<PAGE>
As filed with the Securities and Exchange Commission on May 15, 1998
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. 25
AND REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 27
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)
[ ] on [date] pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on [date] pursuant to paragraph (a)(i)
[X] 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
- -------------------------------------------------------------------------------
<PAGE>
MFS SERIES TRUST III
MFS HIGH YIELD OPPORTUNITIES 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)
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -----------------------
<C> <S> <C>
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) Front Cover Page; 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 - *
Investment Adviser;
Administrator - Back Cover
Page
(e) Management of the Fund - *
Shareholder Servicing
Agent; Back Cover Page
(f) Expense Summary; Condensed *
Financial Information;
Information Concerning Shares
of the Fund
(g) Investment Objective and Policies; *
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; Shareholder
Services
(e) Information Concerning Shares *
of the Fund - Distribution Plan;
Information Concerning Shares
of the Fund - Purchases; 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 * *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -----------------------
<C> <C> <S>
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 Fund -
Investment Adviser Investment Adviser;
Management of the
Fund - Trustees and
Officers
(b) Management of the Fund - Management of the Fund -
Investment Adviser 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 and
(d), (e) Brokerage Commissions
18 (a) Information Concerning Shares Description of Shares,
of the Fund - Description of Voting Rights and Liabilities
Shares, Voting Rights and
Liabilities
(b) * *
19 (a) Information Concerning Shares Shareholder Services
of the Fund - Purchases;
Shareholder Services
(b) Information Concerning Shares Management of the Fund -
of the Fund - Net Asset Distributor; Determination
Value; Information Concerning of Net Asset Value and
Shares of the Fund - Performance - Net Asset
Purchases 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
</TABLE>
<PAGE>
MFS HIGH YIELD OPPORTUNITIES FUND
SUPPLEMENT TO THE JULY 1, 1998 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 JULY 1, 1998,
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............................................... 0.65%
Rule 12b-1 Fees............................................... None
Other Expenses (after expense limitation)(1)(2)............... 0.00%
-----
Total Operating Expenses (after expense limitation)(3)........ 0.65%
-----
- -------------------
(1) 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."
(2) The Adviser has voluntarily agreed to bear all of the Fund's "Other
Expenses" in order that the Fund's "Total Operating Expenses" will not
exceed, on an annualized basis, 0.65% of the Fund's average daily net
assets with respect to Class I shares. Absent this arrangement, "Other
Expenses," expressed as a percentage of average daily net assets, would be
0.39%. "Other Expenses" for the Fund are based on estimates to be made
during the Fund's current fiscal year.
(3) Absent the expense limitation described in footnote 2 above, "Total
Operating Expenses" expressed as a percentage of average daily net assets
for Class I shares would be 1.04%.
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........................................ $ 7
3 years....................................... 21
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.
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 or law firms acting as trustee or manager for trust
accounts 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 or law firm 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.
Subject to termination or revision at the sole discretion of MFS, MFS
has voluntarily agreed to bear all of the Fund's "Other Expenses," which are
defined to include all Fund expenses except for management fees, Rule 12b-1
fees, taxes, extraordinary expenses, brokerage and termination costs and class
specific expenses, in order to maintain the Fund's "Total Operating Expenses" at
65% per annum of the Fund's average daily net assets with respect to Class I
shares. This arrangement may be changed or terminated by the Adviser at any
time.
THE DATE OF THIS SUPPLEMENT IS JULY 1, 1998
<PAGE>
MFS(R) HIGH YIELD OPPORTUNITIES FUND
JULY 1, 1998
PROSPECTUS
CLASS A SHARES OF BENEFICIAL INTEREST
CLASS B SHARES OF BENEFICIAL INTEREST
CLASS C SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
The investment objective of MFS High Yield Opportunities Fund (the "Fund") is
to seek high current income by investing, under normal market conditions, at
least 65% of its total assets in a professionally managed diversified
portfolio of fixed income securities. (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
(continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR
FUTURE REFERENCE.
<PAGE>
Exchange Commission a Statement of Additional Information dated July 1, 1998,
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 41 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 (http://www.sec.gov) that contains the SAI, materials that are
incorporated by reference into this Prospectus and the SAI, and other
information regarding the Fund. This Prospectus is available on the Adviser's
Internet World Wide Web site at http://www.mfs.com.
TABLE OF CONTENTS
Page
1. Expense Summary ........................................................ 3
2. The Fund ............................................................... 5
3. Investment Objective and Policies ...................................... 5
4. Certain Securities and Investment Techniques ........................... 6
5. Additional Risk Factors ................................................ 15
6. Management of the Fund ................................................. 20
7. Information Concerning Shares of the Fund .............................. 21
Purchases .......................................................... 21
Exchanges .......................................................... 29
Redemptions and Repurchases ........................................ 30
Distribution Plan .................................................. 33
Distributions ...................................................... 35
Tax Status ......................................................... 36
Net Asset Value .................................................... 36
Expenses ........................................................... 37
Description of Shares, Voting Rights and Liabilities ............... 37
Performance Information ............................................ 38
8. Shareholder Services ................................................... 39
Appendix A ............................................................. A-1
Appendix B ............................................................. B-1
<PAGE>
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
------- ------- -------
Maximum Initial Sales Charge Imposed
on Purchases of Fund Shares (as a
percentage of offering price) .... 4.75 % 0.00 % 0.00 %
Maximum Contingent Deferred Sales
Charge (as a percentage of original
purchase price or redemption
proceeds, as applicable) .......... See Below(1) 4.00 % 1.00 %
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ..................... 0.65 % 0.65 % 0.65 %
Rule 12b-1 Fees ..................... 0.35 %(2) 1.00 %(3) 1.00 %(3)
Other Expenses (after expense
limitation) (4)(5) 0.00 % 0.00 % 0.00 %
---- ---- ----
Total Operating Expenses
(after expense limitation)(6) ..... 1.00 % 1.65 % 1.65 %
- ------------
(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 Class A
shares. 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."
(5) The Adviser has voluntarily agreed to bear all of the Fund's "Other
Expenses" in order that the Fund's "Total Operating Expenses" will not
exceed, on an annualized basis, 1.00%, 1.65% and 1.65% of the Fund's
average daily net assets with respect to Class A, B and C shares,
respectively. This arrangement may be changed or terminated by the Adviser
at any time. Absent this arrangement, "Other Expenses," expressed as a
percentage of average daily net assets, would be 0.39% for each class of
shares. "Other Expenses" for the Fund are based on estimates to be made
during the Fund's current fiscal year.
(6) Absent the expense limitation described in footnote 5, "Total Operating
Expenses," expressed as a percentage of average daily net assets for Class
A, B and C shares would be 1.39%, 2.04% and 2.04%, respectively.
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
PERIOD CLASS A CLASS B CLASS C
- ------ ------- ------------------- -------
(1)
1 year .......................... $ 57 $ 57 $ 17 $ 27 $ 17
3 years ......................... 78 82 52 52 52
- ------------
(1) Assumes no redemption.
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.
<PAGE>
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
three 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. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The investment objective of the Fund is to seek high
current income. The Fund invests, under normal market conditions, at least 65%
of its total assets in a professionally managed diversified portfolio of fixed
income securities. 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 (see "Additional Risk Factors -- Lower-Rated Fixed Income
Securities" below.) For a description of these rating categories, see Appendix
B to this Prospectus. 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 30% 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% 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.
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.
4. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
Consistent with the Fund's investment objective and policies, the Fund may
engage in the following securities transactions and 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 "tranche", 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 location of its assets. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the
security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c) the
issuer has its principal securities trading market in that country; (d) the
issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; or (e) the issuer has 50% or more of its assets in
that country.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan
debt restructurings have been implemented to date in Argentina, Brazil,
Bulgaria, Costa Rica, Croatia, Dominican Republic, Ecuador, Jordan, Mexico,
Morocco, Nigeria, Panama, Peru, the Philippines, Poland, Slovenia, Uruguay and
Venezuela. Brady Bonds have been issued only recently, and for that reason do
not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the U.S.
dollar) and are actively traded in over-the-counter secondary markets. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed rate bonds
or floating-rate bonds, are generally collateralized in full as to principal
by U.S. Treasury zero coupon bonds having the same maturity as the bonds.
Brady Bonds are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments
in Brady Bonds may be viewed as speculative.
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 addition, 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. While awaiting delivery of
securities purchased on such bases, the Fund will segregate liquid assets
sufficient to cover its commitments.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices or other
financial indicators. Most indexed securities are short to intermediate term
fixed-income securities whose values at maturity (i.e., principal value) or
interest rates rise or fall according to changes in the value of one or more
specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their principal value or interest rates may increase
or decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or
to one or more options on the underlying instrument. Indexed securities may be
more volatile than the underlying instrument itself and could involve the loss
of all or a portion of the principal amount of or interest on the instrument.
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 the Fund's limitation on investing not more
than 15% of its net assets in illiquid investments. The Board of Trustees has
adopted guidelines and delegated to MFS the daily function of determining and
monitoring the liquidity of Rule 144A securities. The Board, however, retains
oversight of the liquidity determinations, focusing on factors such as
valuation, liquidity and availability of information. Investing in Rule 144A
securities could have the effect of decreasing the level of liquidity in the
Fund to the extent that qualified institutional buyers become for a time
uninterested in purchasing Rule 144A securities held in the Fund's portfolio.
Subject to the Fund's 15% limitation on investments in illiquid investments,
the Fund may also invest in restricted securities that may not be sold under
Rule 144A, which presents certain risks. As a result, the Fund might not be
able to sell these securities when the Adviser wishes to do so, or might have
to sell them at less than fair value. In addition, market quotations are less
readily available. Therefore, judgment may at times play a greater role in
valuing these securities than in the case of unrestricted securities.
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 and Options
on Foreign Currencies traded on a CFTC-regulated exchange only (i) for bona
fide hedging purposes (as defined in CFTC regulations), or (ii) for non-
hedging purposes, provided that the aggregate initial margin and premiums
required to establish such non-bona fide hedging positions does not exceed 5%
of the liquidation value of the Fund's assets after taking into account
unrealized profits and unrealized losses on any such contracts the Fund has
entered into, and excluding, in computing such 5%, the in-the-money amount
with respect to an option that is in-the-money at the time of purchase. In
addition, the Fund must comply with the requirements of various state
securities laws in connection with such transactions.
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 assets 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, which require 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.
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.
5. 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 IBCA ("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
securities 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.
EQUITY SECURITIES: The Fund may invest in all types of equity securities,
including the following: common stocks, preferred stocks and preference
stocks; securities such as bonds, warrants or rights that are convertible into
stocks; and depository receipts for those securities. These securities may be
listed on securities exchanges, traded in various over-the-counter markets or
have no organized market.
FOREIGN 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 judgment of the
Adviser, it would be beneficial to convert such currency into U.S. dollars at
a later date, based on anticipated changes in the relevant exchange rate. The
Fund may also hold foreign currency in anticipation of purchasing foreign
securities.
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. Except with respect to the
Fund's policy on borrowing and investing in illiquid securities, 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. MANAGEMENT OF THE FUND
INVESTMENT ADVISER: The Adviser manages the Fund pursuant to an Investment
Advisory Agreement, dated July 1, 1998, 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 commencement of its
investment operations. 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 an annualized basis for the then-current fiscal year of the Fund.
The applicable percentages are reduced as assets reach the following levels:
ANNUAL RATE OF MANAGEMENT FEE
BASED ON AVERAGE DAILY NET ASSETS
---------------------------------
0.65% to $500 million
0.60% of the next $500 million
0.55% of the next $500 million
0.50% on assets over $1.5 billion
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/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.),a
subsidiary of Sun Life Assurance Company of Canada ("Sun Life") in connection
with the sale of various fixed/variable annuity contracts. MFS and its wholly
owned subsidiary, MFS Institutional Advisors, Inc., 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 $ billion on behalf of approximately million investor
accounts as of May 31, 1998. As of such date, the MFS organization managed
approximately $ 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.) Financial Services Holdings, Inc. which in turn is an
indirect wholly owned subsidiary of Sun Life. The Directors of MFS are Jeffrey
L. Shames, Arnold D. Scott, Donald A. Stewart, John D. McNeil and John W.
Ballen. Mr. Shames is the Chairman, Chief Executive Officer and President and
Mr. Scott is the Secretary and a Senior Executive Vice President of MFS. Mr.
Ballen is an Executive Vice President and Chief Equity Officer 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.
Mr. Shames, the Chairman of MFS, is a Trustee of the Trust. Joan S.
Batchelder, Robert J. Manning, Bernard Scozzafava, James T. Swanson, W. Thomas
London, Stephen E. Cavan, James O. Yost, Ellen Moynihan, Mark E. Bradley, and
James R. Bordewick, Jr., all of whom are officers of MFS, are officers of the
Trust.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS. Some simultaneous
transactions are inevitable when several clients receive investment advice
from MFS, particularly when the same security is suitable for more than one
client. While in some cases this arrangement could have a detrimental effect
on the price or availability of the security as far as the Fund is concerned,
in other cases, however, it may produce increased investment opportunities for
the Fund.
ADMINISTRATOR: MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, the Fund pays MFS an administrative fee of up
to 0.015% per annum of the Fund's average daily net assets. This fee
reimburses MFS for a portion of the costs it incurs to provide such services.
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.
7. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, B and C shares of the Fund may be purchased at the public offering
price through any dealer. As used in the Prospectus and any appendices
thereto, the term "dealer" includes any broker, dealer, bank (including bank
trust departments), registered investment adviser, financial planner and any
other financial institutions having a selling agreement or other similar
agreement with MFD. Dealers may also charge their customers fees relating to
investments in the Fund.
This Prospectus offers Class A, B and C shares to the general public which
bear sales charges and distribution fees in different forms and amounts, as
described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus
an initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
<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 five circumstances, Class A shares are offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of
the lesser of the value of the shares redeemed (exclusive of reinvested
dividend and capital gain distributions) or the total cost of such shares, in
the event of a share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(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;
(iv) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1996 and (b) the plan
has, at the time of purchase, a market value of $500,000 or more
invested in shares of any class or classes of the MFS Funds. THE
RETIREMENT PLAN WILL QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR
ITS SPONSORING ORGANIZATION INFORMS THE SHAREHOLDER SERVICING AGENT
PRIOR TO THE PURCHASES THAT THE PLAN HAS A MARKET VALUE OF $500,000
OR MORE INVESTED IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS.
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO
DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY; AND
(v) on investments in Class A shares by certain retirement plans subject
to ERISA if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1997; (b) such plan's records are
maintained on a pooled basis by the Shareholder Servicing Agent; and
(c) the sponsoring organization demonstrates to the satisfaction of
MFD that, at the time of purchase, the employer has at least 200
eligible employees and the plan has aggregate assets of at least
$2,000,000.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
--------------------------------- --------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers
with respect to a shareholder's new investment in Class A shares, purchases
for each shareholder account (and certain other accounts for which the
shareholder is a record or beneficial holder) will be aggregated over a 12-
month period (commencing from the date of the first such purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemptions of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus. In addition to these
circumstances, the CDSC imposed upon the redemption of Class A shares is
waived with respect to shares held by certain retirement plans qualified under
Section 401(a) or 403(b) of the Internal Revenue Code of 1986, as amended (the
"Code"), and subject to ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe
to the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to
the satisfaction of, and certifies to the Shareholder Servicing Agent
that the retirement plan has, at the time of certification or will
have pursuant to a purchase order placed with the certification, a
market value of $500,000 or more invested in shares of any class or
classes of the MFS Funds and aggregate assets of at least $10
million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the Plan makes
a complete redemption of all of its shares in the MFS Funds, or (b) with
respect to plans which established an account with the Shareholder Servicing
Agent prior to November 1, 1997, in the event that there is a change in law or
regulations which results in a material adverse change to the tax advantaged
nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated under
ERISA or is liquidated or dissolved; or (iii) is acquired by, merged into, or
consolidated with, any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption as follows:
CONTINGENT
YEAR OF REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
- ------------------ --------------
First ............................................................ 4%
Second ........................................................... 4%
Third ............................................................ 3%
Fourth ........................................................... 3%
Fifth ............................................................ 2%
Sixth ............................................................ 1%
Seventh and following ............................................ 0%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a
dealer upon the sale of Class B shares is 4% of the purchase price of the
shares (commission rate of 3.75% plus a service fee equal to 0.25% of the
purchase price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has
established its account with the Shareholder Servicing Agent 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
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 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, Class B and Class C shares. In addition, from
time to time, MFD may pay dealers 100% of the applicable sales charge on sales
of Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset
value of all of the Class B and/or Class C shares of certain specified MFS
Funds sold by such dealer during a specified sales period. In addition, from
time to time, MFD, at its expense, may provide additional commissions,
compensation or promotional incentives ("concessions") to dealers which sell
or arrange for the sale of shares of the Fund. Such concessions provided by
MFD may include financial assistance to dealers in connection with preapproved
conferences or seminars, sales or training programs for invited registered
representatives and other employees, payment for travel expenses, including
lodging, incurred by registered representatives and other employees for such
seminars or training programs, seminars for the public, advertising and sales
campaigns regarding one or more MFS Funds, and/or other dealer-sponsored
events. From time to time, MFD may make expense reimbursements for special
training of a dealer's registered representatives and other employees in group
meetings or to help pay the expenses of sales contests. Other concessions may
be offered to the extent not prohibited by state laws or any self-regulatory
agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal
charitable contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting,
selling or distributing securities. Although the scope of the prohibition has
not been clearly defined, MFD believes that such Act should not preclude banks
from entering into agency agreements with MFD. If, however, a bank were
prohibited from so acting, the Trustees would consider what actions, if any,
would be necessary to continue to provide efficient and effective shareholder
services in respect of Shareholders who invested in the Fund through a
national bank. It is not expected that shareholders would suffer any adverse
financial consequence as a result of these occurrences. In addition, state
securities laws on this issue may differ from the interpretation of federal
law expressed herein and banks and financial institutions may be required to
register as broker-dealers pursuant to state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services)
that the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e.,
an established account) may be exchanged for shares of the same class of any
of the other MFS Funds at net asset value (if available for sale). Shares of
one class may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING MFS MONEY MARKET FUNDS): No initial
sales charges or CDSC will be imposed in connection with an exchange from
shares of an MFS Fund to shares of any other MFS Fund, except with respect to
exchanges from an MFS money market fund to another MFS Fund which is not an
MFS money market fund (discussed below). With respect to an exchange
involving shares subject to a CDSC, the CDSC will be unaffected by the
exchange and the holding period for purposes of calculating the CDSC will
carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect
to the imposition of an initial sales charge or a CDSC for exchanges from an
MFS money market fund to another MFS Fund which is not an MFS money market
fund. These rules are described under the caption "Exchanges" in the
Prospectuses of those MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund
held by certain qualified retirement plans may be exchanged for units of
participation of the MFS Fixed Fund (a bank collective investment fund) (the
"Units"), and Units may be exchanged for Class A shares of any MFS Fund. With
respect to exchanges between Class A shares subject to a CDSC and Units, the
CDSC will carry over to the acquired shares or Units and will be deducted from
the redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units
and then exchanges into Class A shares subject to an initial sales charge of
an MFS Fund, the initial sales charge shall be due upon such exchange, but
will not be imposed with respect to any subsequent exchanges between such
Class A shares and Units with respect to shares on which the initial sales
charge has already been paid. In the event that a shareholder initially
purchases Units and then exchanges into Class A shares subject to a CDSC of an
MFS Fund, the CDSC period will commence upon such exchange, and the
applicability of the CDSC with respect to subsequent exchanges shall be
governed by the rules set forth 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 Exchange
(generally, 4:00 p.m., Eastern time), the exchange will occur on that day if
all the requirements set forth above have been complied with at that time and
subject to the Fund's right to reject purchase orders. No more than five
exchanges may be made in any one Exchange Request by telephone. Additional
information concerning this exchange privilege and prospectuses for any of the
other MFS Funds may be obtained from dealers or the Shareholder Servicing
Agent. For federal and (generally) state income tax purposes, an exchange is
treated as a sale of the shares exchanged and, therefore, an exchange could
result in a gain or loss to the shareholder making the exchange. Exchanges by
telephone are automatically available to most non-retirement plan accounts and
certain retirement plan accounts. For further information regarding exchanges
by telephone, see "Redemptions by Telephone." The exchange privilege (or any
aspect of it) may be changed or discontinued and is subject to certain
limitations, including certain restrictions on purchases by market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on
any date on which the Fund is open for business by redeeming shares at their
net asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however,
subject to a CDSC. See "Contingent Deferred Sales Charge" below. Because the
net asset value of shares of the account fluctuates, redemptions or
repurchases, which are taxable transactions, are likely to result in gains or
losses to the shareholder. When a shareholder withdraws an amount from his
account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except for shares purchased or received in
exchange for shares purchased by check (including certified checks or
cashier's checks). Payment of redemption proceeds may be delayed for up to 15
days from the purchase date in an effort to assure that such check has
cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the
shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power with a written request for
redemption or letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally
means that the stock power, written request for redemption, letter of
instruction or certificate must be endorsed by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed in the
manner set forth below under the caption "Signature Guarantee." In addition,
in some cases "good order" will require the furnishing of additional
documents. The Shareholder Servicing Agent may make certain de minimis
exceptions to the above requirements for redemption. Within seven days after
receipt of a redemption request in "good order" by the Shareholder Servicing
Agent, the Fund will make payment in cash of the net asset value of the shares
next determined after such redemption request was received, reduced by the
amount of any applicable CDSC described above and the amount of any income tax
required to be withheld, except during any period in which the right of
redemption is suspended or date of payment is postponed because the Exchange
is closed or trading on such Exchange is restricted or to the extent otherwise
permitted by the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his
account by telephoning the Shareholder Servicing Agent toll-free at (800)
225-2606. Shareholders wishing to avail themselves of this telephone
redemption privilege must so elect on their Account Application, designate
thereon a bank and account number to receive the proceeds of such redemption,
and sign the Account Application Form with the signature(s) guaranteed in the
manner set forth below under the caption "Signature Guarantee." The proceeds
of such a redemption, reduced by the amount of any applicable CDSC and the
amount of any income tax required to be withheld, are mailed by check to the
designated account, without charge, if the redemption proceeds do not exceed
$1,000, and are wired in federal funds to the designated account if the
redemption proceeds exceed $1,000. If a telephone redemption request is
received by the Shareholder Servicing Agent by the close of regular trading on
the Exchange on any business day, shares will be redeemed at the closing net
asset value of the Fund on that day. Subject to the conditions described in
this section, proceeds of a redemption are normally mailed or wired on the
next business day following the date of receipt of the order for redemption.
The Shareholder Servicing Agent will not be responsible for any losses
resulting from unauthorized telephone transactions if it follows reasonable
procedures designed to verify the identity of the caller. The Shareholder
Servicing Agent will request personal or other information from the caller,
and will normally also record calls. Shareholders should verify the accuracy
of confirmation statements immediately after their receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares
through his dealer (a repurchase), the shareholder can place a repurchase
order with his dealer, who may charge the shareholder a fee. IF THE DEALER
RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE
EXCHANGE AND COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME
DAY, THE SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY,
REDUCED BY THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX
REQUIRED TO BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B and
Class C shares ("Direct Purchases") will be subject to a CDSC for a period of:
(i) with respect to Class A and Class C shares, 12 months (however, the CDSC
on Class A shares is only imposed with respect to purchases of $1 million or
more of Class A shares or purchases by certain retirement plans of Class A
shares); or (ii) with respect to Class B shares, six years. Purchases of Class
A shares made during a calendar month, regardless of when during the month the
investment occurred, will age one month on the last day of the month and each
subsequent month. Class C shares and Class B shares purchased on or after
January 1, 1993 will be aggregated on a calendar month basis -- all
transactions made during a calendar month, regardless of when during the month
they have occurred, will age one year at the close of business on the last day
of such month in the following calendar year and each subsequent year. For
Class B shares of the Fund purchased prior to January 1, 1993, transactions
will be aggregated on a calendar year basis -- all transactions made during a
calendar year, regardless of when during the year they have occurred, will age
one year at the close of business on December 31 of that year and each
subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases
exceeds the sum of the six calendar year aggregations (12 months in the case
of purchases of Class C shares and of purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore,
at the time of redemption of a particular class, (i) any Free Amount is not
subject to the CDSC and (ii) the amount of the redemption equal to the then-
current value of Reinvested Shares is not subject to the CDSC, but (iii) any
amount of the redemption in excess of the aggregate of the then-current value
of Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will
first be applied against the amount of Direct Purchases which will result in
any such charge being imposed at the lowest possible rate. The CDSC to be
imposed upon redemptions of shares will be calculated as set forth in
"Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases
of all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days
of the redemption pursuant to the Reinstatement Privilege. If the shares
credited for any CDSC paid are then redeemed within six years of the initial
purchase in the case of Class B shares or within 12 months of the initial
purchase for Class C Shares and certain Class A share purchases, a CDSC will
be imposed upon redemption. Such purchases under the Reinstatement Privilege
are subject to all limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund
solely in cash up to the lesser of $250,000 or 1% of the net asset value of
the Fund during any 90-day period for any one shareholder. The Fund has
reserved the right to pay other redemptions, either totally or partially, by a
distribution in-kind of securities (instead of cash) from the Fund's
portfolio. The securities distributed in such a distribution would be valued
at the same amount as that assigned to them in calculating the net asset value
for the shares being sold. If a shareholder received a distribution in-kind,
the shareholder could incur brokerage or transaction charges when converting
the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in
any account for their then-current value if at any time the total investment
in such account drops below $500 because of redemptions or exchanges, except
in the case of accounts being established for monthly automatic investments
and certain payroll savings programs, Automatic Exchange Plan accounts and
tax-deferred retirement plans, for which there is a lower minimum investment
requirement. See "Purchases -- General -- Minimum Investment." Shareholders
will be notified that the value of their account is less than the minimum
investment requirement and allowed 60 days to make an additional investment
before the redemption is processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder
(the "Distribution Plan"), after having concluded that there is a reasonable
likelihood that the 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
0.35%, 1.00% and 1.00% per annum, respectively.
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 (as well as the rate category or categories
under which such gain is taxable), the portion, if any, representing a return
of capital (which is generally free of current taxes but results in a basis
reduction), and the amount, if any, of federal income tax withheld.
Fund distributions of net capital gains or net short-term capital gains will
reduce the Fund's net asset value per share. Shareholders who buy shares
shortly before the Fund makes such a distribution may thus pay the full price
for the shares and then effectively receive a portion of the purchase price
back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% (or
any lower rate permitted under an applicable treaty) on taxable dividends and
other payments that are subject to such withholding and that are made to
persons who are neither citizens nor residents of the U.S. The Fund is also
required in certain circumstances to apply backup withholding at the rate of
31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the U.S.)
who does not furnish to the Fund certain information and certifications or who
is otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
Prospective investors should read the Fund's Account Application for
additional information regarding backup withholding of federal income tax and
should consult their own tax advisers as to the tax consequences to them of an
investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of 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.
EXPENSES
The Trust pays the compensation of the Trustees who are not officers of MFS
and all expenses of the Fund (other than those assumed by MFS) including but
not limited to: 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 and servicing shareholder accounts; expenses of preparing,
printing and mailing prospectuses, periodic reports, notices and proxy
statements to shareholders and to governmental officers and commissions;
brokerage and other expenses connected with the execution, recording and
settlement of portfolio security transactions; insurance premiums; fees and
expenses of State Street Bank and Trust Company, the 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 are borne by the
Fund except that the Distribution Agreement with MFD requires MFD to pay for
prospectuses that are to be used for sales purposes. Expenses of the Trust
which are not attributable to a specific series are allocable between the
series in a manner believed by management of the Trust to be fair and
equitable.
Subject to termination or revision at the sole discretion of MFS, MFS has
voluntarily agreed to bear all of the Fund's "Other Expenses," which are
defined to include all Fund expenses except for management fees, Rule 12b-1
fees, taxes, extraordinary expenses, brokerage and termination costs and class
specific expenses in order to maintain the Fund's Total Operating Expenses at
1.00%, 1.65% and 1.65% per annum of the Fund's average daily net assets, with
respect to Class A, Class B and Class C Shares, respectively. This arrangement
may be changed or terminated by the Adviser at any time.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of three 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.
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. A
copy of the Annual Report, when available, 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.
8. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described
below or concerning other aspects of the Fund, should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS: Each shareholder will receive
confirmation statements showing the transaction activity in his account. At
the end of each calendar year, each shareholder will receive 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:
o Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified.
o Dividends in cash; capital gain distributions (except as provided below)
reinvested in additional shares.
o 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 may be made 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 July 1, 1998, 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). As used in this Appendix, the term "dealer" includes any broker, dealer,
bank (including bank trust departments), registered investment adviser,
financial planner and any other financial institution having a selling
agreement with MFS Fund Distributors, Inc. ("MFD").
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, is waived:
1. DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Family of Funds
("MFS Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of
assets of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
o Officers, eligible directors, employees (including retired employees)
and agents of Massachusetts Financial Services Company ("MFS"), Sun
Life Assurance Company of Canada ("Sun Life") or any of their
subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the shares;
and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
("MFSI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/ Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
o Death or disability of the IRA owner.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
o Death, disability or retirement of 401(a) or ESP Plan participant;
o Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
o Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
o Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the 401(a) or
ESP Plan);
o Tax-free return of excess 401(a) or ESP Plan contributions;
o To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes
to the MFS FUNDamental 401(k) or ESP Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent; and
o Distributions from a 401(a) or ESP Plan that has invested its assets
in one or more of the MFS Funds for more than 10 years from the later
to occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP
Plan first invests its assets in one or more of the MFS Funds. The
sales charges will be waived in the case of a redemption of all of
the 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")
o Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
o To an IRA rollover account where any sales charges with respect to
the shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants of such Plan, provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent.
7. LOAN REPAYMENTS
o Shares acquired pursuant to repayments by retirement plan
participants of loans from 401(a) or ESP Plans with respect to which
such Plan or its sponsoring organization subscribes to the MFS
FUNDamental 401(k) Program or the MFS Recordkeeper Plus Program (but
not the MFS Recordkeeper Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the contingent deferred sales charge imposed on certain
redemptions of Class A shares are waived:
1. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund "supermarket" account
or a similar program under which such clients pay a fee to such
dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
o Shares acquired by retirement plans or trust accounts whose third
party administrators, or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
o Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
Shares redeemed on account of distributions made under the following
circumstances:
IRA'S
o Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
o Tax-free returns of excess IRA contributions.
401(a) PLANS
o Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
o Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a Plan.
ESP PLANS AND SRO PLANS
o Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
4. PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases Subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund,
MFS Municipal Limited Maturity Fund, MFS Money Market Fund, MFS
Government Money Market Fund and MFS Cash Reserve Fund.
5. BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C
shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRAs
where the redemption is made pursuant to Section 72(t) of the
Internal Revenue Code of 1986, as amended) of the account value at
the time of establishment.
2. DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under
the following circumstances:
IRA'S, 401(a) PLANS, ESP PLANS AND SRO PLANS
o Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
applicable Internal Revenue Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
o Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
o 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 IBCA ("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: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this
obligation are being continued.
D: An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly unlikely
to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility, Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD, D Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50% -- 90% of such outstandings,
and D the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable economic/
industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal and/
or interest payments.
DP: Preferred stock with dividend arrearages.
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>
Investment Adviser
Massachusetts Financial
Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Principal Underwriter
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian 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
<PAGE>
[Logo(SM)]
INVESTMENT MANAGEMENT
MFS(R) HIGH YIELD
OPPORTUNITIES FUND STATEMENT OF
ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) July 1, 1998
- --------------------------------------------------------------------------------
Page
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1. Definitions .......................................................... 2
2. Investment Objective, Policies and Restrictions ...................... 2
3. Management of the Fund ............................................... 12
Trustees .......................................................... 12
Officers .......................................................... 12
Trustee Compensation Table ........................................ 13
Investment Adviser ................................................ 13
Administrator ..................................................... 14
Custodian ......................................................... 14
Shareholder Servicing Agent ....................................... 14
Distributor ....................................................... 14
4. Portfolio Transactions and Brokerage Commissions ..................... 15
5. Shareholder Services ................................................. 15
Investment and Withdrawal Programs ................................ 15
Exchange Privilege ................................................ 17
Tax-Deferred Retirement Plans ..................................... 18
6. Tax Status ........................................................... 18
7. Description of Shares, Voting Rights and Liabilities ................. 20
8. Determination of Net Asset Value and Performance ..................... 20
9. Distribution Plan .................................................... 22
10. Independent Auditors and Financial Statements ........................ 22
MFS HIGH YIELD OPPORTUNITIES 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
July 1, 1998. 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 Yield Opportunities 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
July 1, 1998, 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. The Fund invests, under normal market conditions, at least 65% of its
total assets in a professionally managed diversified portfolio of fixed income
securities. 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."
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
"tranche", 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 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 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 segregated by the
Fund) 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
liquid assets representing the difference are segregated by the Fund. A put
option written by the Fund is "covered" if the Fund segregates liquid assets
with a value equal to the exercise price or else holds a put on the same
security and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price
of the put written. 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 segregates 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 liquid assets representing the difference are
segregated by the Fund. 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 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 by the Fund) 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 liquid assets representing the
difference are segregated by the Fund. A put option written on foreign
currencies by the Fund is "covered" if the Fund segregates assets, 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 amount 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 collateral.
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. The Fund would also receive a fee from the borrower or compensation
from the investment of cash collateral, less a fee paid to the borrower, if
the collateral is in the form of cash. 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."
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 from banks in excess of 33 1/3% of its total assets,
including amounts borrowed;
(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) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal
in real estate or interests therein), interests in oil, gas or mineral
leases, commodities or commodity contracts (excluding options, Options on
Futures Contracts, options of Stock Indices, options on Foreign Currency and
any other type of option, Futures Contracts, any other type of futures
contract, and Forward Contracts) in the ordinary course of its business. The
Fund reserves the freedom of action to hold and to sell real estate,
mineral leases, commodities or commodity contracts (including options,
Options on Futures Contracts, options on stock indices, Options on foreign
currency and any other type of option, Futures Contracts, any other type of
futures contract, and Forward Contracts) acquired as a result of the
ownership of securities;
(4) issue any senior securities except as permitted by the Investment
Company Act of 1940, as amended (the "1940 Act"). For purposes of this
restriction, collateral arrangements with respect to any type of option
(including Options on Futures Contracts, options, options on stock indices
and options on foreign currencies), Forward Contracts, Futures Contracts,
any other type of futures contract, and collateral arrangements with respect
to initial and variation margin, are not deemed to be the issuance of a
senior security;
(5) make loans to other persons. For these purposes, the purchase of
short-term commercial paper, the purchase of a portion or all of an issue of
debt securities, the lending of portfolio securities, or the investment of
the Fund's assets in repurchase agreements, shall not be considered the
making of a loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result, more than 25% of its gross assets would be invested in securities of
issuers whose principal business activities are in the same industry (except
obligations issued or guaranteed by the U.S. Government or its agencies and
instrumentalities and repurchase agreements collateralized by such
obligations).
Except with respect to Investment Restriction (1) and non-fundamental
investment policy (1), 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.
In addition, the Fund has the following nonfundamental policies which may be
changed without shareholder approval. The Fund will not:
(1) invest in illiquid investments, including securities subject to legal
or contractual restrictions on resale or for which there is no readily
available market (e.g., trading in the security is suspended, or, in the
case of unlisted securities, where no market exists), if more than 15% of
the Fund's net assets (taken at market value) would be invested in such
securities. Repurchase agreements maturing in more than seven days will be
deemed to be illiquid for purposes of the Fund's limitation on investment in
illiquid securities. Securities that are not registered under the 1933 Act
and sold in reliance on Rule 144A thereunder, but are determined to be
liquid by the Trust's Board of Trustees (or its delegatee), will not be
subject to this 15% limitation;
(2) invest more than 15% of the value of the Fund's net assets, valued at
the lower of cost or market, in warrants. Included within such amount, but
not to exceed 10% of the value of the Fund's net assets, may be warrants
which are not listed on the New York or American Stock Exchange. Warrants
acquired by the Fund in units or attached to securities may be deemed to be
without value;
(3) invest for the purpose of exercising control or management;
(4) purchase securities issued by any other investment company in excess
of the amount permitted by the 1940 Act; currently, the Fund does not intend
to invest more than 5% of its net assets in such securities;
(5) purchase or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of the
Trust, or is an officer or a director of the investment adviser of the Fund,
if one or more of such persons also owns beneficially more than 1/2 of 1%
of the securities of such issuer, and such persons owning more than 1/2 of
1% of such securities together own beneficially more than 5% of such
securities;
(6) purchase any securities or evidences of interest therein on margin,
except that the Fund may obtain such short-term credit as may be necessary
for the clearance of any transaction and except that the Fund may make
margin deposits in connection with any type of option (including Options on
Futures Contracts, options, options on stock indices and options on foreign
currencies), any short sale, any type of futures contract (including Futures
Contracts), and Forward Contracts;
(7) invest more than 5% of its gross assets in companies which, including
predecessors, controlling persons, sponsoring entities, general partners and
guarantors, have a record of less than three years' continuous operation or
relevant business experience;
(8) pledge, mortgage or hypothecate in excess of 33 1/3% of its gross
assets. For purposes of this restriction, collateral arrangements with
respect to any type of option (incuding Options on Futures Contracts,
options, options on stock indices and options on foreign currencies), any
short sale, any type of futures contract (including Futures Contracts),
Forward Contracts and payments of initial and variation margin in connection
therewith, are not considered a pledge of assets;
(9) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent (a) the purchase, ownership, holding or
sale of (i) warrants where the grantor of the warrants is the issuer of the
underlying securities or (ii) put or call options or combinations thereof
with respect to securities, indices of securities, options on foreign
currencies or any type of futures contract (including Futures Contracts) or
(b) the purchase, ownership, holding or sale of contracts for the future
delivery of securities or currencies; or
(10) invest 25% or more of the market value of its total assets in
securities of issuers in any one industry.
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
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; 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, Chairman, President, Chief Executive
Officer 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, Trustee
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
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. Messrs. Shames and Scott,
Directors of MFD and Mr. Cavan, the Secretary of MFD, hold similar positions
with certain other MFS affiliates. Mr. Bailey is a Director of Sun Life
Assurance Company of Canada (U.S.), a subsidiary of Sun Life Assurance Company
of Canada ("Sun Life").
The Fund pays the compensation of non-interested Trustees and Mr. Bailey who
currently receive a fee of $250 per year plus $25 per meeting and $20 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. 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 $ 645 $ 0 $283,647
Peter G. Harwood 645 0 121,105
J. Atwood Ives 645 0 108,720
Lawrence T. Perera 645 0 127,055
William J. Poorvu 645 0 121,105
Charles W. Schmidt 645 0 121,105
Arnold D. Scott 0 0 0
Jeffrey L. Shames 0 0 0
David B. Stone 645 0 127,055
Elaine R. Smith 645 0 132,035
(1) Information is estimated for fiscal year ended January 31, 1999.
(2) Based on normal retirement age of 73.
(3) All Trustees receiving compensation served as Trustees of 31 funds within
the MFS fund complex (having aggregate net assets at December 31, 1997, of
approximately $29 billion) except Mr. Bailey, who served as Trustee of 69
funds within the MFS fund complex (having aggregate net assets at December
31, 1997, of approximately $48 billion).
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.) Financial
Services Holdings, Inc., which is an indirect wholly owned subsidiary of Sun
Life.
The Adviser manages the Fund pursuant to an Investment Advisory Agreement,
dated July 1, 1998, (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 an annualized basis
for the then-current fiscal year. The applicable percentages are reduced as
assets reach the following levels:
ANNUAL RATE OF MANAGEMENT FEE
BASED ON AVERAGE DAILY NET ASSETS
--------------------------------------
0.65% to $500 million
0.60% next $500 million
0.55% next $500 million
0.50% over $1.5 billion
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.
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.
The Advisory Agreement will remain in effect until July 1, 2000 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 financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997, as amended. Under this
Agreement, the Fund pays MFS an administrative fee up to 0.015% per annum of
the Fund's average daily net assets. This fee reimburses MFS for a portion of
the costs it incurs to provide such services.
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.
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
0.1125%. 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 disbursing agent
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.
The Distribution Agreement will remain in effect until August 1, 1999, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority
of the Trust's shares (as defined in "Investment 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 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 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.
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 discon-
tinued 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, the
following:
Traditional Individual Retirement Accounts (IRAs) (for individuals who
desire to make limited contributions to a tax-deferred retirement program
and, if eligible, to receive a federal income tax deduction for amounts
contributed);
Roth Individual Retirement Accounts (Roth IRAs) (for individuals who desire
to make limited contributions to a tax-favored retirement program);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986 (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 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. Such capital gains will generally be taxable to
shareholders as if the shareholders had directly realized gains from the same
sources from which they were realized by the Fund. 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; a
long-term capital gain realized by an individual, estate or trust may be
eligible for reduced tax rates if the shares were held for more than 18
months. 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, Forward Contracts and
swaps and related transactions will be subject to special tax rules that may
affect the amount, timing and character of Fund income and distributions to
shareholders. For example, certain positions held by 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. The
Fund may elect to mark to market any investments in "passive foreign
investment companies" on the last day of each year. This election may cause
the Fund to recognize income prior to the receipt of cash payments with
respect to those investments; in order to distribute this income and avoid a
tax on the Fund, the Fund may be required to liquidate portfolio securities
that it might otherwise have continued to hold.
Investment income received by 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 the rate of 30%. The Fund intends
to withhold U.S. federal income tax at the rate of 30% (or any lower rate
permitted under an applicable treaty) on taxable dividends and other payments
to Non-U.S. Persons that are subject to such withholding. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund
with the U.S. Internal Revenue Service within the time period 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 two other series. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any series of shares into
one or more classes. Pursuant thereto, the Trustees have authorized the
issuance of four classes of shares, Class A, Class B, Class C and Class I
shares for the Fund and one other series and Class A and Class B shares for
one 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,
Martin Luther King, Jr. 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.
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%.
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.
GENERAL: 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.
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(R) Equity
Fund, the first fund 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.
GENERAL: The Distribution Plan will remain in effect until July 1, 1999, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the
Trustees shall review, at least quarterly, a written report of the amounts
expended (and purposes therefor) under such Plan. The Distribution Plan may be
terminated at any time by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the Fund's shares (as defined in "Investment Restrictions"). All
agreements relating to 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 Fund is newly organized and has not yet issued
financial statements.
<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 YIELD
OPPORTUNITIES FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[Logo](SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM) HYD-13-6/97/525 18/218/318
<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
MFS HIGH YIELD OPPORTUNITIES FUND
Not Applicable
(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. (12)
(d) Amendment to Declaration of Trust, dated May 14, 1998,
to establish MFS High Yield Opportunities Fund as a new
series; 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)
(d) Form of Investment Advisory Agreement for MFS High
Yield Opportunities Fund; filed herewith.
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. (12)
(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, 1998 to amend Fee Schedule; filed herewith.
(c) Exchange Privilege Agreement, dated July 30, 1997. (13)
(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) Third Amendment dated February 14, 1997 to Loan
Agreement dated February 21, 1995 by and among the Banks
named therein and The First National Bank of Boston. (14)
(f) Dividend Disbursing Agency Agreement, dated February 1,
1986. (2)
(g) Master Administrative Services Agreement, dated March
1, 1997 as amended. (10)
10 Consent and Opinion of Counsel, dated May 13, 1998;
filed herewith.
11 (a) Not Applicable.
(b) Not Applicable.
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)
(d) Forms for Roth Individual Retirement Account Disclosure
Statement and Trust Agreement as currently in effect. (9).
15 (a) Master Distribution Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940, effective January
1, 1997. (11)
(b) Exhibits as revised February 11, 1998 to Master
Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 to replace those exhibits to
the Master Distribution Plan contained in Exhibit 15(a)
above. (10).
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 Not Applicable.
18 Plan pursuant to Rule 18f-3(d) under the Investment
Company Act of 1940. (7).
Power of Attorney, dated September 21, 1994. (1)
Power of Attorney, dated February 19, 1998; filed herewith.
- -----------------------------
(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. 14 filed with the SEC via EDGAR on
February 26, 1998.
(10) Incorporated by reference to Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective Amendment No. 65 filed with
the SEC via EDGAR on March 30, 1998.
(11) Incorporated by reference to MFS Series Trust IV (File Nos. 33-7638 and
811-2594) Post-Effective Amendment No. 18 filed with the SEC via EDGAR on
December 27, 1996.
(12) Incorporated by reference to the Registrant's Post-Effective Amendment No.
24 filed with the SEC via EDGAR on May 29, 1997.
(13) Incorporated by reference to Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective Amendment No. 64 filed with
the SEC via EDGAR on October 29, 1997.
(14) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 24 filed with the SEC via EDGAR on
May 29, 1997.
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
<TABLE>
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Class A Shares of Beneficial Interest 36,584
(without par value) (as of April 30, 1998)
Class B Shares of Beneficial Interest 18,911
(without par value) (as of April 30, 1998)
Class C Shares of Beneficial Interest 1,964
(without par value) (as of April 30, 1998)
Class I Shares of Beneficial Interest 5
(without par value) (as of April 30, 1998)
FOR MFS MUNICIPAL HIGH INCOME FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 27,099
(without par value) (as of April 30, 1998)
Class B Shares of Beneficial Interest 5,076
(without par value) (as of April 30, 1998)
FOR MFS HIGH YIELD OPPORTUNITIES FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 0
(without par value) (as of April 30, 1998)
Class B Shares of Beneficial Interest 0
(without par value) (as of April 30, 1998)
Class C Shares of Beneficial Interest 0
(without par value) (as of April 30, 1998)
Class I Shares of Beneficial Interest 0
(without par value) (as of April 30, 1998)
</TABLE>
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 (except the Vertex Funds mentioned below):
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 Strategic 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 three series: MFS Emerging Growth Fund, MFS Large Cap Growth Fund and MFS
Intermediate Income 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 Mid Cap Growth Fund), MFS Series Trust V (which has
six series: MFS Total Return Fund, MFS Research Fund, MFS International
Opportunities Fund, MFS International Strategic Growth Fund, MFS International
Value Fund and MFS Asia Pacific 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 eight series: MFS Government
Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS
International Growth Fund, MFS International Growth and Income Fund, MFS Real
Estate Investment Fund, MFS Strategic Value Fund, MFS Small Cap Value Fund and
MFS Emerging Markets Debt Fund), MFS Series Trust XI (which has six series: MFS
Union Standard Equity Fund, Vertex All Cap Fund, Vertex Research All Cap Fund,
Vertex Growth Fund, Vertex Discovery Fund and Vertex Contrarian Fund (the Vertex
Funds are expected to be declared effective April 28, 1998)), 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 open-end Funds:
MFS Institutional Trust ("MFSIT") (which has seven series) and MFS Variable
Insurance Trust ("MVI") (which has thirteen series). 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") (which has 26 series), 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 (collectively, the "Accounts"). The
principal business address of MFS/SL is 500 Boylston Street, Boston,
Massachusetts 02116. The principal business address of each of the
aforementioned Accounts is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
Vertex Investment Management, Inc., a Delaware corporation and a wholly
owned subsidiary of MFS, whose principal business address is 500 Boylston
Street, Boston, Massachusetts 02116 ("Vertex"), serves as investment adviser to
Vertex All Cap Fund, Vertex Research All Cap Fund, Vertex Growth Fund, Vertex
Discovery Fund and Vertex Contrarian Fund, each a series of MFS Series Trust XI.
The principal business address of the aforementioned Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
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 Funds (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 Governments 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, MFS
Meridian U.S. High Yield Fund, MFS Meridian Emerging Markets Debt Fund, MFS
Meridian Strategic Growth Fund and MFS Meridian World Asset Allocation 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 Institutional Advisors (Australia) Ltd. ("MFSI-Australia"), a
private limited company organized under the Corporations Law of New South Wales,
Australia whose current address is Level 37, Governor Phillip Tower, One Farrer
Place, Sydney, N5W2000, Australia, is involved primarily in investment
management and distribution of Australian superannuation unit trusts and acts as
an investment adviser to institutional accounts.
MFS Holdings Australia Pty Ltd. ("MFS Holdings Australia"), a private
limited company organized pursuant to the Corporations Law of New South Wales,
Australia whose current address is Level 37, Governor Phillip Tower, One Farrer
Place, Sydney, NSW2000 Australia, and whose function is to serve primarily as a
holding company.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the MFS Funds, MVI and MFSIT.
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 and MVI.
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 Jeffrey L. Shames, Arnold D. Scott, John W.
Ballen, Donald A. Stewart and John D. McNeil. Mr. Shames is the Chairman, Chief
Executive Officer and President, Mr. Scott is a Senior Executive Vice President
and Secretary, William W. Scott, Jr., Patricia A. Zlotin, John W. Ballen, Thomas
J. Cashman, Jr., Joseph W. Dello Russo and Kevin R. Parke 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
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost, Ellen M. Moynihan and Mark E. Bradley, Vice Presidents of MFS,
are the Assistant Treasurers, James R. Bordewick, Jr., Senior Vice President and
Associate General Counsel of MFS, is the Assistant Secretary.
MFS SERIES TRUST II
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, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and
James R. Bordewick, Jr. is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
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, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and
James R. Bordewick, Jr. is the Assistant Secretary.
MFS SERIES TRUST III
James T. Swanson, Robert J. Manning 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, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers, and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
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, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS SERIES TRUST VII
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, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS SERIES TRUST VIII
Jeffrey L. Shames, Leslie J. Nanberg and James T. Swanson and John D.
Laupheimer, Jr., a Senior Vice President of MFS, are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen
M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
Robert A. Dennis is Vice President, David B. Smith and Geoffrey L.
Schechter, 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, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is
the Assistant Secretary.
MFS VARIABLE INSURANCE TRUST
MFS SERIES TRUST XI
MFS INSTITUTIONAL TRUST
Jeffrey L. Shames is the President and Chairman, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
Robert J. Manning is Vice President, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
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, Ellen
M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS SPECIAL VALUE TRUST
Robert J. Manning is Vice President, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers 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, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers 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.
VERTEX
Jeffrey L. Shames and Arnold D. Scott are the Directors, Jeffrey L.
Shames is the President, Kevin R. Parke and John W. Ballen are Executive Vice
Presidents, John F. Brennan, Jr., and John D. Laupheimer are Senior Vice
Presidents, Brian E. Stack is a 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.
MIL
Arnold D. Scott, Jeffrey L. Shames and Thomas J. Cashman, Jr. are
Directors, Stephen E. Cavan is a Director, Senior Vice President and the Clerk,
Robert T. Burns is an Assistant Clerk, Joseph W. Dello Russo, Executive Vice
President and Chief Financial Officer of MFS, is the Treasurer and Thomas B.
Hastings is the Assistant Treasurer.
MIL-UK
Thomas J. Cashman, Jr. is President and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Stephen E. Cavan is a Director and the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Assistant Secretary.
MFSI - AUSTRALIA
Thomas J. Cashman, Jr. is President and a Director, Graham E. Lenzer,
John A. Gee and David Adiseshan are Directors, Stephen E. Cavan is the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MFS HOLDINGS - AUSTRALIA
Jeffrey L. Shames is the President and a Director, Arnold D. Scott,
Thomas J. Cashman, Jr., and Graham E. Lenzer are Directors, Stephen E. Cavan is
the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL FUNDS
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 O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS MERIDIAN FUNDS
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 and James O. Yost, Ellen M. Moynihan and Mark E. Bradley
are the Assistant Treasurers.
MFD
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.
MFSC
Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph A.
Recomendes, a Senior Vice President and Chief Information Officer of MFS, is
Vice Chairman and a Director, Janet A. Clifford is the 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
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, Kevin R. Parke is the
Executive Vice President and a Managing Director, George F. Bennett, Jr., John
A. Gee, Brianne Grady, Joseph A. Kosciuszek and Joseph J. Trainor 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
Arnold D. Scott is the Chairman and a Director, Martin E. Beaulieu is
the President, William W. Scott, Jr. is a Director, 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.
In addition, the following persons, Directors or officers of MFS, have
the affiliations indicated:
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 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 13th day of May, 1998.
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 13, 1998.
SIGNATURE TITLE
STEPHEN E. CAVAN* Principal Executive Officer
- -------------------------
Stephen E. Cavan
W. THOMAS LONDON* Treasurer (Principal Financial Officer
- ------------------------- 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
LAWRENCE T. PERERA, ESQ* Trustee
- -------------------------
Lawrence T. Perera, Esq.
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) 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; and (ii) a Power of Attorney dated
February 19, 1998; filed herewith.
<PAGE>
POWER OF ATTORNEY
MFS Series Trust III
The undersigned officer of MFS Series Trust III (the "Registrant")
hereby severally constitutes and appoints Jeffrey L. Shames, Arnold D. Scott, W.
Thomas London, and James R. Bordewick, Jr., and each of them singly, as true and
lawful attorneys, with full power to them and each of them to sign for the
undersigned, in the name of, and in the capacity indicated below, any
Registration Statement and any and all amendments thereto and to file the same
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission for the purpose of registering the Registrant
as a management investment company under the Investment Company Act of 1940
and/or the shares issued by the Registrant under the Securities Act of 1933
granting unto my said attorneys, and each of them, acting alone, full power and
authority to do and perform each and every act and thing requisite or necessary
or desirable to be done in the premises, as fully to all intents and purposes as
he or she might or could do in person, hereby ratifying and confirming all that
said attorneys or any of them may lawfully do or cause to be done by virtue
thereof.
In WITNESS WHEREOF, the undersigned has hereunto set his hand on this
19th day of February, 1998.
Signature Title
--------- -----
STEPHEN E. CAVAN Principal Executive Officer
----------------
Stephen E. Cavan
<PAGE>
MFS SERIES TRUST III
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
1 (d) Amendment to Declaration of Trust, dated May 14,
1998, to establish MFS High Yield Opportunities
Fund as a new series.
5 (d) Form of Investment Advisory Agreement for MFS High
Yield Opportunities Fund.
9 (b) Amendment to the Shareholder Servicing Agreement
dated January 1, 1998 to amend Fee Schedule.
10 Consent and Opinion of Counsel, dated May 13, 1998.
<PAGE>
EXHIBIT NO. 99.1(d)
MFS SERIES TRUST III
CERTIFICATION OF AMENDMENT
TO THE DECLARATION OF TRUST
ESTABLISHMENT AND DESIGNATION
OF SERIES
AND
ESTABLISHMENT AND DESIGNATION
OF CLASSES
Pursuant to Section 6.9 of the Amended and Restated Declaration of
Trust dated February 15, 1995 (the "Declaration") of MFS Series Trust III, a
business Trust organized under the laws of The Commonwealth of Massachusetts
(the "Trust"), the undersigned Trustees of the Trust, being a majority of the
Trustees of the Trust, hereby establish and designate a new series of Shares (as
defined in the Declaration), such series to have the following special and
relative rights:
1. The new series shall be designated:
- MFS High Yield Opportunities Fund.
2. The series shall be authorized to invest in cash, securities,
instruments and other property as from time to time described in
the Trust's then currently effective registration statement under
the Securities Act of 1933, as amended, to the extent pertaining
to the offering of Shares of such series. Each Share of the series
shall be redeemable, shall be entitled to one vote or fraction
thereof in respect of a fractional share on matters on which
Shares of the series shall be entitled to vote, shall represent a
pro rata beneficial interest in the assets allocated or belonging
to the series, and shall be entitled to receive its pro rata share
of the net assets of the series upon liquidation of the series,
all as provided in Section 6.9 of the Declaration.
3. Shareholders of each series shall vote separately as a class on
any matter to the extent required by, and any matter shall be
deemed to have been effectively acted upon with respect to the
series as provided in Rule 18f-2, as from time to time in effect,
under the Investment Company Act of 1940, as amended, or any
successor rule, and by the Declaration.
4. The assets and liabilities of the Trust shall be allocated among
the previously established and existing series of the Trust and
such new series as set forth in Section 6.9 of the Declaration.
5. Subject to the provisions of Section 6.9 and Article IX of the
Declaration, the Trustees (including any successor Trustees) shall
have the right at any time and from time to time to reallocate
assets and expenses or to change the designation of any series now
or hereafter created, or to otherwise change the special and
relative rights of any such establishment and designation of
series of Shares.
Pursuant to Section 6.9 of the Declaration, this instrument shall be
effective upon the execution by a majority of the Trustees of the Trust.
The undersigned, being a majority of the Trustees of the Trust, acting
pursuant to Section 6.10 of the Declaration, do hereby divide the Shares of MFS
High Yield Opportunities to create four classes of Shares, within the meaning of
Section 6.10, as follows:
1. The four classes of Shares are designated "Class A Shares," "Class
B Shares," "Class C Shares" and "Class I Shares";
2. Class A Shares, Class B Shares, Class C Shares and Class I Shares
shall be entitled to all the rights and preferences accorded to
shares under the Declaration;
3. The purchase price of Class A Shares, Class B Shares, Class C
Shares and Class I Shares, the method of determination of the net
asset value of Class A Shares, Class B Shares, Class C Shares and
Class I Shares, the price, terms and manner of redemption of Class
A Shares, Class B Shares, Class C Shares and Class I Shares, any
conversion feature of Class B Shares, and relative dividend rights
of holders of Class A Shares, Class B Shares, Class C Shares and
Class I Shares shall be established by the Trustees of the Trust
in accordance with the Declaration and shall be set forth in the
current prospectus and statement of additional information of the
Trust or any series thereof, as amended from time to time,
contained in the Trust's registration statement under the
Securities Act of 1933, as amended;
4. Class A Shares, Class B Shares, Class C Shares and Class I Shares
shall vote together as a single class except that shares of a
class may vote separately on matters affecting only that class and
shares of a class not affected by a matter will not vote on that
matter; and
5. A class of shares of any series of the Trust may be terminated by
the Trustees by written notice to the Shareholders of the class.
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 14th day of May, 1998 and further certify, as provided by the provisions
of Section 9.3(c) of the Declaration, that this amendment was duly adopted by
the undersigned in accordance with the second sentence of Section 9.3(a) of the
Declaration.
RICHARD B. BAILEY CHARLES W. SCHMIDT
- ---------------------- --------------------
Richard B. Bailey Charles W. Schmidt
63 Atlantic Avenue 63 Claypit Hill Road
Boston, MA 02110 Wayland, MA 01778
PETER G. HARWOOD ARNOLD D. SCOTT
- ---------------------- --------------------
Peter G. Harwood Arnold D. Scott
211 Lindsay Pond Road 20 Rowes Wharf
Concord, MA 01742 Boston, MA 02110
J. ATWOOD IVES
- ---------------------- --------------------
J. Atwood Ives Jeffrey L. Shames
17 West Cedar Street 38 Lake Avenue
Boston, MA 02108 Newton, MA 02159
LAWRENCE T. PERERA ELAINE R. SMITH
- ---------------------- --------------------
Lawrence T. Perera Elaine R. Smith
18 Marlborough Street 75 Scotch Pine Road
Boston, MA 02116 Weston, MA 02193
WILLIAM J. POORVU DAVID B. STONE
- ---------------------- --------------------
William J. Poorvu David B. Stone
975 Memorial Drive 282 Beacon Street
Cambridge, MA 02138 Boston, MA 02116
<PAGE>
EXHIBIT NO. 99.5(d)
FORM OF INVESTMENT ADVISORY AGREEMENT
INVESTMENT ADVISORY AGREEMENT, dated this 1st day of July, 1998, by and
between MFS SERIES TRUST III, a Massachusetts business trust (the "Trust"), on
behalf of MFS HIGH YIELD OPPORTUNITIES FUND, a series of the Trust (the "Fund"),
and MASSACHUSETTS FINANCIAL SERVICES COMPANY, a Delaware corporation (the
"Adviser").
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940; and
WHEREAS, the Adviser is willing to provide business services to the
Fund on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
ARTICLE 1. DUTIES OF THE ADVISER. The Adviser shall provide the Fund
with such investment advice and supervision as the latter may from time to time
consider necessary for the proper supervision of its funds. The Adviser shall
act as Adviser to the Fund and as such shall furnish continuously an investment
program and shall determine from time to time what securities shall be
purchased, sold or exchanged and what portion of the assets of the Fund shall be
held uninvested, subject always to the restrictions of the Trust's Amended and
Restated Declaration of Trust, dated February 15, 1995, and By-Laws, each as
amended from time to time (respectively, the "Declaration" and the "By-Laws"),
to the provisions of the Investment Company Act of 1940 and the Rules,
Regulations and orders thereunder and to the Fund's then-current Prospectus and
Statement of Additional Information. The Adviser shall also make recommendations
as to the manner in which voting rights, rights to consent to corporate action
and any other rights pertaining to the Fund's portfolio securities shall be
exercised. Should the Trustees at any time, however, make any definite
determination as to the investment policy and notify the Adviser thereof in
writing, the Adviser shall be bound by such determination for the period, if
any, specified in such notice or until similarly notified that such
determination shall be revoked. The Adviser shall take, on behalf of the Fund,
all actions which it deems necessary to implement the investment policies
determined as provided above, and in particular to place all orders for the
purchase or sale of portfolio securities for the Fund's account with brokers or
dealers selected by it, and to that end, the Adviser is authorized as the agent
of the Fund to give instructions to the Custodian of the Fund as to the
deliveries of securities and payments of cash for the account of the Fund. In
connection with the selection of such brokers or dealers and the placing of such
orders, the Adviser is directed to seek for the Fund execution at the most
reasonable price by responsible brokerage firms at reasonably competitive
commission rates. In fulfilling this requirement, the Adviser shall not be
deemed to have acted unlawfully or to have breached any duty, created by this
Agreement or otherwise, solely by reason of its having caused the Fund to pay a
broker or dealer an amount of commission for effecting a securities transaction
in excess of the amount of commission another broker or dealer would have
charged for effecting that transaction, if the Adviser determined in good faith
that such amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the Adviser's overall
responsibilities with respect to the Fund and to other clients of the Adviser as
to which the Adviser exercises investment discretion.
The Adviser may from time to time enter into sub-investment advisory agreements
with one or more investment advisers with such terms and conditions as the
Adviser may determine, provided that such sub-investment advisory agreements
have been approved in accordance with applicable provisions of the Investment
Company Act of 1940. Subject to the provisions of Article 6, the Adviser shall
not be liable for any error of judgment or mistake of law by any sub-adviser or
for any loss arising out of any investment made by any sub-adviser or for any
act or omission in the execution and management of the Fund by any sub-adviser.
ARTICLE 2. ALLOCATION OF CHARGES AND EXPENSES. The Adviser shall
furnish at its own expense investment advisory and administrative services,
office space, equipment and clerical personnel necessary for servicing the
investments of the Fund and maintaining its organization and investment advisory
facilities and executive and supervisory personnel for managing the investments
and effecting the portfolio transactions of the Fund. The Adviser shall arrange,
if desired by the Trust, for Directors, officers and employees of the Adviser to
serve as Trustees, officers or agents of the Trust if duly elected or appointed
to such positions and subject to their individual consent and to any limitations
imposed by law. It is understood that the Fund will pay all of its own expenses
including, without limitation, compensation of Trustees "not affiliated" with
the Adviser; 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 and servicing shareholder accounts; expenses of preparing, printing and
mailing stock 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 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; expenses of shareholders' meetings; and expenses
relating to the issuance, registration and qualification of shares of the Fund
and the preparation, printing and mailing of prospectuses for such purposes
(except to the extent that any Distribution Agreement to which the Trust is a
party provides that another party is to pay some or all of such expenses).
ARTICLE 3. COMPENSATION OF THE ADVISER. For the services to be rendered
and the facilities provided, the Fund shall pay to the Adviser an investment
advisory fee computed and paid monthly at a rate equal to the sum of 0.650% of
the first $500 million of the Fund's average daily net assets, 0.600% of the
next $500 million, 0.550% of the next $500 million of the Fund's average daily
net assets and 0.500% in excess of $1.5 billion, in each case on an annualized
basis for the Fund's then-current fiscal year. If the Adviser shall serve for
less than the whole of any period specified in this Article 3, the compensation
to the Adviser will be prorated.
ARTICLE 4. SPECIAL SERVICES. Should the Trust have occasion to request
the Adviser to perform services not herein contemplated or to request the
Adviser to arrange for the services of others, the Adviser will act for the
Trust on behalf of the Fund upon request to the best of its ability, with
compensation for the Adviser's services to be agreed upon with respect to each
such occasion as it arises.
ARTICLE 5. COVENANTS OF THE ADVISER. The Adviser agrees that it will
not deal with itself, or with the Trustees of the Trust or the Trust's
distributor, if any, as principals in making purchases or sales of securities or
other property for the account of the Fund, except as permitted by the
Investment Company Act of 1940 and the Rules, Regulations or orders thereunder,
will not take a long or short position in the shares of the Fund except as
permitted by the Declaration, and will comply with all other provisions of the
Declaration and the By-Laws and the then-current Prospectus and Statement of
Additional Information of the Fund relative to the Adviser and its Directors and
officers.
ARTICLE 6. LIMITATION OF LIABILITY OF THE ADVISER. The Adviser shall
not 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 duties and obligations hereunder. As used
in this Article 6, the term "Adviser" shall include Directors, officers and
employees of the Adviser as well as that corporation itself.
ARTICLE 7. ACTIVITIES OF THE ADVISER. The services of the Adviser to
the Fund are not deemed to be exclusive, the Adviser being free to render
investment advisory and/or other services to others. The Adviser may permit
other fund clients to use the initials "MFS" in their names. The Fund agrees
that if the Adviser shall for any reason no longer serve as the Adviser to the
Fund, the Fund will change its name so as to delete the initials "MFS." It is
understood that the Trustees, officers and shareholders of the Trust are or may
be or become interested in the Adviser, as Directors, officers, employees, or
otherwise and that Directors, officers and employees of the Adviser are or may
become similarly interested in the Trust, and that the Adviser may be or become
interested in the Fund as a shareholder or otherwise.
ARTICLE 8. DURATION, TERMINATION AND AMENDMENT OF THIS AGREEMENT. This
Agreement shall become effective on the date first above written and shall
govern the relations between the parties hereto thereafter, and shall remain in
force until July 1, 2000 on which date it will terminate unless its continuance
after July 1, 2000 is "specifically approved at least annually" (i) by the vote
of a majority of the Trustees of the Trust who are not "interested persons" of
the Trust or of the Adviser at a meeting specifically called for the purpose of
voting on such approval, and (ii) by the Board of Trustees of the Trust, or by
"vote of a majority of the outstanding voting securities" of the Fund.
This Agreement may be terminated at any time without the payment of any
penalty by the Trustees or by "vote of a majority of the outstanding voting
securities" of the Fund, or by the Adviser, in each case on not more than sixty
days' nor less than thirty days' written notice to the other party. This
Agreement shall automatically terminate in the event of its "assignment".
This Agreement may be amended only if such amendment is approved by
"vote of a majority of the outstanding voting securities" of the Fund.
ARTICLE 9. SCOPE OF TRUST'S OBLIGATIONS. A copy of the Trust's
Declaration of Trust is on file with the Secretary of State of The Commonwealth
of Massachusetts. The Adviser acknowledges that the obligations of or arising
out of this Agreement are not binding upon any of the Trust's trustees,
officers, employees, agents or shareholders individually, but are binding solely
upon the assets and property of the Trust. If this Agreement is executed by the
Trust on behalf of one or more series of the Trust, the Adviser further
acknowledges that the assets and liabilities of each series of the Trust are
separate and distinct and that the obligations of or arising out of this
Agreement are binding solely upon the assets or property of the series on whose
behalf the Trust has executed this Agreement.
ARTICLE 10. DEFINITIONS. The terms "specifically approved at least
annually," "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person," and "interested person," when used in this
Agreement, shall have the respective meanings specified, and shall be construed
in a manner consistent with, the Investment Company Act of 1940 and the Rules
and Regulations promulgated thereunder, subject, however, to such exemptions as
may be granted by the Securities and Exchange Commission under said Act.
ARTICLE 11. RECORD KEEPING. The Adviser will maintain records in a form
acceptable to the Trust and in compliance with the rules and regulations of the
Securities and Exchange Commission, including but not limited to records
required to be maintained by Section 31(a) of the Investment Company Act of 1940
and the rules thereunder, which at all times will be the property of the Trust
and will be available for inspection and use by the Trust.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, and their respective seals to be hereto affixed, all
as of the day and year first written above. The undersigned Trustee of the Trust
has executed this Agreement not individually, but as Trustee under the
Declaration.
MFS SERIES TRUST III, on behalf of
MFS HIGH YIELD OPPORTUNITIES
FUND, one of its series
By:
-------------------------
James R. Bordewick, Jr.
Assistant Secretary
MASSACHUSETTS FINANCIAL SERVICES COMPANY
By:
-------------------------
Jeffrey L. Shames
Chairman
<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, 1998
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, 1998
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 0.1125% of the average daily net assets of the Fund.
<PAGE>
Exhibit 99.10
May 13, 1998
MFS Series Trust III
500 Boylston Street
Boston, MA 02116
Gentlemen:
I am a Senior Vice President and Associate General Counsel of
Massachusetts Financial Services Company, which serves as investment adviser to
MFS High Income Fund, MFS Municipal High Income Fund and MFS High Yield
Opportunities Fund, each a portfolio of MFS Series Trust III (the "Trust"), and
the Assistant Secretary of the Trust. I am admitted to practice law in The
Commonwealth of Massachusetts. The Trust was created under a written Declaration
of Trust dated December 15, 1977, executed and delivered in Boston,
Massachusetts, as amended and restated February 17, 1995 (the "Declaration of
Trust"). The beneficial interest thereunder is represented by transferable
shares without par value. The Trustees have the powers set forth in the
Declaration of Trust, subject to the terms, provisions and conditions therein
provided.
I am of the opinion that the legal requirements have been complied with
in the creation of the Trust, and that said Declaration of Trust is legal and
valid.
Under Article III, Section 3.4 and Article VI, Section 6.4 of the
Declaration of Trust, the Trustees are empowered, in their discretion, from time
to time to issue shares of the Trust for such amount and type of consideration,
at such time or times and on such terms as the Trustees may deem best. Under
Article VI, Section 6.1, it is provided that the number of shares of beneficial
interest authorized to be issued under the Declaration of Trust is unlimited.
By vote adopted on January 18, 1995, the Trustees of the Trust
determined to sell to the public the authorized but unissued shares of
beneficial interest of the Trust for cash at a price which will net the Trust
(before taxes) not less than the net asset value thereof, as defined in the
Trust's By-Laws, determined next after the sale is made or at some later time
after such sale.
The Trust has registered an indefinite number of shares of beneficial
interest under the Securities Act of 1933 (the "Shares").
I am of the opinion that all necessary Trust action precedent to the
issue of all the authorized but unissued shares of the Trust has been duly
taken, and that all the Shares were legally and validly issued, and when sold,
will be fully paid and non-assessable, assuming the receipt by the Fund of the
cash consideration therefor in accordance with the terms of the January 18, 1995
vote of the Trustees described above, except as described below. I express no
opinion as to compliance with the Securities Act of 1933, the Investment Company
Act of 1940, or applicable state "Blue Sky" or securities laws in connection
with the sale of the Shares.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Declaration of Trust provides for indemnification out of
the Trust property for all loss and expense of any shareholder held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
I consent to your filing this opinion with the Securities and Exchange
Commission.
Very truly yours,
JAMES R. BORDEWICK, JR.
James R. Bordewick, Jr.
JRB/bjn
