Networking account all forms, applications, waivers, exemptions, certifications
or other documents or information required by applicable laws, rules or
regulations including, without limitation, state and federal securities and tax
laws, rules and regulations; you do not act as our agent under this paragraph;
and you have and will maintain adequate insurance coverage as is appropriate for
your duties and obligations hereunder, and will, upon request, provide us or
MFSC with a certificate of insurance evidencing your compliance.
Nothing herein shall prohibit us, any Fund, the advisers of the Funds
or MFSC from mailing or otherwise distributing to Shareholders any material
concerning the Funds or other funds or services now or hereafter offered by any
of us. We may terminate your participation in the transactions contemplated by
this paragraph and the Networking agreement at any time if you fail to comply
with any of the conditions set forth herein or, with respect to accounts of an
originating firm, the termination of our Dealer or Mutual Fund Agreement with
such firm, or in any event, or with respect to any accounts, with 30 days' prior
written notice. Such termination will not affect your responsibilities under
paragraph 24 with respect to such transactions.
17. You may purchase shares of the Funds for sale to your clients
(including without limitation Bank Trust Department clients) in a fee-based
program made available by you to your clients (the "Fee-Based Program"), and
afford your fee-based clients the opportunity to purchase such shares at net
asset value, subject to the following terms and conditions:
A. You must first notify us of your desire to include the Funds in the
Fee-Based Program and to institute the necessary operational procedures and
requirements as established by us from time to time.
B. You may in connection with the Fee-Based Program, sell shares of any
Funds made available by us, from time to time, at net asset value to your bona
fide clients participating in the Fee-Based Program. You will receive no
discount, commission or other concession with respect to any such sale, but will
be entitled to receive any service fees otherwise payable with respect thereto
to the extent provided from time to time in the applicable Funds' Prospectuses
and in this Agreement.
C. For any Fee-Based Program customer eligible to purchase Fund shares
at net asset value, you shall charge an annual fee to such customer of not more
than 2.50% of such customer's average net assets included in the Fee-Based
Program, nor less than 0.50% of such assets. You shall send to us upon request
from time to time the then-current standard fee schedule for the Fee-Based
Program. Brochures, written materials or advertising relating to the Fee-Based
Program may refer to the Funds as available at net asset value if the fees and
expenses of the Fee-Based Program are given at least equal prominence.
D. You will (i) provide us with continuous reasonable access to your
offices, representatives and mutual fund and Fee-Based Program sales support
personnel, to meetings, including national and regional sales conferences and
training programs, of your representatives and sales personnel, and include our
representatives on your internal sales lines and conference calls on a regular
basis, (ii) include descriptions of all Funds offered through the Fee-Based
Program in internal sales materials and electronic information displays used in
conjunction with the Fee-Based Program, (iii) use reasonable efforts to motivate
your representatives to recommend suitable Funds for clients of the Fee-Based
Program, (iv) provide us with sales information in reasonable Fund-by-Fund
detail, including identification of offices and representatives that account for
the most significant sales of shares of the Funds through the Fee-Based Program,
and (v) include the Funds on any approved, preferred or other similar list of
mutual fund products offered through the Fee-Based Program.
E. You may maintain with the Funds' shareholder servicing agent either
(i) one or more omnibus accounts solely for the clients of your Fee-Based
Program or (ii) separate accounts for each client of your Fee-Based Program. If
one or more omnibus accounts are maintained, you shall, among other things, be
responsible for forwarding proxies, annual and semi-annual reports and other
materials to each beneficial owner in a timely manner.
F. We are not endorsing, recommending or otherwise involved in
providing any investment product of yours, including but not limited to the
Fee-Based Program. We are merely affording you the opportunity to use shares of
the Funds as an investment medium for the Fee-Based Program. You acknowledge and
agree that you are solely responsible for the Fee-Based Program, and you hereby
authorize and instruct us, the Funds and our respective affiliates to accept,
rely upon and carry out instructions received from you or your affiliates with
respect to any purchase, redemption (including any redemption to pay fees),
exchange, account maintenance, request for information, or other matter
concerning any accounts maintained by you in connection with the Fee-Based
Program. You represent and warrant that all such instructions will be rightful
and will have been duly and sufficiently authorized by your clients.
18. Units of the MFS Fixed Fund may be offered for sale by you only to
retirement plans which have been determined by the IRS to be qualified for tax
exemption under sections 401 and 501 of the Code, to governmental plans within
the meaning of section 414(d) of the Code or to financial institutions which are
acting as trustee, custodian or agent for any such plan; excluding, however,
certain retirement plans which cover individuals some or all of whom are
self-employed, as further described in the Description (such eligible investors
are collectively referred to as "Qualified Investors"). With respect to Units
offered for sale by you to Qualified Investors, we will pay to you a periodic
distribution fee as described in the Description. No dealer discount or
commission is applicable to sales of the Units. All offers for sale of the Units
shall be subject to the terms of the Description. You agree that we have made no
representation to you with respect to the Units or the MFS Fixed Fund in
addition to, or conflicting with, the Description. We may terminate your ability
to offer the Units at any time if we believe or have reason to believe that you
have failed or may fail to comply with any of the conditions set forth herein
or, in any event, upon 10 days' prior written notice. Such termination will not
affect your responsibilities under paragraph 24 with respect to any transactions
affecting the Units.
19. We and you agree that all disputes between us of whatever subject
matter, whether existing on the date hereof or arising hereafter, shall be
submitted to arbitration in accordance with the Code of Arbitration Procedure of
the NASD, or similar rules or code, in effect at the time of the submission of
any such dispute.
20. You shall make available for your customers such administrative
services as are necessary or appropriate for providing information and services
to your customers. Such services and assistance may include, but not be limited
to, establishment and maintenance of accounts and records, processing purchase
and redemption transactions, answering routine inquiries, and such other
services as may be agreed upon from time to time and as may be permitted by
applicable statute, rule or regulation. You shall promptly answer all written
complaints received by you relating to Fund accounts or forward such complaints
to us.
21. The customers in question are your customers and MFS Fund
Distributors, Inc. will not engage in any activity which would interfere with
such relationship. The names of your customers shall remain your sole property
and shall not be used by MFS Fund Distributors, Inc. for any purpose except for
servicing and informational mailings in the normal course of business. This
confidentiality of customer information shall survive the termination of this
Agreement.
22. All communications to us shall be sent to MFS Service Center, Inc.,
500 Boylston Street, Boston MA 02116. Any notice to you shall be duly given if
mailed, telegraphed or sent by facsimile machine to you at the address specified
by you below. This Agreement shall be governed by and construed in accordance
with the internal laws of The Commonwealth of Massachusetts.
23. You appoint MFSC, the transfer agent for each Fund, as your agent
to execute the purchase transactions of Shares of such Fund in accordance with
the terms and provisions of any account, program, plan or service established or
used by your customers and to confirm each purchase to your customers on your
behalf, except as modified in writing by the transfer agent, and you represent
and guarantee to us, the Fund and the MFS Fixed Fund the legal capacity of your
customers purchasing such Shares or Units (including the satisfaction of the
eligibility requirements in the Description) and any other person in whose name
the Shares or Units are to be registered.
24. You agree that you shall indemnify and hold harmless us, MFSC, the
Funds, the MFS Fixed Fund and their affiliates, SEI (individually and as trustee
of the MFS Fixed Fund), Dwight Asset Management Company ("Dwight") (individually
and as investment adviser to the MFS Fixed Fund), and our and their affiliates,
officers, trustees, directors, employees, shareholders and agents (collectively,
the "Indemnitees") against any claims, losses, costs or liabilities, including
attorneys' fees, that may be assessed against, or suffered or incurred by any of
them, howsoever they arise, and as they are incurred, which relate in any way to
(1) any use of supplemental hypothetical information provided on computer
diskettes other than in one-on-one presentations or any misuse of or alteration
to any supplemental information; provided, however, that the addition of the
name of a customer or other identifying or variable information expressly
authorized by us within such supplemental information which calls for the
addition of such information is expressly permitted; (2) any transactions or
other activity processed through NSCC programs, including the automated mutual
fund order entry, settlement and registration verification system known as
Fund/Serv; if an agreement has been signed by you and us so to permit, the
program known as Networking; and the redemption of shares pursuant to paragraph
15; (3) any exchange requests initiated by you via facsimile (4) any
contribution accepted or order placed by you pursuant to paragraph 13 hereof,
including, but not limited to, any claims, losses or liabilities relating to the
loss of favorable tax status of an IRA Plan or contribution, any IRA revocation
by an individual in connection with an IRA Plan, and any failed trades for IRA
Plans hereunder, or any contribution accepted in violation of the terms of
paragraph 13 hereof (the indemnification provided under this subparagraph (4)
will extend to the Trustee as well as the parties listed above); (5) any account
established by your firm, or for which your firm is financial intermediary of
record, with a "transfer on death," "payable on death" or other similar
registration; (6) improper compliance with federal, state or local reporting
requirements or backup or nonresident alien withholding requirements, including
losses resulting from omitted, incorrect or uncertified TINS or the failure to
provide an accurate tax residence status; (7) any account changes made pursuant
to paragraph 14 thereof; (8) the Fee-Based Program, including without limitation
any brochures, written material or advertising in any form that refers to the
Funds or the Fee-Based Program, and any Indemnitee's acceptance, reliance upon
or carrying out of instructions received from you or your affiliates in
connection with the Fee-Based Program; and (9) any breach of your
representations or warranties, or failure to comply with your obligations, set
forth in this Agreement, in any event whether such action, failure, error,
omission, misconduct, or breach is committed by you or by your employee, agent
or clearing broker, whether or not acting within the scope of his employment,
agency or authority (the indemnification provided under this subparagraph (9)
will extend to the Trustee as well as the parties listed above).
You agree to notify us within a reasonable time of any claim against
you or any person who controls you within the meaning of Section 15 of the
Securities Act of 1933 with respect to securities offered hereunder.
Nothing in this paragraph 24 shall be deemed to preclude the
Indemnitees and the Trustee (with respect to subparagraph (4) or (9) above) from
seeking monetary damages and/or injunctive relief in connection with such
claims, losses and liabilities. This paragraph 24 will survive termination of
this Agreement or any provision hereof.
MFS FUND DISTRIBUTORS, INC.
By: ----------------------------
WILLIAM W. SCOTT, JR.,
President
We have read the foregoing Agreement and accept and agree to the terms and
conditions thereof.
FIRM: -------------------------------------------------------------------------
By: ---------------------------------------------------------------------------
(Authorized Representative)
Title: ------------------------------------------------------------------------
Address: ----------------------------------------------------------------------
The above Agreement should be executed in duplicate and one copy resumed to us:
MFS Fund Distributors, Inc.
Banking Industry Marketing
500 Boylston Street
Boston, Massachusetts 02116
<PAGE>
EXHIBIT NO. 99.9(b)
MFS SERIES TRUST III
500 BOYLSTON STREET o BOSTON o MASSACHUSETTS o 02116
(617) o 954-5000
January 1, 1997
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Dear Sir/Madam:
This will confirm our understanding that Exhibit B to the Shareholder
Servicing Agent Agreement between us, dated August 1, 1985, as amended, is
hereby amended, effective immediately, to read in its entirety as set forth on
Attachment 1 hereto.
Please indicate your acceptance of the foregoing by signing below.
Sincerely,
MFS SERIES TRUST III
By: W. THOMAS LONDON
---------------------------
W. Thomas London
Treasurer
Accepted and Agreed:
MFS SERVICE CENTER, INC.
By: JOSEPH W. DELLO RUSSO
----------------------------
Joseph W. Dello Russo
Treasurer
<PAGE>
ATTACHMENT 1
January 1, 1997
EXHIBIT B TO THE SHAREHOLDER
SERVICING AGENT AGREEMENT BETWEEN
MFS SERVICE CENTER, INC. ("MFSC")
AND MFS SERIES TRUST III (THE "FUND")
The fees to be paid by the Fund on behalf of its series with respect to all
shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be 0.13% of the average daily net assets of the Fund.
<PAGE>
EXHIBIT NO. 99.11(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 24 to Registration Statement No. 2-60491 of MFS High Income Fund
of our report dated March 6, 1997 appearing in the annual report to shareholders
for the year ended January 31, 1997, of MFS High Income Fund, a series of MFS
Series Trust III, and to the references to us under the headings "Condensed
Financial Information" in the Prospectus and "Independent Auditors and Financial
Statements" in the Statement of Additional Information, both of which are part
of such Registration Statement.
DELOITTE & TOUCHE, LLP
- ---------------------------
Deloitte & Touche, LLP
Boston, Massachusetts
May 27, 1997
<PAGE>
EXHIBIT NO. 99.11(b)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference made to our firm under the captions
"Condensed Financial Information" in the Prospectus and "Independent Auditors
and Financial Statements" in the Statement of Additional Information and to the
incorporation by reference in this Post-Effective Amendment No. 24 to
Registration No. 2-60491 on Form N-1A of our report dated March 7, 1997, on the
financial statements and financial highlights of MFS Municipal High Income Fund,
included in the 1997 Annual Report to Shareholders.
ERNST & YOUNG LLP
Boston, Massachusetts
May 27, 1997
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