<PAGE>
As filed with the Securities and Exchange Commission on May 28, 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. 26
AND REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 28
MFS SERIES TRUST III
(Exact name of Registrant as Specified in Charter)
500 Boylston Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (617) 954-5000
Stephen E. Cavan, Massachusetts Financial Services Company
500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
|_| immediately upon filing pursuant to paragraph (b)
|X| on May 31, 1998 pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|_| on [date] pursuant to paragraph (a)(i)
|_| 75 days after filing pursuant to paragraph (a)(ii)
|_| on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
================================================================================
<PAGE>
MFS SERIES TRUST III
MFS HIGH INCOME FUND
MFS MUNICIPAL HIGH INCOME FUND
CROSS REFERENCE SHEET
(Pursuant to Rule 404 showing location in Prospectus and/or Statement of
Additional Information of the responses to the Items in Parts A and B of Form
N-1A)
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -----------------------
1 (a), (b) Front Cover Page *
2 (a) Expense Summary *
(b), (c) * *
3 (a) Condensed Financial *
Information
(b) * *
(c) Information Concerning *
Shares of the Fund -
Performance Information
(d) Condensed Financial *
Information
4 (a) 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
<PAGE>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -----------------------
(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) * *
<PAGE>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -----------------------
(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
<PAGE>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -----------------------
(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 * *
<PAGE>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -----------------------
10 (a), (b) * Front Cover Page
11 * Front Cover Page
12 * Definitions
13 (a), (b), (c) * Investment Objective,
Policies and Restrictions
(d) * *
14 (a), (b) * Management of the Fund -
Trustees and Officers
(c) * Management of the Fund -
Trustees and Officers;
Trustee Compensation
Table
15 (a) * *
(b), (c) * Management of the Fund -
Trustees and Officers
16 (a) Management of the Fund - Management of the 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
<PAGE>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -----------------------
(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
Shares, Voting Rights and Liabilities
Liabilities
(b) * *
19 (a) Information Concerning Shares Shareholder Services
of the Fund - Purchases;
Shareholder Services
(b) Information Concerning Shares Management of the Fund -
of the Fund - Net Asset Distributor;
Value; Information Concerning Determination of Net
Shares of the Fund - Asset Value and
Purchases Performance - Net Asset
Value
(c) * *
20 * Tax Status
<PAGE>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -----------------------
21 (a), (b) * Management of the Fund -
Distributor; Distribution
Plan
(c) * *
22 (a) * *
(b) * Determination of Net Asset
Value and Performance;
Performance Information
23 * Independent Auditors and
Financial Statements
- -----------------------------
* Not Applicable
** Contained in Annual Report
<PAGE>
MFS HIGH INCOME FUND
SUPPLEMENT TO THE JUNE 1, 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 JUNE 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............................................. 0.45%
Rule 12b-1 Fees............................................. None
Other Expenses(1)........................................... 0.26%
Total Operating Expenses.................................... 0.71%
- -----------------
(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."
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......................... 23
5 years......................... 40
10 years........................ 88
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
The "Example" set forth above should not be considered a representation of past
or future expenses of the Fund; actual expenses may be greater or less than
those shown.
<PAGE>
CONDENSED FINANCIAL INFORMATION
The following information has been audited and should be read in conjunction
with the financial statements included in the Fund's Annual Report to
Shareholders which are incorporated by reference into the SAI in reliance upon
the report of the Fund's independent auditors, given upon their authority as
experts in accounting and auditing. The Fund's independent auditors are Deloitte
& Touche LLP.
FINANCIAL HIGHLIGHTS - CLASS I SHARES
1998 1997***
---- ----
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 5.35 $ 5.34
------- ------
Income from investment operations# -
Net investment income $ 0.49 $ 0.04
Net realized and unrealized gain
on investments and foreign currency transactions 0.25 0.01
------ ------
Total from investment operations $ 0.74 $ 0.05
------- ------
Less distributions declared to shareholders -
From net investment income $ (0.48) $(0.04)
-------- ------
Total distributions declared to shareholders $ (0.48) $(0.04)
-------- ------
Net asset value - end of period $ 5.61 $ 5.35
------- ------
Total return 14.77% 0.91%+ +
Ratios (to average net assets)/ Supplemental data:
Expenses## 0.71% 0.59%+
Net investment income 8.86% 8.70%+
Portfolio turnover 137% 87%
Net assets, end of period (000,000 omitted) $ 4 $ 3
- --------------------------
+ Annualized
++ Not Annualized
*** For the period from the inception of Class I shares, January 2, 1997 to
January 31, 1997.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD;
(iii) any retirement plan, endowment or foundation which (a) purchases shares
directly through MFD (rather than through a third party broker or dealer
or other financial intermediary); (b) has, at the time of purchase of
Class I shares, aggregate assets of at least $100 million; and (c) invests
at least $10 million in Class I shares of the Fund either alone or in
combination with investments in Class I shares of other MFS funds
distributed by MFD (additional investments may be made in any amount);
provided that MFD may accept purchases from smaller plans, endowments or
foundations or in smaller amounts if it believes, in its sole discretion,
that such entity's aggregate assets will equal or exceed $100 million, or
that such entity will make additional investments which will cause its
total investment to equal or exceed $10 million, within a reasonable
period of time; and
(iv) bank trust departments 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.
THE DATE OF THIS SUPPLEMENT IS JUNE 1, 1998
<PAGE>
MFS(R) HIGH INCOME FUND
JUNE 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 Income Fund (the "Fund") is to seek high
current income by investing primarily in a professionally managed diversified
portfolio of fixed income securities, some of which may involve equity features
(see "Investment Objective and Policies"). The Fund is a diversified series of
MFS Series Trust III (the "Trust"), an open-end investment company. The minimum
initial investment is generally $1,000 per account (see "Information Concerning
Shares of the Fund -- Purchases").
THE FUND MAY INVEST UP TO 100% OF ITS NET ASSETS IN LOWER-RATED BONDS, COMMONLY
KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING DEFAULT RISKS, THAN
THOSE FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER
THESE RISKS BEFORE INVESTING (SEE "ADDITIONAL RISK FACTORS -- LOWER- RATED FIXED
INCOME SECURITIES").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Trust and
the Fund that a prospective investor ought to know before investing. The Trust,
on behalf of the Fund, has filed with the Securities and Exchange Commission a
Statement of Additional Information dated June 1, 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 46 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.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
TABLE OF CONTENTS
Page
1. Expense Summary ..................................... 3
2. Condensed Financial Information ..................... 4
3. The Fund ........................................... 9
4. Investment Objective and Policies ................... 9
5. Certain Securities and Investment Techniques ........ 11
6. Additional Risk Factors ............................. 19
7. Management of the Fund ............................. 24
8. Information Concerning Shares of the Fund .......... 26
Purchases ....................................... 26
Exchanges ....................................... 33
Redemptions and Repurchases ..................... 34
Distribution Plan ............................... 37
Distributions ................................... 40
Tax Status ...................................... 40
Net Asset Value ................................. 41
Description of Shares, Voting Rights and
Liabilities ............................................ 41
Performance Information ......................... 42
9. Shareholder Services ................................ 43
Appendix A .......................................... A-1
Appendix B .......................................... B-1
Appendix C .......................................... C-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 ..................... 0.45% 0.45% 0.45%
Rule 12b-1 Fees ..................... 0.30%(2) 1.00%(3) 1.00%(3)
Other Expenses(4) ................... 0.26% 0.26% 0.26%
---- ---- ----
Total Operating Expenses ............ 1.01% 1.71% 1.71%
- ------------
1 Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a contingent deferred
sales charge (a "CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such
purchases. See "Information Concerning Shares of the Fund -- Purchases"
below.
2 The Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to the Class A
shares. The Fund is currently paying distribution fees in the amount of
0.05%. Payment of the remaining portion of the 0.10% per annum distribution
fee, equal to 0.05% per annum, will commence on such date as the Trustees of
the Trust may determine. Assets attributable to Class A shares sold prior to
March 1, 1991 are subject to a reduced service fee of 0.15% per annum.
Distribution expenses paid under the Plan, together with the initial sales
charge, may cause long-term shareholders to pay more than the maximum sales
charge that would have been permissible if imposed entirely as an initial
sales charge. See "Information Concerning Shares of the Fund -- Distribution
Plan" below.
3 The Fund's Distribution Plan provides that it will pay distribution/service
fees aggregating up to (but not necessarily all of) 1.00% per annum of the
average daily net assets attributable to the Class B shares and Class C
shares, respectively. Distribution expenses paid under the Plan, with
respect to Class B or Class C shares, together with any CDSC payable upon
redemption of Class B and Class C shares, may cause long-term shareholders
to pay more than the maximum sales charge that would have been permissible
if imposed entirely as an initial sales charge. See "Information Concerning
Shares of the Fund -- Distribution Plan" below.
4 The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
<PAGE>
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B CLASS C
- ------ ------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
(1) (1)
1 year ........................................... $ 57 $ 57 $ 17 $ 27 $ 17
3 years .......................................... 78 84 54 54 54
5 years .......................................... 101 113 93 93 93
10 years .......................................... 165 183(2) 183 202 202
</TABLE>
- ------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
The purpose of the expense table is to assist investors in understanding the
various costs and expenses that a shareholder of the Fund will bear directly or
indirectly. More complete descriptions of the following expenses of the Fund are
set forth in the following sections of the Prospectus: (i) varying sales charges
on share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii)
management fees -- "Investment Adviser"; and (iv) Rule 12b-1 (i.e. distribution
plan) fees -- "Distribution Plan".
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
2. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with financial statements
included in the Fund's Annual Report to shareholders which are incorporated by
reference into the SAI in reliance upon the report of the Fund's independent
auditors, given upon their authority as experts in accounting and auditing. The
Fund's independent auditors are Deloitte & Touche LLP.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C> <C>
Net asset value -- beginning of period .... $ 5.35 $ 5.24 $ 4.84 $ 5.50 $ 5.11
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income ................... $ 0.47 $ 0.47 $ 0.45 $ 0.44 $ 0.40
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions ........................... 0.27 0.10 0.39 (0.66) 0.48
------ ------ ------ ------ ------
Total from investment operations .... $ 0.74 $ 0.57 $ 0.84 $(0.22) $ 0.88
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income .............. $(0.47) $(0.46) $(0.44) $(0.43) $(0.42)
From net realized gain on investments and
foreign currency transactions .......... -- -- -- (0.01) (0.07)
------ ------ ------ ------ ------
Total distributions declared to
shareholders ....................... $(0.47) $(0.46) $(0.44) $(0.44) $(0.49)
------ ------ ------ ------ ------
Net asset value -- end of period .......... $ 5.62 $ 5.35 $ 5.24 $ 4.84 $ 5.50
====== ====== ====== ====== ======
Total return(+) ........................... 14.63% 11.52% 17.97% (3.95)% 18.13%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## .............................. 1.01% 1.02% 1.00% 0.99% 1.00%
Net investment income ................... 8.56% 8.92% 8.83% 8.65% 8.22%
PORTFOLIO TURNOVER ........................ 137% 87% 59% 59% 68%
NET ASSETS AT END OF PERIOD (000,000
OMITTED) $766 $672 $620 $524 $645
- ------------
# Per share data for the periods subsequent to January 31, 1994, are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------------------------------------------------------
1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period .... $ 4.89 $ 3.71 $ 4.85 $ 6.04 $ 6.17
------ ------ ------ ------ ------
Income from investment operations --
Net investment income ................... $ 0.51 $ 0.56 $ 0.65 $ 0.69 $ 0.76
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions ........................... 0.24 1.21 (1.08) (1.13) (0.09)
------ ------ ------ ------ ------
Total from investment operations .... $ 0.75 $ 1.77 $(0.43) $(0.44) $ 0.67
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income .............. $(0.51) $(0.56) $(0.71) $(0.75) $(0.75)
From net realized gain on investments and
foreign currency transactions .......... -- -- -- -- (0.05)
From paid-in capital### ................. (0.02) (0.03) -- -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders ....................... $(0.53) $(0.59) $(0.71) $(0.75) $(0.80)
------ ------ ------ ------ ------
Net asset value -- end of period .......... $ 5.11 $ 4.89 $ 3.71 $ 4.85 $ 6.04
====== ====== ====== ====== ======
Total return(+) ........................... 16.36% 49.64% (10.99)% (9.18)% 10.68%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ................................ 1.03% 1.10% 1.05% 0.87% 0.87%
Net investment income ................... 10.21% 11.59% 14.97% 12.17% 12.44%
PORTFOLIO TURNOVER ........................ 75% 28% 24% 25% 34%
NET ASSETS AT END OF PERIOD (000,000
OMITTED) ................................. $585 $556 $380 $574 $880
- ------------
### For the year ended January 1, 1989, the per share distribution from paid-in capital was $0.0004.
(+) Total returns for Class A shares do not include the applicable sales charge (except for reinvested dividends prior to
March 1, 1991). If the charge had been included, the results would have been lower.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<CAPTION>
YEAR ENDED JANUARY 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994**
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ... $ 5.35 $ 5.24 $ 4.84 $ 5.50 $ 5.27
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income .................. $ 0.43 $ 0.43 $ 0.41 $ 0.39 $ 0.15
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions .......................... 0.27 0.10 0.39 (0.65) 0.22
------ ------ ------ ------ ------
Total from investment operations ... $ 0.70 $ 0.53 $ 0.80 $(0.26) $ 0.37
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ............. $(0.43) $(0.42) $(0.40) $(0.39) $(0.13)
In excess of net investment income and
foreign currency transactions ......... -- -- -- (0.01) (0.01)
------ ------ ------ ------ ------
Total distributions declared to
shareholders ...................... $(0.43) $(0.42) $(0.40) $(0.40) $(0.14)
------ ------ ------ ------ ------
Net asset value -- end of period ......... $ 5.62 $ 5.35 $ 5.24 $ 4.84 $ 5.50
====== ====== ====== ====== ======
Total return ............................. 13.83% 10.66% 16.98% (4.77)% 20.29%+
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ............................. 1.70% 1.79% 1.85% 1.85% 1.79%+
Net investment income .................. 7.82% 8.13% 7.99% 7.79% 6.94%+
PORTFOLIO TURNOVER ....................... 137% 87% 59% 59% 68%
NET ASSETS AT END OF PERIOD
(000,000 OMITTED) ....................... $385 $301 $283 $286 $371
- ------------
+ Annualized.
** For the period from the inception of Class B, September 27, 1993, through January 31, 1994.
# Per share data for the periods subsequent to January 31, 1994, are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<CAPTION>
YEAR ENDED JANUARY 31,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994***
- ------------------------------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ... $ 5.36 $ 5.25 $ 4.85 $ 5.50 $ 5.41
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income .................. $ 0.43 $ 0.43 $ 0.41 $ 0.41 $ --
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions .......................... 0.28 0.11 0.39 (0.66) 0.09
------ ------ ------ ------ ------
Total from investment operations ... $ 0.71 $ 0.54 $ 0.80 $(0.25) $ 0.09
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ............. $(0.43) $(0.43) $(0.40) $(0.39) $ --
In excess of net investment income and
foreign currency transactions ......... -- -- -- (0.01) --
------ ------ ------ ------ ------
Total distributions declared to
shareholders ...................... $(0.43) $(0.43) $(0.40) $(0.40) $ --
------ ------ ------ ------ ------
Net asset value -- end of period ......... $ 5.64 $ 5.36 $ 5.25 $ 4.85 $ 5.50
====== ====== ====== ====== ======
Total return ............................. 13.81% 10.71% 17.03% (4.51)% 20.94%+
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ............................. 1.70% 1.72% 1.77% 1.79% 1.36%+
Net investment income .................. 7.78% 8.16% 8.02% 8.01% 5.92%+
PORTFOLIO TURNOVER ....................... 137% 87% 59% 59% 68%
NET ASSETS AT END OF PERIOD
(000,000 OMITTED) ....................... $60 $28 $16 $3 $1
- ------------
+ Annualized.
*** For the period from the inception of Class C, January 3, 1994, through January 31, 1994.
# Per share data for the periods subsequent to January 31, 1994, are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
</TABLE>
<PAGE>
3. THE FUND
The Fund is a diversified series of the Trust, an open-end management investment
company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts in 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.
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The investment objective of the Fund is to seek high
current income by investing primarily in a professionally managed diversified
portfolio of fixed income securities, some of which may involve equity features.
Capital growth, if any, is a consideration incidental to the objective of the
Fund of high current income. Any investment involves risk and there can be no
assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES -- Fixed income securities offering the high current income
sought by the Fund normally include those fixed income securities which offer a
current yield above that generally available on debt securities in the three
highest rating categories of the recognized rating agencies (commonly known as
"junk bonds" if rated below the four highest categories of recognized rating
agencies). The Fund may invest up to 100% of its net assets in such securities.
For a description of these rating categories, see Appendix B to this Prospectus,
and Appendix C for a chart showing the Fund's holdings of fixed income
securities broken down by rating category for its most recent fiscal year end
(see "Additional Risk Factors -- Lower-Rated Fixed Income Securities" below.)
However, since available yields and yield differentials vary over time, no
specific level of income or yield differential can ever be assured. The
dividends paid by the Fund will increase or decrease in relation to the income
received by the Fund from its investments, which would in any case be reduced by
the expenses of the Fund before such income is distributed to its shareholders.
Fixed income securities include preferred and preference stocks and all types of
debt obligations of both domestic and foreign issuers, such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates
(including interests in trusts or other entities representing such obligations),
conditional sales contracts, commercial paper and obligations issued or
guaranteed by the U.S. Government, any foreign government or any of their
respective political subdivisions, agencies or instrumentalities (including
obligations, such as repurchase agreements, secured by such instruments).
Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest and may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participations based on revenues, sales or profits; or the
purchase of common stock in a unit transaction (where corporate debt securities
and common stock are offered as a unit). Under normal market conditions, not
more than 25% of the value of the total assets of the Fund will be invested in
equity securities, including common stocks, warrants and rights.
Consistent with its investment objective and policies described above, the Fund
may also invest up to 50% (and generally expects to invest between 0% and 20%)
of its total assets in foreign securities which are not traded on a U.S.
Exchange. The Fund has authority to invest up to 25% of its total assets in
securities issued or guaranteed by foreign governments or their agencies or
instrumentalities. See "Additional Risk Factors -- Foreign Securities" below.
However, the Fund has made commitments to regulatory authorities to limit its
investments in securities issued by any single foreign government to 5% of its
total assets and to continue to maintain its status as a diversified company
under the 1940 Act.
The Fund may invest up to 40% of the value of its total assets in each of the
electric utility and telephone industries, but will not invest more than 25% in
either of those industries unless yields available for four consecutive weeks in
the four highest rating categories on new issue bonds in such industry (issue
size of $50 million or more) have averaged in excess of 105% of yields of new
issue long-term industrial bonds similarly rated (issue size of $50 million or
more) and, in the opinion of the Adviser, the relative return available from the
electric utility or telephone industry and the relative risk, marketability,
quality and availability of securities of such industry justifies such an
investment.
When and if available, fixed income securities may be purchased at a discount
from face value. However, the Fund does not intend to hold such securities to
maturity for the purpose of achieving potential capital gains, unless current
yields on these securities remain attractive. From time to time the Fund may
purchase securities not paying interest at the time acquired if, in the opinion
of the Adviser, such securities have the potential for future income or capital
appreciation.
5. 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 additiion, swaps can be highly
volatile and may have a considerable impact on the Fund's performance. Swap
agreements are subject to risks related to the counterparty's ability to
perform, and may decline in value if the counterparty's creditworthiness
deteriorates. The Fund may also suffer losses if it is unable to terminate
outstanding swap agreements or reduce its exposure through offsetting
transactions.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the SAI on the risks involved in these activities.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize risk.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities. Such loans will usually be made to member firms
(and subsidiaries thereof) of the New York Stock Exchange (the "Exchange") and
to member banks of the Federal Reserve System, and would be required to be
secured continuously by collateral in cash, U.S. Treasury securities or an
irrevocable letter of credit maintained on a current basis at an amount at least
equal to the market value of the securities loaned. If the Adviser determines to
make securities loans, it is intended that the value of the securities loaned
would not exceed 30% of the value of the total assets of the Fund.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion of its assets
in loans. By purchasing a loan, the Fund acquires some or all of the interest of
a bank or other lending institution in a loan to a corporate borrower. Many such
loans are secured, and most impose restrictive covenants which must be met by
the borrower. These loans are made generally to finance internal growth,
mergers, acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans may be in default at the time of purchase. The Fund may
also purchase trade or other claims against companies, which generally represent
money owed by the company to a supplier of goods or services. These claims may
also be purchased at a time when the company is in default. Certain of the loans
acquired by the Fund may involve revolving credit facilities or other standby
financing commitments which obligate the Fund to pay additional cash on a
certain date or on demand.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loans and other
direct investments may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, the Fund may be unable to sell such investments
at an opportune time or may have to resell them at less than fair market value.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities for delivery in the future (generally
within 30 days) and simultaneously contracts to repurchase substantially similar
(same type, coupon and maturity) securities on a specified future date. The Fund
will only enter into covered rolls. A "covered roll" is a specific type of
dollar roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction.
"WHEN-ISSUED" SECURITIES: The Fund may purchase some securities on a "when-
issued" or on a "forward delivery" basis, which means that the securities will
be delivered to the Fund at a future date usually beyond customary settlement
time. The commitment to purchase a security for which payment will be made on a
future date may be deemed a separate security. The Fund does not pay for the
securities until received, and does not start earning interest on the securities
until the contractual settlement date. 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 account will be marked to market on a
daily basis. The Fund may also be required to, or may elect to, receive delivery
of foreign currencies underlying Forward Contracts, which may involve certain
risks. The Fund has established procedures consistent with statements of the SEC
and its staff regarding the use of Forward Contracts by registered investment
companies, which require the 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.
6. ADDITIONAL RISK FACTORS
The following discussion of additional risk factors supplements the risk factors
described above. Additional information concerning risk factors can be found
under the caption "Investment Objective, Policies and Restrictions" in the SAI.
FIXED INCOME SECURITIES: Because shares of the Fund represent an investment in
securities with fluctuating market prices, shareholders should understand that
the value of shares of the Fund will vary as the aggregate value of the
portfolio securities of the Fund increases or decreases. However, changes in the
value of securities subsequent to their acquisition will not affect cash income
or yield to maturity to the Fund.
The net asset value of the shares of an open-end investment company such as the
Fund, which invests primarily in fixed income securities, changes as the general
levels of interest rates fluctuate. When interest rates decline, the value of a
portfolio invested at higher yields can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio invested at lower yields can be
expected to decline.
The Fund seeks to maximize the return on its portfolio by taking advantage of
market developments, yield disparities and variations in the creditworthiness of
issuers. This may result in increases or decreases in the current income of the
Fund available for distribution to its shareholders and in the holding by the
Fund of debt securities which sell at moderate to substantial premiums or
discounts from face value. Moreover, if the Fund's expectations of changes in
interest rates or its evaluation of the normal yield relationship between two
securities proves to be incorrect, the income, net asset value and potential
capital gain of the Fund may be decreased or its potential capital loss may be
increased.
LOWER-RATED FIXED INCOME SECURITIES: Securities offering the high current income
sought by the Fund are ordinarily in the lower rating categories of recognized
rating agencies (that is, ratings of Baa or lower by Moody's Investors Service,
Inc. ("Moody's") or BBB or lower by Standard & Poor's Ratings Services ("S&P"),
Fitch 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.
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. For the fiscal year ended January 31, 1998,
the Fund had a portfolio turnover rate in excess of 100%. Transaction costs
incurred by the Fund and the realized capital gains and losses of the Fund may
be greater than that of a fund with a lesser portfolio turnover rate.
The 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.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement, dated May 20, 1987, as amended (the "Advisory Agreement").
Under the Advisory Agreement, the Adviser provides the Fund with overall
investment advisory services. Robert J. Manning, a Senior Vice President of the
Adviser, has been the Fund's portfolio manager since June, 1994. Mr. Manning has
been employed as a portfolio manager by the Adviser since 1984. Subject to such
policies as the Trustees may determine, the Adviser makes investment decisions
for the Fund. For these services and facilities, MFS receives a management fee,
computed and paid monthly, on the basis of a formula based upon a percentage of
the average daily net assets of the Fund plus a percentage of its gross income
(i.e., income other than gains from the sale of securities or gains received
from futures contracts) in each case on an annualized basis for the then-current
fiscal year of the Fund. The applicable percentages are reduced as assets and
income reach the following levels:
ANNUAL RATE OF MANAGEMENT FEE ANNUAL RATE OF MANAGEMENT FEE
BASED ON AVERAGE DAILY NET ASSETS BASED ON GROSS INCOME
--------------------------------- -----------------------------
0.220% of the first $200 million 3.00% of the first $22 million
0.187% of average daily net assets in 2.55% of gross income in excess of
excess of $200 million $22 million
For the Fund's fiscal year ended January 31, 1998, MFS received management fees
under the Advisory Agreement of $4,780,801 (equivalent to 0.45% of the Fund's
average daily net assets).
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R) Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS Variable
Insurance Trust, MFS Institutional Trust, MFS/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 $84 billion on behalf of approximately 3.1 million investor
accounts as of April 30, 1998. As of such date, the MFS organization managed
approximately $21.2 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.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, B and C shares of the Fund may be purchased at the public offering
price through any dealer. As used in the Prospectus and any appendices thereto,
the term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement or other similar agreement
with MFD. Dealers may also charge their customers fees relating to investments
in the Fund.
This Prospectus offers Class A, B and C shares to the general public which bear
sales charges and distribution fees in different forms and amounts, as described
below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
SALES CHARGE* AS
PERCENTAGE OF:
---------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
- ------------------ -------------- -------- -----------------
Less than $100,000 .............. 4.75% 4.99% 4.00%
$100,000 but less than $250,000 . 4.00 4.17 3.20
$250,000 but less than $500,000 . 2.95 3.04 2.25
$500,000 but less than $1,000,000 2.20 2.25 1.70
$1,000,000 or more .............. None** None** See Below**
- ----------
* Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above.
** A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge). In
the following five circumstances, Class A shares are offered at net asset value
without an initial sales charge but subject to a CDSC, equal to 1% of the lesser
of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(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 lease 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
individuals, 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 0.30%,
1.00% and 1.00% per annum, respectively. The Fund is currently paying
distribution fees of 0.05% under the Distribution Plan for Class A shares.
Payment of the remaining portion of the 0.10% per annum distribution fee, equal
to 0.05% per annum for Class A shares, will commence on such date as the
Trustees of the Trust may determine. Assets attributable to Class A shares sold
prior to March 1, 1991 are subject to a service fee of 0.15% per annum.
DISTRIBUTIONS
The Fund intends to declare daily and pay to its shareholders substantially all
of its net investment income as dividends on a monthly basis. Dividends
generally are distributed on the first business day of the following month. In
addition, the Fund will make one or more distributions during the calendar year
to its shareholders from any long-term capital gains, and may also make one or
more distributions during the calendar year to its shareholders from short-term
capital gains. Shareholders may elect to receive dividends and capital gain
distributions in either cash or additional shares of the same class with respect
to which a distribution is made. All distributions not paid in cash will be
reinvested in shares of the class in which the distribution is paid. (see "Tax
Status" and "Shareholder Services -- Distribution Options" below). Distributions
paid by the Fund with respect to Class A shares will generally be greater than
those paid with respect to Class B and Class C shares because expenses
attributable to Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). Because the Fund intends to distribute all of
its net investment income and net realized capital gains to its shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Fund will be required to pay any federal income or excise taxes,
although the Fund's foreign-source income may be subject to foreign withholding
taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund whether 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, if any, taxable
as long-term capital gain (as well as the rate category or categories under
which any such gain is taxable), the portion, if any, representing a return of
capital (which is generally free of current taxes, but which results in a basis
reduction), and the amount, if any, of federal income tax withheld.
Fund distributions of net capital gains or net short-term capital gains will
reduce the Fund's net asset value per share. Shareholders who buy shares shortly
before the Fund makes such a distribution may thus pay the full price for the
shares and then effectively receive a portion of the purchase price back as a
taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% (or any
lower rate permitted under an applicable treaty) on taxable dividends and other
payments that are subject to such withholding and that are made to persons who
are neither citizens nor residents of the U.S. The Fund is also required in
certain circumstances to apply backup withholding at the rate of 31% on taxable
dividends and redemption proceeds paid to any shareholder (including a
shareholder who is neither a citizen nor a resident of the U.S.) who does not
furnish to the Fund certain information and certifications or who is otherwise
subject to backup withholding. Backup withholding will not, however, be applied
to payments that have been subject to 30% withholding. Prospective investors
should read the Fund's Account Application for additional information regarding
backup withholding of federal income tax and should consult their own tax
advisers as to the tax consequences to them of an investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the Fund's
assets attributable to the class and dividing the difference by the number of
shares of the class outstanding. Assets in the Fund's portfolio are valued on
the basis of valuations furnished by a pricing service or at their fair value,
as described in the SAI. The net asset value of each class of shares is
effective for orders received in "good order" by the dealer prior to its
calculation and received by MFD, prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of two series of the Trust, has three classes of shares which it
offers to the general public, entitled Class A, Class B and Class C Shares of
Beneficial Interest (without par value). The Fund also has a class of shares
which it offers exclusively to institutional investors, entitled Class I shares.
The Trust has reserved the right to create and issue additional classes and
series of shares, in which case each class of shares of a series would
participate equally in the earnings, dividends and assets attributable to that
class of shares of that particular series. Shareholders are entitled to one vote
for each share held and shares of each series would be entitled to vote
separately to approve investment advisory agreements or changes in investment
restrictions, but shares of all series would vote together in the election of
Trustees and selection of accountants. Additionally, each class of shares of a
series will vote separately on any material increases in the fees under the
Distribution Plan or on any other matter that affects solely its class of
shares, but will otherwise vote together with all other classes of shares of the
series on all other matters. The Trust does not intend to hold annual
shareholder meetings. The Declaration of Trust provides that a Trustee may be
removed from office in certain instances (see "Description of Shares, Voting
Rights and Liabilities" in the SAI).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to any liabilities of that class.
Shares have no pre-emptive or conversion rights (except as set forth above in
"Purchases -- Conversion of Class B Shares"). Shares are fully paid and
non-assessable. Should the Fund be liquidated, the shareholders of each class
would be entitled to share pro rata in its net assets attributable to that class
available for distribution to shareholders. Shares will remain on deposit with
the Shareholder Servicing Agent and certificates will not be issued except in
connection with pledges and assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance (e.g., fidelity bonding and errors and omissions insurance) existed
and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote fund
rankings in the relevant fund category from various sources, such as the Lipper
Analytical Securities Corporation and Wiesenberger Investment Companies Service.
Yield quotations will be based on the annualized net investment income per share
allocated to each class of the Fund over a 30-day period stated as a percent of
the maximum public offering price of that class on the last day of that period.
Yield calculations for Class B and Class C shares assume no CDSC is paid. The
current distribution rate for each class is generally based upon the total
amount of dividends per share paid by the Fund to shareholders of that class
during the past twelve months and is computed by dividing the amount of such
dividends by the maximum public offering price of that class at the end of such
period. Current distribution rate calculations for Class B shares and Class C
shares assume no CDSC is paid. The current distribution rate differs from the
yield calculation because it may include distributions to shareholders from
sources other than dividends and interest, such as premium income from option
writing, short-term capital gains, and return of invested capital, and is
calculated over a different period of time. Total rate of return quotations will
reflect the average annual percentage change over stated periods in the value of
an investment in each class of shares of the Fund made at the maximum public
offering price of shares of that class with all distributions reinvested and
which will give effect to the imposition of any applicable CDSC assessed upon
redemptions of the Fund's Class B and Class C shares. Such total rate of return
quotations may be accompanied by quotations which do not reflect the reduction
in value of the initial investment due to the sales charge or the deduction of a
CDSC, and which will thus be higher. The Fund offers multiple classes of shares
which were initially offered for sale to, and purchased by, the public on
different dates (the class "inception date"). The calculation of total rate of
return for a class of shares which has a later class inception date than another
class of shares of the Fund is based both on (i) the performance of the Fund's
newer class from its inception date and (ii) the performance of the Fund's
oldest class from its inception date up to the class inception date of the newer
class. See the SAI for further information on the calculation of total rate of
return for share classes with different class inception dates.
All performance quotations of the Fund are based on historical performance and
are not intended to indicate future performance. Yield reflects only net
portfolio income as of a stated time and current distribution rate reflects only
the rate of distributions paid by the Fund over a stated period of time, while
total rate of return reflects all components of investment return over a stated
period of time. The quotations of the Fund may from time to time be used in
advertisements, shareholder reports or other communications to shareholders. For
a discussion of the manner in which the Fund will calculate its yield, current
distribution rate and total rate of return, see the SAI. For further information
about the Fund's performance for the fiscal year ended January 31, 1998, please
see the Fund's Annual Report. A copy of the Annual Report may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number). In addition to information provided in shareholder
reports, the Fund may, in its discretion, from time to time, make a list of all
or a portion of its holdings available to investors upon request.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund, should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS: Each shareholder will receive confirmation
statements showing the transaction activity in his account. At the end of each
calendar year, each shareholder will receive information regarding the tax
status of all reportable dividends and distributions for that year (see "Tax
Status").
DISTRIBUTION OPTIONS: The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified.
-- Dividends in cash; capital gain distributions (except as provided below)
reinvested in additional shares.
-- Dividends and capital gain distributions in cash.
With respect to the second option, the Fund may from time to time make
distributions from short-term capital gains on a monthly basis, and to the
extent such gains are distributed monthly, they shall be paid in cash; any
remaining short-term capital gains not so distributed shall be reinvested in
additional shares. Reinvestments (net of any tax withholding) will be made in
additional full and fractional shares of the same class of shares at the net
asset value in effect at the close of business on the record date. Dividends and
capital gains distributions in amounts less than $10 will automatically be
reinvested in additional shares of the Fund. If a shareholder has elected to
receive dividends and/or capital gain distributions in cash, and the postal or
other delivery service is unable to deliver checks to the shareholder's address
of record, or the shareholder does not respond to mailings from the Shareholder
Servicing Agent with regard to uncashed distribution checks, such shareholder's
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares. Any request to change a
distribution option must be received by the Shareholder Servicing Agent by the
record date for a dividend or distribution in order to be effective for that
dividend or distribution. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS: For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $100,000 or more of Class A shares
of the Fund alone or in combination with Class B or Class C shares of the Fund
or any of the classes of other MFS Funds or MFS Fixed Fund (a bank collective
investment fund) within a 13-month period (or 36-month period for purchases of
$1 million or more), the shareholder may obtain such shares of the Fund at the
same reduced sales charge as though the total quantity were invested in one lump
sum, subject to escrow agreements and the appointment of an attorney for
redemptions from the escrow amount if the intended purchases are not completed,
by completing the Letter of Intent section of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of Class A, Class B and Class C
shares of that shareholder in the MFS Funds or MFS Fixed Fund, reaches a
discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of any other MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value (and without any applicable CDSC) in
shares of the same class of another MFS Fund, if shares of such Fund are
available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments
based upon the value of his account. Each payment under a Systematic Withdrawal
Plan (a "SWP") must be at least $100, except in certain limited circumstances.
The aggregate withdrawals of Class B and Class C shares in any year pursuant to
a SWP will not be subject to any CDSC and generally are limited to 10% of the
value of the account at the time of the establishment of the SWP. The CDSC will
not be waived in the case of SWP redemptions of Class A shares which are subject
to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more through a
shareholder's checking account 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 June 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>
APPENDIX C
PORTFOLIO COMPOSITION CHART
MFS HIGH INCOME FUND
FOR FISCAL YEAR ENDED JANUARY 31, 1998
The table below shows the percentages of the Fund's assets at January 31, 1998
invested in securities assigned to the various rating categories by S&P,
Moody's, Fitch and Duff & Phelps and in unrated securities determined by MFS to
be of comparable quality. The highest of the four rating services is used with
respect to each rating.
UNRATED
SECURITIES OF
COMPILED COMPARABLE
RATING RATINGS QUALITY TOTAL
- ------ ------- ------- -----
AAA/Aaa ............................ -- -- --
AA/Aa .............................. -- -- --
A/A ................................ -- -- --
BBB/Baa ............................ 1.01% 0.94% 1.95%
BB/Ba .............................. 14.51% -- 14.51%
B/B ................................ 65.25% 5.22% 70.47%
CCC/Caa ............................ 4.15% 2.45% 6.60%
CC/Ca .............................. -- -- --
C/C ................................ 0.03% -- 0.03%
Default ............................ -- -- --
----- ---- -----
TOTAL .............................. 84.95% 8.61% 93.56%
===== ==== =====
The chart does not necessarily indicate what the composition of the Fund's
portfolio will be in subsequent years. Rather, the Fund's investment objective,
policies and restrictions indicate the extent to which the Fund may purchase
securities in the various categories.
<PAGE>
Investment Adviser
Massachusetts Financial
Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
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
MHI-1-6/98/264M 18/218/318
<PAGE>
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
MFS(R) HIGH INCOME FUND STATEMENT OF
ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) June 1, 1998
- --------------------------------------------------------------------------------
Page
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 .......................................... 14
Administrator ............................................... 14
Custodian ................................................... 14
Shareholder Servicing Agent ................................. 14
Distributor ................................................. 15
4. Portfolio Transactions and Brokerage Commissions ............... 15
5. Shareholder Services ........................................... 16
Investment and Withdrawal Programs .......................... 16
Exchange Privilege .......................................... 18
Tax-Deferred Retirement Plans ............................... 19
6. Tax Status ..................................................... 19
7. Description of Shares, Voting Rights and Liabilities ........... 20
8. Determination of Net Asset Value and Performance ............... 21
9. Distribution Plan .............................................. 23
10. Independent Auditors and Financial Statements .................. 24
Appendix A -- Performance Information .......................... A-1
MFS HIGH INCOME FUND
A Series of MFS Series Trust III
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information as amended or supplemented from time
to time, (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus dated
June 1, 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 Income Fund, a series of
MFS Series Trust III (the "Trust"),
a Massachusetts business trust. The
Trust was known as "Massachusetts
Financial High Income Trust", until
its name was changed on August 20,
1993.
"MFS" or the "Adviser" -- Massachusetts Financial Services
Company, a Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc., a
Delaware corporation.
"Prospectus" -- The Prospectus of the Fund, dated
June 1, 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 by investing primarily in a professionally managed diversified
portfolio of fixed income securities, some of which may involve equity
features. Capital growth, if any, is a consideration incidental to the
objective of high current income. There can be no assurance that the Fund
will achieve its investment objective.
INVESTMENT POLICIES. The fixed income and other securities in which the Fund
may invest and the risks associated with such investments are described in the
Fund's Prospectus. The following policies are not fundamental and may be
changed without shareholder approval as may the Fund's investment objective.
RESTRICTED SECURITIES: The Fund may invest in restricted securities of
companies which the Adviser believes have significant growth potential. These
securities are subject to legal or contractual restrictions on resale.
Consequently, there is no public trading market for these securities and
market quotations are not readily available. As a result, the Fund might not
be able to sell these securities when the Adviser wishes to do so, or might
have to sell them at less than fair value. The Fund may not invest more than
15% of its net assets in restricted securities (as described in the Fund's
investment restrictions) (restricted securities the Board of Trustees has
determined are liquid are not included in this amount). See "Investment
Objective, Policies and Restrictions -- Investment Restrictions."
The Fund will not (a) invest more than 5% of its assets, taken at market
value, in warrants not acquired in a unit transaction or (b) invest more than
15% of its assets, taken at market value, in securities for which there are no
readily available market quotations.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and other
direct claims against a borrower. In purchasing loans, the Fund acquires some
or all of the interest of a bank or other lending institution in a loan to a
corporate borrower. Many such loans are secured, although some may be
unsecured. Such loans may be in default at the time of purchase. Loans that
are fully secured offer the Fund more protection than an unsecured loan in
the event of non-payment of scheduled interest or principal. However, there is
no assurance that the liquidation of collateral from a secured loan would
satisfy the corporate borrower's obligation, or that the collateral can be
liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which
the Fund would assume all of the rights of the lending institution in a loan,
or as an assignment, pursuant to which the Fund would purchase an assignment
of a portion of a lender's interest in a loan either directly from the lender
or through an intermediary. The Fund may also purchase trade or other claims
against companies, which generally represent money owed by the company to a
supplier of goods or services. These claims may also be purchased at a time
when the company is in default.
Certain of the loans acquired by the Fund may involve revolving credit
facilities or other standby financing commitments which obligate the Fund to
pay additional cash on a certain date or on demand. These commitments may have
the effect of requiring the Fund to increase its investment in a company at a
time when the Fund might not otherwise decide to do so (including at a time
when the company's financial condition makes it unlikely that such amounts
will be repaid). The Fund will always have liquid assets sufficient to cover
any commitments or to limit any potential risk.
The Fund's ability to receive payments of principal, interest and other
amounts due in connection with these investments will depend primarily on the
financial condition of the borrower. In selecting the loans and other direct
investments which the Fund will purchase, the Adviser will rely upon its (and
not that of the original lending institution's) own credit analysis of the
borrower. As the Fund may be required to rely upon another lending
institution to collect and pass on to the Fund amounts payable with respect
to the loan and to enforce the Fund's rights under the loan, an insolvency,
bankruptcy or reorganization of the lending institution may delay or prevent
the Fund from receiving such amounts. The highly leveraged nature of many
such loans may make such loans especially vulnerable to adverse changes in
economic or market conditions. Investments in such loans may involve
additional risks to the Fund. For example, if a loan is foreclosed, the Fund
could become part owner of any collateral, and would bear the costs and
liabilities associated with owning and disposing of the collateral. In
addition, it is conceivable that under emerging legal theories of lender
liability, the Fund could be held liable as a co-lender. It is unclear
whether loans and other forms of direct indebtedness offer securities law
protections against fraud and misrepresentation. In the absence of definitive
regulatory guidance, the Fund relies on the Adviser's research in an attempt
to avoid situations where fraud or misrepresentation could adversely affect
the Fund. In addition, loan participations and other direct investments may
not be in the form of securities or may be subject to restrictions on
transfer, and only limited opportunities may exist to resell such instruments.
As a result, the Fund may be unable to sell such investments at an opportune
time or may have to resell them at less than fair market value. To the extent
that the Adviser determines that any such investments are illiquid, the Fund
will include them in the investment limitations described below.
"WHEN-ISSUED" SECURITIES: When the Fund commits to purchase a security on a
"when-issued" or "forward delivery" basis, it will set up procedures
consistent with policies promulgated by the Securities and Exchange Commission
(the "SEC") concerning such purchases. Since that policy currently recommends
that an amount of the Fund's assets equal to the amount of the purchase be
held aside or segregated to be used to pay for the commitment, the Fund will
always have liquid assets sufficient to cover any commitments or to limit any
potential risk. However, although the Fund does not intend to make such
purchases for speculative purposes and intends to adhere to policies
promulgated by the SEC, purchases of securities on such bases may involve more
risk than other types of purchases. For example, the Fund may have to sell
assets which have been set aside in order to meet redemptions. Also, if the
Fund determines it necessary to sell the "when-issued" or "forward delivery"
securities before delivery, it may incur a loss because of market fluctuations
since the time the commitment to purchase such securities was made.
FOREIGN SECURITIES: As discussed in the Prospectus, investing in foreign
securities generally represents a greater degree of risk than investing in
domestic securities, due to possible exchange rate fluctuations, less publicly
available information, more volatile markets, less securities regulation, less
favorable tax provisions, war or expropriation. As a result of its investments
in foreign securities, the Fund may receive interest or dividend payments, or
the proceeds of the sale or redemption of such securities, in the foreign
currencies in which such securities are denominated. Under certain
circumstances, such as where the Adviser believes that the applicable exchange
rate is unfavorable at the time the currencies are received or the Adviser
anticipates, for any other reason, that the exchange rate will improve, the
Fund may hold such currencies for an indefinite period of time. While the
holding of currencies will permit the Fund to take advantage of favorable
movements in the applicable exchange rate, such strategy also exposes the Fund
to risk of loss if exchange rates move in a direction adverse to the Fund's
position. Such losses could reduce any profits or increase any losses
sustained by the Fund from the sale or redemption of securities and could
reduce the dollar value of interest or dividend payments received. The Fund
may also hold foreign currency in anticipation of purchasing foreign
securities.
AMERICAN DEPOSITARY RECEIPTS: American Depositary Receipts ("ADRs") are
certificates issued by a U.S. depository (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. ADRs may be sponsored or unsponsored. A
sponsored ADR is issued by a depository which has an exclusive relationship
with the issuer of the underlying security. An unsponsored ADR may be issued
by any number of U.S. depositories. Under the terms of most sponsored
arrangements, depositories agree to distribute notices of shareholder meetings
and voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities. The depository of an unsponsored ADR, on the other hand, is under
no obligation to distribute shareholder communications received from the
issuer of the deposited securities or to pass through voting rights to ADR
holders in respect of the deposited securities. The Fund may invest in either
type of ADR. Although the U.S. investor holds a substitute receipt of
ownership rather than direct stock certificates, the use of the depository
receipts in the United States can reduce costs and delays as well as potential
currency exchange and other difficulties. The Fund may purchase securities in
local markets and direct delivery of these ordinary shares to the local
depository of an ADR agent bank in the foreign country. Simultaneously, the
ADR agents create a certificate which settles at the Fund's custodian in five
days. The Fund may also execute trades on the U.S. markets using existing
ADRs. A foreign issuer of the security underlying an ADR is generally not
subject to the same reporting requirements in the United States as a domestic
issuer. Accordingly the information available to a U.S. investor will be
limited to the information the foreign issuer is required to disclose in its
own country and the market value of an ADR may not reflect undisclosed
material information concerning the issuer of the underlying security. ADRs
may also be subject to exchange rate risks if the underlying foreign
securities are denominated in foreign currency.
MORTGAGE PASS-THROUGH SECURITIES. The Fund may invest in mortgage pass-
through securities as described in the Prospectus. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. Some mortgage pass-through securities (such as
securities issued by the Government National Mortgage Association ("GNMA")),
are described as "modified pass-through." These securities entitle the holder
to receive all interest 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 segregate 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 in excess of 10% of its gross assets, and then only as
a temporary measure for extraordinary or emergency purposes, or pledge,
mortgage or hypothecate its assets taken at market value to an extent
greater than 15% of its gross assets, in each case taken at the lower of
cost or market value and subject to a 300% asset coverage requirement (for
the purpose of this restriction, collateral arrangements with respect to
options on fixed income securities, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies and payments
of initial and variation margin in connection therewith are not considered a
pledge of assets).
(2) Underwrite securities issued by other persons except insofar as the
Fund may technically be deemed an underwriter under the Securities Act of
1933 in selling a portfolio security.
(3) Invest more than 25% of the market value of its total assets in
securities of issuers in any one industry, except that up to 40% of the
Fund's total assets, taken at market value, may be invested in each of the
electric utility and telephone industries.
(4) Purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except Futures Contracts, Options on Futures Contracts, Forward Contracts
and options on foreign currencies) in the ordinary course of the business of
the Fund. The Fund reserves the freedom of action to hold and to sell real
estate acquired as a result of the ownership of securities.
(5) Make loans to other persons except through the lending of its
portfolio securities in accordance with, and to the extent permitted by, its
investment objective and policies and except through repurchase agreements.
Not more than 10% of the Fund's assets will be invested in repurchase
agreements maturing in more than seven days. For these purposes the purchase
of commercial paper or of all or a portion of a private or public issue of
debt securities shall not be considered the making of a loan.
(6) Purchase the securities of any issuer if such purchase, at the time
thereof, would cause more than 5% of the total assets of the Fund taken at
market value to be invested in the securities of such issuer, other than
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, and provided further that up to 25% of the total assets
of the Fund may be invested in securities issued or guaranteed by any
foreign government, its agencies or instrumentalities.
(7) Purchase voting securities of any issuer if such purchase, at the time
thereof, would cause more than 10% of the outstanding voting securities of
such issuer to be held by the Fund; or purchase securities of any issuer if
such purchase at the time thereof would cause more than 10% of any class of
securities of such issuer to be held by the Fund. For this purpose all
indebtedness of an issuer shall be deemed a single class and all preferred
stock of an issuer shall be deemed a single class.
(8) Invest for the purpose of exercising control or management.
(9) Purchase securities issued by any registered investment company except
by purchase in the open market where no commission or profit to a sponsor or
dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation; provided, however,
that the Fund shall not purchase the securities of any registered
investment companies if such purchase at the time thereof would cause more
than 10% of the Fund's total assets, taken at market value, to be invested
in the securities of such issuers; and provided, further, that the Fund
shall not purchase securities issued by any open-end investment company.
(10) Invest more than 5% of its assets in companies which, including
predecessors, have a record of less than three years' continuous operation.
(11) Purchase or retain in its portfolio any securities issued by an
issuer any of whose officers, directors, trustees or security holders is an
officer or Trustee of the Fund, or is a partner, officer, director or
trustee of the investment adviser of the Fund, if after the purchase of the
securities of such issuer by the Fund one or more of such persons owns
beneficially more than 1/2 of 1% of the shares or securities, or both, all
taken at market value, of such issuer, and such persons owning more than
1/2 of 1% of such shares or securities together own beneficially more than 5%
of such shares or securities, or both, all taken at market value.
(12) Purchase any securities or evidences of interest therein on margin
except to make deposits on margin in connection with options on fixed income
securities, Futures Contracts, Options on Futures Contracts, Forward
Contracts and options on foreign currencies, and, except that the Fund may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of securities and provided that this shall not prevent
the purchase, ownership, holding or sale of contracts for the future
acquisition or delivery of fixed income securities.
(13) Sell any security which the Fund does not own unless by virtue of
its ownership of other securities it has at the time of sale a right to
obtain securities without payment of further consideration equivalent in
kind and amount to the securities sold and provided that if such right is
conditional the sale is made upon the same conditions.
(14) Purchase or sell any put or call options or any combination thereof,
provided that this shall not prevent the purchase, ownership, holding or
sale of warrants where the grantor of the warrants is the issuer of the
underlying securities or the writing, purchasing and selling of puts, calls
or combinations thereof with respect to securities, Futures Contracts and
foreign currencies.
As a matter of non-fundamental policy, the Fund may not (i) invest in
securities (other than repurchase agreements) which are restricted as to
disposition under the federal securities laws (unless the Board of Trustees
has determined that such securities are liquid based upon trading markets for
the specific security), if more than 15% of the Fund's assets would be
invested in such securities and (ii) invest 25% or more of the market value of
its total assets in securities of issuers in any one industry.
Except for the Fund's non-fundamental policy on investing in illiquid
securities, these investment restrictions are adhered to at the time of
purchase or utilization of assets; a subsequent change in circumstances will
not be considered to result in a violation of policy.
3. MANAGEMENT OF THE FUND
The Board of Trustees provides broad supervision over the affairs of the Fund.
The Adviser is responsible for the investment management, and the officers of
the Fund are responsible for its operations. The Fund's Trustees and officers
are listed below, together with their principal occupations during the past
five years. (Their titles may have varied during that period.)
TRUSTEES
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, President, Chairman, 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 $3,250 per year plus $165 per meeting and $130 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 $5,457 $1,309 8 $283,647
Peter G. Harwood 4,847 960 5 121,105
J. Atwood Ives 4,412 1,319 17 108,720
Lawrence T. Perera 5,047 2,322 26 127,055
William J. Poorvu 4,847 2,377 25 121,105
Charles W. Schmidt 4,847 2,367 20 121,105
Arnold D. Scott -0- -0- N/A -0-
Jeffrey L. Shames -0- -0- N/A -0-
David B. Stone 5,047 1,987 11 127,055
Elaine R. Smith 5,177 1,453 27 132,035
(1) For fiscal year ended January 31, 1998.
(2) Based on normal retirement age of 73. See the table below for the
estimated annual benefits payable upon retirement by the Fund to a Trustee
based on his or her estimated credited years of service.
(3) Information provided is provided for calendar year 1997. All Trustees
receiving compensation served as Trustees of 27 funds within the MFS fund
complex (having aggregate net assets at December 31, 1997, of
approximately $28.9 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 $47.8 billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY
FUND UPON RETIREMENT(4)
YEARS OF SERVICE
AVERAGE ---------------------------------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
- ------------------------------------------------------------------------------
$3,971 $596 $ 993 $1,390 $1,985
4,316 647 1,079 1,510 2,158
4,660 699 1,165 1,631 2,330
5,005 751 1,251 1,752 2,503
5,350 802 1,337 1,872 2,675
5,695 854 1,424 1,993 2,847
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of April 30, 1998, all Trustees and officers as a group owned less than 1%
of shares outstanding on that date. As of April 30, 1998, Merrill Lynch,
Pierce, Fenner & Smith Inc., Attn: Fund Administration, 4800 Deer Lake Drive
East - 3rd Floor, Jacksonville, FL 32246-6484, was the record owner of
approximately 5.23%, 10.76% and 26.38% of the outstanding Class A, Class B and
Class C shares, respectively, of the Fund. As of April 30, 1998, MFS Defined
Contribution Plan, c/o Mark Leary, Massachusetts Financial Services, 500
Boylston Street, Boston, MA 02116-3740 was the record owner of approximately
99% of the outstanding Class I Shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, unless, as to liabilities to the Trust or its shareholders, it is
finally adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
with respect to any matter, unless it is adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interest of the Trust. In the case of settlement, such indemnification will
not be provided unless it has been determined pursuant to the Declaration of
Trust that such officers or Trustees have not engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management
dating from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) 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 May 20, 1987, as amended (the "Advisory Agreement"). Under the Advisory
Agreement, the Adviser provides the Fund with overall investment advisory
services. Subject to such policies as the Trustees may determine, the Adviser
makes investment decisions for the Fund.
For these services and facilities, under the Advisory Agreement, the Adviser
receives a management fee computed and paid monthly, on the basis of a formula
based upon a percentage of the average daily net assets of the Fund plus a
percentage of the gross income (i.e., income other than gains from the sale of
securities) of the Fund, in each case on an annualized basis for the then-
current fiscal year. The applicable percentages are reduced as assets and
income reach the following levels:
ANNUAL RATE OF MANAGEMENT FEE ANNUAL RATE OF MANAGEMENT FEE
BASED ON AVERAGE DAILY NET ASSETS BASED ON GROSS INCOME
- -------------------------------------- --------------------------------
0.220% of the first $200 million 3.00% of the first $22 million
0.187% of average daily net assets 2.55% of gross income in excess
in excess of $200 million of $22 million
For the fiscal years ended January 31, 1996, 1997 and 1998, MFS received
management fees under the Advisory Agreement of $4,031,708, $4,238,339 and
$4,780,801, equivalent on an annualized basis to 0.45%, 0.46% and 0.45%,
respectively, of the Fund's average daily net assets.
The Fund pays all of its expenses (other than those assumed by MFS or MFD)
including: Trustee fees (discussed above); governmental fees; interest
charges; taxes; membership dues in the Investment Company Institute allocable
to the Fund; fees and expenses of independent auditors, of legal counsel, and
of any transfer agent, registrar and dividend disbursing agent of the Fund;
expenses of repurchasing and redeeming shares; expenses of preparing, printing
and mailing share certificates, shareholder reports, notices, proxy statements
and reports to governmental officers and commissions; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions; insurance premiums; fees and expenses of the Fund's
custodian, for all services to the Fund, including safekeeping of funds and
securities and maintaining required books and accounts; expenses of
calculating the net asset value of shares of the Fund; and expenses of
shareholder meetings. Expenses relating to the issuance, registration and
qualification of shares of the Fund and the preparation, printing and mailing
of prospectuses for such purposes are borne by the Fund except that its
Distribution Agreement with MFD, the Fund's Distributor, requires MFD to pay
for prospectuses that are to be used for sales purposes. Expenses of the Trust
which are not attributable to a specific series are allocated among the series
in a manner believed by management of the Trust to be fair and equitable. For
a list of the Fund's expenses, including the compensation paid to the Trustees
who are not officers of MFS, during the fiscal year ended January 31, 1998,
see "Statement of Operations" in the Fund's Annual Report to shareholders
incorporated by reference into this SAI.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing the investments of the Fund, effecting the
portfolio transactions.
The Advisory Agreement will remain in effect until August 1, 1998 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. For the period commencing March
1, 1997 through the period ended January 31, 1998, MFS received fees under
the Administrative Services Agreement of $137,896.
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.
For the Fund's fiscal year ended January 31, 1998, MFD received sales charges
of $293,651 and dealers received sales charges of $1,671,188 (as their
concession on gross sales charges of $1,964,839) for selling Class A shares of
the Fund; the Fund received $124,627,726 representing the aggregate net asset
value of such shares. For the Fund's fiscal year ended January 31, 1997, MFD
received sales charges of $193,347 and dealers received sales charges of
$931,228 (as their concession on gross sales charges of $1,124,575) for
selling Class A shares of the Fund; the Fund received $109,971,079
representing the aggregate net asset value of such shares. For the Fund's
fiscal year ended January 31, 1996, MFD received sales charges of $136,238 and
dealers received sales charges of $655,338 (as their concession on gross sales
charges of $791,576) for selling Class A shares of the Fund; the Fund received
$71,221,902 representing the aggregate net asset value of such shares.
For the Fund's fiscal year ended January 31, 1998, 1997 and 1996, the CDSC
imposed on redemption of Class A shares was $25,625, $24,467 and $1,729,
respectively.
For the Fund's fiscal year ended January 31, 1998, 1997 and 1996, the CDSC
imposed on redemption of Class B shares was $442,794, $441,696 and $490,067,
respectively.
For the Fund's fiscal year ended January 31, 1998 and 1997, the CDSC imposed
on redemption of Class C shares was $24,613 and $3,591, respectively.
The Distribution Agreement will remain in effect until August 1, 1998, 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.
During the fiscal years ended January 31, 1996 1997 and 1998, the Fund paid
total brokerage commissions (which term includes underwriters' con-
cessions on new issues of fixed income securities) of $2,900, $-0-
and $12,641, on total transactions of $3,785,142,000, $-0- and $5,173,675,422,
respectively.
For the fiscal year ended January 31, 1998, the Fund owned securities issued
by Merrill Lynch Mortgage Investors, Inc., a regular broker-dealer of the
Fund, which securities had a value of $4,484,531. These securities were
acquired during the fiscal year ended January 31, 1998.
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 shareholder's account in an MFS Fund for
investment in the same class of shares of other MFS Funds selected by the
shareholder. Under the Automatic Exchange Plan, exchanges of at least $50 each
may be made to up to six different funds effective on the seventh day of each
month or of every third month, depending whether monthly or quarterly exchanges
are elected by the shareholder. If the seventh day of the month is not a
business day, the transaction will be processed on the next business day.
Generally, the initial exchange will occur after receipt and processing by the
Shareholder Servicing Agent of an application in good order. Exchanges will
continue to be made from a shareholder's account in any MFS Fund, as long as the
balance of the account is sufficient to complete the exchanges. Additional
payments made to a shareholder's account will extend the period that exchanges
will continue to be made under the Automatic Exchange Plan. However, if
additional payments are added to an account subject to the Automatic Exchange
Plan shortly before an exchange is scheduled, such funds may not be available
for exchanges until the following month; therefore, care should be used to avoid
inadvertently terminating the Automatic Exchange Plan through exhaustion of the
account balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, 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
of net capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses), whether paid in cash or reinvested in additional
shares, are taxable to shareholders as long-term capital gains for federal
income tax purposes without regard to the length of time the shareholders have
held their shares. 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 that is
declared in October, November or December of any calendar year, that is
payable to shareholders of record in such a month, and that is paid the
following January will be treated as if received by the shareholders on
December 31 of the year in which the dividend is declared. The Fund will
notify shareholders regarding the federal tax status of its distributions
after the end of each calendar year.
Any Fund distribution of net capital gains or net short-term capital gains
will have the effect of reducing the per share net asset value of shares in
the Fund by the amount of the distribution. Shareholders purchasing shares
shortly before the record date of any such distribution may thus pay the full
price for the shares and then effectively receive a portion of the purchase
price back as a taxable distribution.
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 eighteen
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 without payment of an additional sales
charge (including purchases by exchange or by reinvestment) 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 of the Fund 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 of the Fund and one of the Trust's other
series, Class A, Class B, Class C and Class I shares and Class A and Class B
shares of the Trust's other series. Each share of a class of the Fund
represents an equal proportionate interest in the assets of the Fund allocable
to that class. Upon liquidation of the Fund, shareholders of each class are
entitled to share pro rata in the net assets of the Fund attributable to that
class available for distribution to shareholders. The Trust has reserved the
right to create and issue additional series or classes of shares, in which
case the shares of each class of a series would participate equally in the
earnings, dividends and assets allocable to that class of the particular
series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of
shareholders. Although Trustees are not elected annually by the shareholders,
shareholders have under certain circumstances the right to remove one or more
Trustees in accordance with the provisions of section 16(c) of the 1940 Act.
No material amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the Trust shares (as defined in "Investment
Restrictions"). Shares have no pre-emptive or conversion rights (except as
described in "Purchases -- Conversion of Class B Shares" in the Prospectus).
Shares are fully paid and non-assessable. The Fund may be terminated (i) upon
the merger or consolidation of the Fund with another organization or upon the
sale of all or substantially all its assets if approved by the vote of the
holders of two-thirds of its outstanding shares, except that if the Trustees
recommend such merger, consolidation or sale, the approval by vote of the
holders of a majority of the Fund's outstanding shares will be sufficient or
(ii) upon liquidation and distribution of its assets, if approved by the vote
of the holders of two-thirds of its outstanding shares. If not so terminated,
the Fund will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Trust and provides for
indemnification and reimbursement of expenses out of Trust property for any
shareholder held personally liable for the obligations of the Trust. The
Declaration of Trust also provides that it shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance)
for the protection of the Trust, its shareholders, Trustees, officers,
employees and agents covering possible tort or other liabilities. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which both inadequate insurance
existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are
not binding upon the Trustees individually but only upon the property of the
Trust and that the Trustees will not be liable for any action or failure to
act, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE -- The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for
the following holidays or days on which they are observed: New Year's Day,
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.
The Fund offers multiple classes of shares which were initially offered for
sale to, and purchased by, the public on different dates (the class "inception
date"). The calculation of total rate of return for a class of shares which
has a later class inception date than another class of shares of the Fund is
based both on (i) the performance of the Fund's newer class from its inception
date and (ii) the performance of the Fund's oldest class from its inception
date up to the class inception date of the newer class.
As discussed in the Prospectus, the sales charges, expenses and expense
ratios, and therefore the performance, of the Fund's classes of shares differ.
In calculating total rate of return for a newer class of shares in accordance
with certain formulas required by the SEC, the performance will be adjusted to
take into account the fact that the newer class is subject to a different
sales charge than the oldest class (e.g., if the newer class is Class A
shares, the total rate of return quoted will reflect the deduction of the
initial sales charge applicable to Class A shares; if the newer class is Class
B shares, the total rate of return quoted will reflect the deduction of the
CDSC applicable to Class B shares). However, the performance will not be
adjusted to take into account the fact that the newer class of shares bears
different class specific expenses than the oldest shares (e.g., Rule 12b-1
fees). Therefore, the total rate of return quoted for a newer class of shares
will differ from the return that would be quoted had the newer class of shares
been outstanding for the entire period over which the calculation is based
(i.e., the total rate of return quoted for the newer class will be higher than
the return that would have been quoted had the newer class of shares been
outstanding for the entire period over which the calculation is based if the
class specific expenses for the newer class are higher than the class specific
expenses of the oldest class, and the total rate of return quoted for the
newer class will be lower than the return that would be quoted had the newer
class of shares been outstanding for this entire period if the class specific
expenses for the newer class are lower than the class specific expenses of the
oldest class).
PERFORMANCE RESULTS: The performance results for Class A shares presented in
Appendix A attached hereto under the heading "Performance Results" assume an
initial investment of $10,000 and cover the period from January 1, 1988 to
December 31, 1997. It has been assumed that dividends and capital gain
distributions were reinvested in additional shares. These performance results,
as well as any yield or total rate of return quotation provided by the Fund,
should not be considered as representative of the performance of the Fund in
the future since the net asset value and public offering price of shares of
the Fund will vary based not only on the type, quality and maturities of the
securities held in the portfolio of the Fund, but also on changes in the
current value of such securities and on changes in the Fund's expenses. These
factors and possible differences in the methods used to calculate yields and
total rates of return should be considered when comparing the yield and total
rate of return to yields and total rates of return published for other
investment companies or other investment vehicles. Total rate of return
reflects the performance of both principal and income. Current net asset value
as well as account balance information may be obtained by calling 1-800-MFS-
TALK (637-8255).
YIELD: Any yield quotation of a class of shares of the Fund is based on the
annualized net investment income per share allocated to that class over a 30-
day period. The yield for each class of the Fund is calculated by dividing the
net investment income allocated to that class earned during the period by the
maximum offering price per share of that class of the Fund on the last day of
that period. The resulting figure is then annualized. Net investment income
per share of a class is determined by dividing (i) the dividends and interest
allocated to that class during the period, minus accrued expenses of that
class for the period by (ii) the average number of shares of the class
entitled to receive dividends during the period multiplied by the maximum
offering price per share on the last day of the period and no payment of any
CDSC in the case of Class B and Class C shares. The Fund's yield calculations
for Class A shares assume a maximum sales charge of 4.75%. Yield quotations
for each class of shares are presented in Appendix A attached hereto under the
heading "Performance Quotations."
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the Securities and Exchange Commission, is not indicative of the
amounts which were or will be paid to the Fund's shareholders. Amounts paid to
shareholders of each class are reflected in the quoted "current distribution
rate" for that class. The current distribution rate for a class is computed by
dividing the total amount of dividends per share paid by the Fund to
shareholders of that class during the past twelve months by the maximum public
offering price of that class at the end of such period. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be
appropriate to annualize the dividends paid over the period such policies were
in effect, rather than using the dividends during the past twelve months. The
current distribution rate differs from the yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income for option writing, short-term capital gains
and return of invested capital, and is calculated over a different period of
time. The Fund's current distribution rate calculation for Class A shares
assumes a maximum sales charge of 4.75%. The Fund's current distribution rate
calculation for Class B shares and Class C shares assumes no CDSC is paid.
Current distribution rate quotations for each Class of shares are presented in
Appendix A attached hereto.
GENERAL: From time to time 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.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended January 31, 1998, the Fund paid the following
Distribution Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
CLASSES OF SHARES BY FUND BY MFD BY DEALERS
- ----------------- ------- ------ ----------
Class A Shares $2,113,612 $ 727,310 $1,386,302
Class B Shares $3,361,080 $2,728,625 $ 632,455
Class C Shares $ 407,599 $ 32,009 $ 375,590
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the
Trustees shall review, at least quarterly, a written report of the amounts
expended (and purposes therefor) under such Plan. The Distribution Plan may be
terminated at any time by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the Fund's shares (as defined in "Investment Restrictions"). All
agreements relating to the Distribution Plan entered into between the Fund or
MFD and other organizations must be approved by the Board of Trustees,
including a majority of the Distribution Plan Qualified Trustees. Agreements
under the Distribution Plan must be in writing, will be terminated
automatically if assigned, and may be terminated at any time without payment
of any penalty, by vote of a majority of the Distribution Plan Qualified
Trustees or by vote of the holders of a majority of the respective class of
the Fund's shares. The Distribution Plan may not be amended to increase
materially the amount of permitted distribution expenses without the approval
of a majority of the respective class of the Fund's shares (as defined in
"Investment Restrictions") or may not be materially amended in any case
without a vote of the Trustees and a majority of the Distribution Plan
Qualified Trustees. The selection and nomination of Distribution Plan
Qualified Trustees shall be committed to the discretion of the non-interested
Trustees then in office. No Trustee who is not an "interested person" has any
financial interest in the Distribution Plan or in any related agreement.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, assistance and consultation with respect to the preparation of
filings with the SEC.
The Portfolio of Investments at January 31, 1998, the Statement of Assets and
Liabilities at January 31, 1998, the Statement of Operations for the year ended
January 31, 1998, the Statement of Changes in Net Assets for each of the two
years in the period ended January 31, 1998, the Notes to Financial Statements
and the Independent Auditors' Report, each of which is included in the Annual
Report to shareholders of the Fund, are incorporated by reference into this SAI
and have been so incorporated in reliance upon the report of Deloitte & Touche
LLP, independent auditors, as experts in accounting and auditing. A copy of the
Annual Report accompanies this SAI.
<PAGE>
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net
asset value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
PERFORMANCE RESULTS -- CLASS A SHARES
- --------------------------------------------------------------------------------
VALUE OF VALUE OF VALUE OF
INITIAL $10,000 CAP. GAIN REINVESTED TOTAL
DATE INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
---- ---------- ------------- --------- -----
12/31/88 9,382 77 1,243 10,702
12/31/89 8,053 66 2,371 10,490
12/31/90 5,696 46 2,993 8,735
12/31/91 7,420 61 5,525 13,006
12/31/92 7,800 64 7,359 15,223
12/31/93 8,544 70 9,561 18,175
12/31/94 7,626 62 10,010 17,698
12/31/95 8,196 67 12,470 20,733
12/31/96 8,449 69 14,819 23,337
12/31/97 8,749 71 17,517 26,337
- ------------
Explanatory Notes: The results in the table assume that income dividends and
capital gain distributions were invested in additional shares. The results
also assume that the initial investment in Class A shares was reduced by the
current maximum applicable sales charge. No adjustment has been made for
income taxes, if any, payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are as of January 31, 1998.
<TABLE>
<CAPTION>
ACTUAL
30-DAY 30-DAY
YIELD YIELD
AVERAGE ANNUAL TOTAL RETURNS (INCLUDING (WITHOUT CURRENT
---------------------------- ANY ANY DISTRIBUTION
1 YEAR 5 YEAR TEN YEAR WAIVERS) WAIVERS) RATE
------ ------ -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares with sales charge ........... 9.12% 10.28% 10.17% N/A 7.26% 3.20%
Class A Shares without sales charge ........ 14.63% 11.34% 10.71% N/A N/A N/A
Class B Shares with CDSC ................... 9.83% 10.31%(1) 10.33%(1) N/A N/A N/A
Class B Shares without CDSC ................ 13.83% 10.57%(1) 10.33%(1) N/A 6.91% 2.13%
Class C Shares with CDSC ................... 12.81% 10.68%(2) 10.38%(2) N/A N/A N/A
Class C Shares without CDSC ................ 13.81% 10.68%(2) 10.38%(2) N/A 6.91% 2.28%
Class I Shares ............................. 14.77% 11.36%(3) 10.72%(3) N/A 7.93% 2.56%(4)
(1) Class B share performance includes the performance of the Fund's Class A shares for periods prior to the inception of
Class B shares on September 27, 1993. Sales charges, expenses and expense ratios, and therefore performance, for Class A
and Class B shares differ. Class B share performance has been adjusted to reflect that Class B shares generally are
subject to CDSC (unless the performance quotation does not give effect to the CDSC) whereas Class A shares generally are
subject to an initial sales charge. Class B share performance has not, however, been adjusted to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for Class A shares.
(2) Class C share performance includes the performance of the Fund's Class A shares for periods prior to the inception of
Class C shares on January 3, 1994. Sales charges, expenses and expense ratios, and therefore performance, for Class A and
Class C shares differ. Class C share performance has been adjusted to reflect that Class C shares generally are subject
to a CDSC (unless the performance quotation does not give effect to the CDSC) whereas Class A shares generally are
subject to an initial sales charge. Class C share performance has not, however, been adjusted to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for Class A shares.
(3) Class I share performance includes the performance of the Fund's Class A shares for the periods prior to the inception of
Class I shares on January 2, 1997. Sales charges, expenses and expense ratios, and therefore performance for Class I and
A shares differ. Class I share performance has been adjusted to reflect that Class I shares are not subject to an initial
sales charge, whereas Class A shares generally are subject to an initial sales charge. Class I share performance has not,
however, been adjusted to reflect differences in operating expenses (e.g., Rule 12b-1 fees), which generally are lower
for Class I shares.
(4) The current distribution rate for Class I shares is calculated by annualizing the last dividend.
</TABLE>
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
HIGH INCOME
FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[GRAPHIC OMITTED]
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MHI-13-6/98/.5M 18/218/318
<PAGE>
MFS(R) MUNICIPAL HIGH INCOME FUND
JUNE 1, 1998
PROSPECTUS
CLASS A SHARES OF BENEFICIAL INTEREST
CLASS B SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
The investment objective of MFS Municipal High Income Fund (the "Fund") is to
provide high current income exempt from federal income taxes. The Fund seeks
to achieve this objective by investing its assets primarily in municipal bonds
and notes which may be of medium and lower quality (see "Investment Objective
and Policies"). The Fund is a non-diversified series of MFS Series Trust III
(the "Trust"), an open-end investment company.
THE FUND MAY INVEST UP TO 100% OF ITS NET ASSETS IN LOWER-RATED MUNICIPAL
BONDS, COMMONLY KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING
DEFAULT RISKS, THAN THOSE FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD
CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING (SEE "ADDITIONAL RISK FACTORS
- -- LOWER RATED MUNICIPAL BONDS").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street,
Boston, Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT
AGENCY, AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY
FINANCIAL INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE
IN VALUE. YOU MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR
SHARES.
This Prospectus sets forth concisely the information concerning the Trust and
the Fund that a prospective investor ought to know before investing. The
Trust, on behalf of the Fund, has filed with the Securities and
Exchange Commission (the "SEC") a Statement of Additional Information dated
June 1, 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 35 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.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
TABLE OF CONTENTS
Page
1. Expense Summary .................................................. 3
2. Condensed Financial Information .................................. 4
3. The Fund ......................................................... 6
4. Investment Objective and Policies ................................ 7
5. Certain Securities and Investment Techniques ..................... 9
6. Additional Risk Factors .......................................... 14
7. Management of the Fund ........................................... 16
8. Information Concerning Shares of the Fund ........................ 17
Purchases .................................................... 17
Exchanges .................................................... 24
Redemptions and Repurchases .................................. 25
Distribution Plan ............................................ 28
Distributions ................................................ 29
Tax Status ................................................... 30
Net Asset Value .............................................. 31
Description of Shares, Voting Rights and Liabilities ......... 31
Performance Information ...................................... 32
9. Shareholder Services ............................................. 33
Appendix A ................................................... A-1
Appendix B ................................................... B-1
Appendix C ................................................... C-1
Appendix D ................................................... D-1
<PAGE>
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
CLASS A CLASS B
------- -------
Maximum Initial Sales Charge Imposed on Purchases
of Fund Shares (as a percentage of offering
price) ........................................ 4.75% 0.00%
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase or
redemption proceeds, as applicable) ........... See Below(1) 4.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ................................. 0.65% 0.65%
Rule 12b-1 Fees ................................. 0.00% 0.91%(2)
Other Expenses(3) ............................... 0.22% 0.22%
---- ----
Total Operating Expenses ........................ 0.87% 1.78%
- ------------
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a Contingent Deferred
Sales Charge (a "CDSC") of 1% will be imposed on such purchases in the
event of certain redemption transactions within 12 months following such
purchases. See "Information Concerning Shares of the Fund -- Purchases"
below.
(2) The Fund has adopted a distribution plan for its Class B shares in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act") (the "Distribution Plan"), which provides that it
will pay distribution/service fees aggregating up to (but not necessarily
all of) 1.00% per annum of the average daily net assets attributable to
the Class B shares. Except in the case of the 0.25% per annum Class B
service fee paid by the Fund upon the sale of Class B shares, payment of
the Class B service fee will be suspended until such date as the Trustees
of the Trust may determine. Distribution expenses paid under the Plan with
respect to Class B shares, together with any CDSC, may cause long-term
shareholders to pay more than the maximum sales charge that would have
been permissible if imposed entirely as an initial sales charge. See
"Information Concerning Shares of the Fund -- Distribution Plan" below.
(3) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have
the effect of reducing the Fund's expenses). Any such fee reductions are
not reflected under "Other Expenses."
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
PERIOD CLASS A CLASS B
------- --------------------
(1)
1 year ............................ $ 56 $ 58 $ 18
3 years ........................... 74 86 56
5 years ........................... 94 116 96
10 years ........................... 150 185(2) 185(2)
- ------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
The purpose of the expense table provided above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund
will bear directly or indirectly. More complete descriptions of the following
expenses of the Fund are set forth in the following sections of the
Prospectus: (i) varying sales charges on share purchases -- "Purchases"; (ii)
varying CDSCs -- "Purchases"; (iii) management fees -- "Investment Adviser";
and (iv) Rule 12b-1 (i.e., distribution plan) fees -- "Distribution Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
2. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the SAI in reliance upon the report of the
Fund's independent auditors, given upon their authority as experts in
accounting and auditing. The Fund's independent auditors are Ernst & Young
LLP.
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- ------------- --------------- ------------- ------------
CLASS A
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of
period .......................... $ 8.73 $ 9.12 $ 8.60 $ 9.38 $ 9.26
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income ........... $ 0.57 $ 0.61 $ 0.61 $ 0.64 $ 0.77
Net realized and unrealized gain
(loss) on investments ......... 0.34 (0.36) 0.59 (0.75) 0.05
------ ------ ------ ------ ------
Total from investment
operations ................ $ 0.91 $ 0.25 $ 1.20 $(0.11) $ 0.82
------ ------ ------ ------ ------
Less distributions declared to shareholders
from net investment income ...... $(0.57) $(0.64) $(0.68) $(0.67) $(0.70)
------ ------ ------ ------ ------
Net asset value - end of period ... $ 9.07 $ 8.73 $ 9.12 $ 8.60 $ 9.38
====== ====== ====== ====== ======
Total return(+) ................... 10.81% 2.87% 13.92% (1.04)% 9.19%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ...................... 0.89% 0.93% 0.93% 1.04% 1.10%
Net investment income ........... 6.42% 6.96% 6.83% 7.27% 7.15%
PORTFOLIO TURNOVER ................ 19% 17% 20% 32% 18%
NET ASSETS AT END OF PERIOD (000
OMITTED) ........................ $1,107,181 $988,178 $1,009,031 $920,043 $809,957
# Per share data for the periods subsequent to January 31, 1995, are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
CLASS A
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of period . $ 9.22 $ 9.09 $ 9.45 $ 9.55 $ 9.68
------ ------ ------ ------ ------
Income from investment operations -
Net investment income ............... $ 0.73 $ 0.73 $ 0.74 $ 0.85 $ 0.88
Net realized and unrealized gain
(loss) on investments ............. 0.06 0.17 (0.32) (0.09) (0.12)
------ ------ ------ ------ ------
Total from investment operations $ 0.79 $ 0.90 $ 0.42 $ 0.76 $ 0.76
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income .......... $(0.75) $(0.77) $(0.78) $(0.81) $(0.82)
From net realized gain on investments -- -- -- (0.04) (0.07)
From paid-in capital ................ -- -- -- (0.01) --
------ ------ ------ ------ ------
Total distributions declared to
shareholders .................. $(0.75) $(0.77) $(0.78) $(0.86) $(0.89)
------ ------ ------ ------ ------
Net asset value - end of period ....... $ 9.26 $ 9.22 $ 9.09 $ 9.45 $ 9.55
====== ====== ====== ====== ======
Total return(+)........................ 9.02% 10.34% 4.65% 8.24% 8.32%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ............................ 1.00% 1.03% 1.05% 1.02% 0.65%
Net investment income ............... 7.95% 7.96% 8.17% 8.90% 9.27%
PORTFOLIO TURNOVER .................... 10% 21% 41% 21% 23%
NET ASSETS AT END OF PERIOD (000
OMITTED) ............................ $731,968 $648,043 $638,185 $485,037 $325,044
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<CAPTION>
YEAR ENDED JANUARY 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994**
---- ---- ---- ---- ------
CLASS B
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of period ... $ 8.74 $ 9.12 $ 8.60 $ 9.38 $ 9.40
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) .............. $ 0.49 $ 0.52 $ 0.52 $ 0.57 $ 0.32
Net realized and unrealized gain (loss)
on investments ...................... 0.34 (0.35) 0.59 (0.78) (0.14)
------ ------ ------ ------ ------
Total from investment operations .. $
$ 0.83 $ 0.17 $ 1.11 (0.21) $ 0.18
------ ------ ------ ------ ------
Less distributions declared to shareholders
from net investment income ............ $(0.49) $(0.55) $(0.59) $(0.57) $(0.20)
------ ------ ------ ------ ------
Net asset value - end of period ......... $ 9.08 $ 8.74 $ 9.12 $ 8.60 $ 9.38
====== ====== ====== ====== ======
Total return ............................ 9.87% 1.96% 12.78% (2.13)% 1.89%+
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ............................ 1.73% 1.86% 1.91% 2.10% 2.04%+
Net investment income ................. 5.50% 6.00% 5.84% 6.32% 5.43%+
PORTFOLIO TURNOVER ...................... 19% 17% 20% 32% 18%
NET ASSETS AT END OF PERIOD (000 OMITTED) $264,575 $125,971 $77,808 $55,675 $ 1
** For the period from the inception of Class B, September 7, 1993, through January 31, 1994.
+ Annualized.
# Per share data for the periods subsequent to January 31, 1995, are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
(S) The distributor voluntarily waived a portion of its distribution fee for the period indicated. If this fee had
been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income ............... $ 0.49 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ........................ 1.80% -- -- -- --
Net investment income ............. 5.43% -- -- -- --
</TABLE>
3. THE FUND
The Fund is a non-diversified series of the Trust, an open-end management
investment company which was organized as a business trust under the laws of
The Commonwealth of Massachusetts in 1977. The Trust presently consists of
three series, each of which represents a portfolio with separate investment
policies. Two classes of shares of the Fund are offered for sale to the
general public. Class A shares are offered at net asset value plus an initial
sales charge up to a maximum of 4.75% of the offering price (or a CDSC of
1.00% upon redemption during the first year in the case of certain purchases
of $1 million or more and certain purchases by retirement plans). Class B
shares are offered at net asset value without an initial sales charge but are
subject to a CDSC upon redemption (declining from 4.00% during the first year
to 0% after 6 years) and an annual distribution fee and service fee up to a
maximum of 1.00% per annum. Class B shares will convert to Class A shares
approximately eight years after purchase. The Fund buys securities (primarily
municipal bonds and notes that may be in the medium or lower rating categories
or may be unrated, the interest on which is exempt from federal income tax)
for its portfolio.
In June 1985, the Trust's Board of Trustees decided to terminate sales of Fund
shares, other than to the Fund's shareholders, because the Fund had attained
optimal size for management purposes. The Board of Trustees voted to re-open
the Fund for sales to new shareholders for the period from March 1, 1989 to
the close of business on March 23, 1989. During such period the Fund's net
assets increased by approximately $109 million as a result of such additional
investments. The Board of Trustees voted again to re-open the Fund for sales
to new shareholders for the period from February 6, 1990 to the close of
business on February 7, 1990. During such period, the Fund's net assets
increased by approximately $205 million as a result of such additional
investments. On February 28, 1990, the sale of Fund shares to existing
shareholders (other than through the reinvestment of dividends and capital
gains of the Fund) was terminated. On November 5, 1990, Fund shares were made
available for sale to existing shareholders only. Upon a vote by the Board of
Trustees, the Fund was again reopened for sales to new shareholders for one
day, June 3, 1994. During such day, the Fund's net assets increased by
approximately $189 million as a result of such additional investments. On
August 5, 1996, Class A shares and Class B shares of the Fund became available
for sale to new shareholders.
The Trust's Board of Trustees provides broad supervision over the affairs of
the Fund. MFS is the Fund's investment adviser. A majority of the Trustees are
not affiliated with the Adviser. The Adviser is responsible for the management
of the assets of the Fund and the officers of the Trust are responsible for
the Fund's operations. The Adviser manages the Fund's portfolio from day to
day in accordance with the investment objective and policies of the Fund. The
selection of investments and the way they are managed depend on the conditions
and trends in the economy and the financial marketplaces. The Fund also offers
to buy back (redeem) its shares from its shareholders at any time at their net
asset value, less any applicable CDSC.
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE: The investment objective of the Fund is to provide high
current income exempt from federal income taxes. Any investment involves risk
and there can be no assurance that the Fund will achieve its investment
objective.
INVESTMENT POLICIES: The Fund seeks to achieve its investment objective by
investing primarily (i.e., at least 80% of its assets under normal
circumstances) in debt securities issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia and
their political subdivisions, agencies or instrumentalities, the interest on
which is exempt from federal income tax ("Municipal Bonds" or "tax-exempt
securities"). The interest income on certain of these obligations may be
subject to an alternative minimum tax, which is considered to be tax-exempt
for purposes of the 80% test described above. Under normal circumstances, the
Fund will invest at least 65% of its total assets in tax-exempt securities
which offer a current yield above that generally available on tax-exempt
securities in the three highest rating categories of the recognized rating
agencies (commonly known as "junk bonds" if rated below the four highest
categories of recognized rating agencies). For a comparison of yields on
Municipal Bonds and taxable securities, see Appendix B to this Prospectus, for
a general discussion on Municipal Bonds and their rating categories, see
Appendix C, and for a chart showing the Fund's fixed income securities broken
down by rating category, see Appendix D. The Fund may invest up to 100% of its
net assets in these lower-rated securities. Such high risk securities
generally involve greater volatility of price and greater risk of nonpayment
of principal and interest (including the possibility of default by or
bankruptcy of the issuers of such securities) than securities in higher rating
categories. See "Additional Risk Factors -- Lower-Rated Municipal Bonds"
below. However, since available yields and yield differentials vary over time,
no specific level of income or yield differential can ever be assured. Also,
any income earned on portfolio securities would be reduced by the expenses of
the Fund before it is distributed to shareholders.
The value of the tax-exempt securities that the Fund intends to purchase may
be less sensitive to market factors than other securities; however, they may
be more sensitive to changes in the perception of the credit quality of such
securities, or of similar types of securities or of securities issued within
the same geographical region. Changes in the value of securities subsequent to
their acquisition will not affect income or yields to maturity of the Fund's
portfolio securities but will be reflected in the net asset value of the
shares of the Fund. In order to preserve or enhance the value of its
investments, the Fund may, on occasion, make additional capital expenditures
beyond the initial cost of an investment. The Fund will seek to reduce risk
through diversification, credit analysis and attention to current developments
and trends in both the economy and financial markets.
The net asset value of the shares of an open-end investment company, such as
the Fund, which invests primarily in fixed income tax-exempt securities,
changes as the general levels of interest rates fluctuate. When interest rates
decline, the value of a portfolio invested at higher yields can be expected to
rise. Conversely, when interest rates rise, the value of a portfolio invested
at lower yields can be expected to decline.
When the Adviser believes that investing for temporary defensive purposes is
appropriate, such as during periods of unusual market conditions or at times
when yield spreads are narrow and the higher yields do not justify the
increased risk or if acceptable quantities of higher yielding securities are
unavailable, the Fund may either invest in tax-exempt securities in the higher
rating categories of recognized rating agencies (that is, ratings of A or
higher by Moody's Investors Service, Inc., ("Moody's"), Standard & Poor's
Ratings Services ("S&P"), Fitch IBCA ("Fitch") or Duff & Phelps Credit Rating
Co. ("Duff & Phelps") or comparable unrated tax-exempt securities) or in cash
or cash equivalent short-term obligations of similar quality (i.e., with
ratings equivalent to A or better by Moody's, S&P, Fitch or Duff & Phelps or
comparable unrated tax-exempt securities) including, but not limited to,
short-term municipal obligations, certificates of deposit, commercial paper,
short-term notes, obligations issued or guaranteed by the U.S. Government or
any of its agencies or instrumentalities and repurchase agreements. From time
to time, a portion of the Fund's distributions will be taxable to shareholders
(e.g., distributions of income from taxable obligations, from capital gains,
from transactions in certain Municipal Bonds purchased at market discount and
from certain other transactions).
The Fund may invest in a relatively high percentage of municipal bonds issued
by entities having similar characteristics. The issuers may be located in the
same geographic area, or may pay interest on their obligations from revenue of
similar projects such as hospitals, electric utility systems, multi-family
housing, nursing homes, commercial facilities (including hotels), steel
companies or life care facilities. This may make the Fund more susceptible to
similar economic, political or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation of the net asset value of
shares of the Fund also increases.
The Fund reserves the right to invest more than 25% of its assets in
industrial revenue bonds, including industrial revenue bonds issued for
hospitals, electric utility systems, multi-family housing, nursing homes,
commercial facilities (including hotels), steel companies and life care
facilities. See the SAI for a discussion of the risks which these investments
might entail. Certain of the bonds issued for these purposes provide financing
for construction or rehabilitation of facilities as described above. As such
they are susceptible to various construction related risks, including labor
costs and environmental, zoning and site development considerations, as well
as the ability of contractors to perform within time and cost constraints.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Bonds. See "Information Concerning Shares of the Fund --
Tax Status" below for the effect of current federal tax law on this exemption.
5. 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: Municipal Bonds in which the Fund may invest also include
zero coupon bonds. Zero coupon bonds are debt obligations which are issued at
a significant discount from face value and do not require the periodic payment
of interest. The discount approximates the total amount of interest the bonds
will accrue and compound over the period until maturity or the first interest
payment date at a rate of interest reflecting the market rate of the security
at the time of issuance. Zero coupon bonds benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of
return to attract investors who are willing to defer receipt of such cash.
Such investments may experience greater volatility in market value due to
changes in interest rates than debt obligations which make regular payments of
interest. The Fund will accrue income on such investments for tax and
accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Fund's distribution
obligations. Because of the higher rates of return, such investments are
regarded by the Fund as consistent with its investment objective.
INVERSE FLOATING RATE OBLIGATIONS: The Fund may invest in so called "inverse
floating rate obligations" or "residual interest" bonds, or other obligations
or certificates relating thereto structured to have similar features. Such
obligations generally have floating or variable interest rates that move in
the opposite direction of short-term interest rates and generally increase or
decrease in value in response to changes in short-term interest rates at a
rate which is a multiple (typically two) of the rate at which fixed-rate long-
term tax-exempt securities increase or decrease in response to such changes.
As a result, such obligations have the effect of providing investment leverage
and may be more volatile than long-term fixed rate tax exempt obligations.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order
to earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize risk.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion of its
assets in loans. By purchasing a loan, the Fund acquires some or all of the
interest of a bank or other lending institution in a loan to a corporate
borrower. Many such loans are secured, and most impose restrictive covenants
which must be met by the borrower. These loans are made generally to finance
internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs
and other corporate activities. Such loans may be in default at the time of
purchase. The Fund may also purchase trade or other claims against companies,
which generally represent money owed by the company to a supplier of goods and
services. These claims may also be purchased at a time when the company is in
default. Certain of the loans acquired by the Fund may involve revolving
credit facilities or other standby financing commitments which obligate the
Fund to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loans and
other direct investments may not be in the form of securities or may be
subject to restrictions on transfer, and only limited opportunities may exist
to resell such instruments. As a result, the Fund may be unable to sell such
investments at an opportune time or may have to resell them at less than fair
market value.
"WHEN-ISSUED" SECURITIES: Some tax-exempt securities may be purchased on a
"when-issued" or on a "forward delivery" basis, which means that the
obligations will be delivered to the Fund at a future date, usually beyond
customary settlement time. The commitment to purchase a security for which
payment will be made on a future date may be deemed a separate security.
Although the Fund is not limited as to the amount of tax-exempt securities for
which it has such commitments, it is expected that under normal circumstances,
the Fund will not commit more than 30% of its assets to such purchases. The
Fund does not pay for the securities until received, and does not start
earning interest on the securities until the contractual settlement date.
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 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.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933 ("1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). A determination is made, based upon a continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to a Fund's limitation on investing not more than
15% of its net assets in illiquid investments. The Board of Trustees has
adopted guidelines and delegated to MFS the daily function of determining and
monitoring the liquidity of Rule 144A securities. The Board, however, retains
oversight 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 intends to write (sell) "covered" put and call
options on fixed income securities. Call options written by the Fund give the
holder the right to buy the underlying securities from the Fund at a fixed
exercise price up to a stated expiration date or, in the case of certain
options, on such date. Put options written by the Fund give the holder the
right to sell the underlying securities to the Fund during the term of the
option at a fixed exercise price up to a stated expiration date or, in the
case of certain options, on such date. Call options are "covered" by the Fund,
for example, when it owns the underlying securities, and put options are
"covered" by the Fund, for example, when it has established a segregated
account of liquid assets which can be liquidated promptly to satisfy any
obligation of the Fund to purchase the underlying securities. The Fund may
also write straddles (combinations of puts and calls on the same underlying
security). Such transactions generate additional premium income but also
include greater risk.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised
or is closed out at a profit. The amount of the premium will reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option,
supply and demand and interest rates. By writing a call option, the Fund
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, the Fund assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then-current market
value, resulting in a potential capital loss unless the security subsequently
appreciates in value.
The Fund may terminate an option that it has written prior to its expiration
by entering into a closing purchase transaction in which it purchases an
option having the same terms as the option written. It is possible, however,
that illiquidity in the options markets may make it difficult from time to
time for the Fund to close out its written option positions.
The Fund may also purchase put or call options in anticipation of changes in
interest rates which may adversely affect the value of its portfolio or the
prices of securities that the Fund wants to purchase at a later date. The
premium paid for a put or call option plus any transaction costs will reduce
the benefit, if any, realized by the Fund upon exercise of the option, and,
unless the price of the underlying security changes sufficiently, the option
may expire without value to the Fund.
The Fund intends to write and purchase options on securities for hedging
purposes and also in an effort to increase current income, which involves
greater risk. Options on securities that are written or purchased by the Fund
will be traded on U.S. exchanges and over-the-counter.
The Fund may purchase detachable call options on municipal securities, which
are options issued by an issuer of the underlying municipal securities giving
the purchaser the right to purchase the securities at a fixed price, up to a
stated time in the future, or in some cases, on a future date.
In addition, the Fund may purchase warrants on fixed income securities. A
warrant on a fixed income security is a long-dated call option conveying to
the holder of the warrant the right, but not the obligation, to purchase a
fixed income security of a specific description (from the issuer) on a certain
date or dates (the exercise date) at a fixed exercise price.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and
sell futures contracts on fixed income securities or indices of such
securities, including Municipal Bond indices and any other indices of fixed
income securities which may become available for trading ("Futures
Contracts"). The Fund may also purchase and write options on such Futures
Contracts ("Options on Futures Contracts"). These instruments will be used to
hedge against anticipated future changes in interest rates which otherwise
might either adversely affect the value of the Fund's portfolio securities or
adversely affect the prices of securities which the Fund intends to purchase
at a later date. Should interest rates move in an unexpected manner, the Fund
may not achieve the anticipated benefits of the hedging transactions and may
realize a loss. Such transactions may also be entered into for non-hedging
purposes to the extent permitted by applicable law, which involves greater
risk and may result in losses which are not offset by gains on other portfolio
assets.
In order to assure that the Fund will not be deemed to be a "commodity pool"
for purposes of the Commodity Exchange Act, regulations of the Commodity
Futures Trading Commission (the "CFTC") require that the Fund enter into
transactions in Futures Contracts and Options on Futures Contracts 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-bona
fide 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. exchanges.
PORTFOLIO TRADING: The Fund intends to engage in portfolio trading rather than
holding all portfolio securities to maturity. In trading portfolio securities,
the Fund seeks to take advantage of market developments, yield disparities and
variations in the creditworthiness of issuers.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Conduct
Rules of the National Association of Securities Dealers, Inc., (the "NASD")
and such other policies as the Trustees may determine, the Adviser may
consider sales of shares of the Fund and of the other investment company
clients of MFD as a factor in the selection of broker-dealers to execute the
portfolio transactions of the Fund. From time to time, the Adviser may direct
certain portfolio transactions to broker-dealer firms which, in turn, have
agreed to pay a portion of the Fund's operating expenses (e.g., fees charged
by the custodian of the Fund's assets). For a further discussion of portfolio
trading, see "Portfolio Transactions and Brokerage Commissions" in the Fund's
SAI.
--------------------
The investment objective and policies of the Fund described above may be
changed without shareholder approval.
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the investment policies of the
Fund. Except as otherwise indicated, the Fund's specific investment
restrictions listed in the SAI may be changed without the approval of the
shareholders of the Fund unless indicated otherwise (see "Investment
Restrictions" in the SAI). 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. ADDITIONAL RISK FACTORS
LOWER-RATED MUNICIPAL BONDS: Tax-exempt securities offering the high current
income sought by the Fund are ordinarily in the medium and lower rating
categories of recognized rating agencies or are unrated and, therefore,
generally are high risk securities involving greater volatility of price
(especially during periods of economic uncertainty or change) and risk of
principal (including the possibility of default by or bankruptcy of the
issuers of such securities) and income than securities in the higher rating
categories and because yields vary over time, no specific level of income can
ever be assured. No minimum rating is required by the Fund. In particular,
securities rated BBB by S&P, Fitch or Duff & Phelps or Baa by Moody's or
comparable unrated securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic
conditions and other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
grade Municipal Bonds. Securities rated lower than BBB by S&P, Fitch or Duff &
Phelps or Baa by Moody's or comparable unrated securities (high risk
securities) are considered speculative. While such high risk securities may
have some quality and protective characteristics, they can be expected to be
outweighed by large uncertainties or major risk exposures to adverse
conditions. These Municipal Bonds will be affected by the market's perception
of their credit quality, economic changes and the outlook for economic growth
to a greater extent than higher rated securities which react primarily to
fluctuations in the general level of interest rates. Medium and lower-rated
Municipal Bonds are also affected by changes in interest rates, as noted in
"Investment Objective and Policies" above. Furthermore, an economic downturn
may result in a higher incidence of defaults by issuers of these securities.
During certain periods, the higher yields on the Fund's lower-rated high
yielding fixed income securities are paid primarily because of the increased
risk of loss of principal and income, arising from such factors as the
heightened possibility of default or bankruptcy of the issuers of such
securities. Due to the fixed income payments of these securities, the Fund may
continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Fund's yield despite the actual loss of principal.
In addition, medium and lower-rated or unrated tax-exempt securities are
frequently traded only in markets where the number of potential purchasers and
sellers, if any, is very limited. Furthermore, the liquidity of these
securities may be affected by the market's perception of the issuer's credit
quality. Therefore, judgment may at times play a greater role in valuing these
securities than in the case of higher grade tax-exempt securities. This
consideration may also have the effect of limiting the availability of such
securities for the Fund to purchase and may also have the effect of limiting
the ability of the Fund to sell such securities at their fair value either to
meet redemption requests or to respond to changes in the economy or the
financial markets.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the policy of the Fund to rely exclusively on ratings
issued by these agencies, but rather to supplement such ratings with the
Adviser's own independent and ongoing review of credit quality. The Fund's
achievement of its investment objective may be more dependent on the Adviser's
own credit analysis than in the case of an investment company investing in
primarily higher quality bonds. With respect to those municipal bonds and
notes which are not rated by a major rating agency, the Fund will be more
reliant on the Adviser's judgment, analysis and experience than would be the
case if such bonds and notes were rated. In evaluating the creditworthiness of
an issuer, whether rated or unrated, the Adviser will take into consideration,
among other things, the issuer's financial resources, its sensitivity to
economic conditions and trends, any operating history of and the community
support for the facility financed by the issue, the ability of the issuer's
management and regulatory matters.
The Adviser will attempt to reduce the risks of investing in medium or lower-
rated or unrated tax-exempt securities to the greatest extent practicable
through portfolio management techniques (see the SAI) and through the use of
credit analysis and Futures Contracts.
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: Although the Fund
will enter into certain transactions in options, Futures Contracts and Options
on Futures Contracts for hedging purposes, such transactions nevertheless
involve risks. For example, a lack of correlation between the instrument
underlying an option or Futures Contract and the assets being hedged, or
unexpected adverse price movements, could render the Fund's hedging strategy
unsuccessful and could result in losses. The Fund also may enter into
transactions in options, Futures Contracts and Options on Futures Contracts
for other than hedging purposes, to the extent permitted by applicable law,
which involves greater risk. There can be no assurance that a liquid secondary
market will exist for any contract purchased or sold, and the Fund may be
required to maintain a position until exercise or expiration, which could
result in losses. The SAI contains a further description of options, Futures
Contracts and Options on Futures Contracts, and a discussion of the risks
related to transactions therein. Transactions entered into for non-hedging
purposes involve greater risk and could result in losses which are not offset
by gains on other portfolio assets.
Transactions in options may be entered into on U.S. exchanges regulated by the
SEC and in the over-the-counter market, while Futures Contracts and Options on
Futures Contracts may be entered into on U.S. commodities exchanges regulated
by the CFTC. Over-the-counter transactions involve certain risks which may not
be present in exchange-traded transactions.
Gains recognized from options and futures transactions engaged in by the Fund
are taxable to shareholders upon distribution.
NON-DIVERSIFICATION: The Fund has registered as a "non-diversified" investment
company as that term is defined by the 1940 Act, but intends to qualify as a
"regulated investment company" ("RIC") for federal tax purposes. This means,
in general, that although more than 5% of the Fund's total assets may be
invested in the obligations of one issuer, at the close of each quarter of its
taxable year the aggregate amount of such holdings may not exceed 50% of the
value of its total assets, and no more than 25% of the value of its total
assets may be invested in the obligations of a single issuer. Since the Fund
may invest a relatively high percentage of its assets in the obligations of a
limited number of issuers, the Fund may be more susceptible to any single
economic, political or regulatory occurrence than a diversified investment
company.
For the above reasons, an investment in shares of the Fund should not
constitute a complete investment program and may not be appropriate for
investors who cannot assume the greater risk of capital depreciation or loss
inherent in seeking higher tax-exempt yields.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER: MFS manages the assets of the Fund pursuant to an
Investment Advisory Agreement dated September 1, 1993, as amended. Under the
Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. Michael Roberge, a Vice President of the Adviser, has been
the Fund's portfolio manager since December, 1997 and has been employed as a
portfolio manager by the Adviser since 1986. From 1994 to 1996, Mr. Roberge
worked as a municipal credit analyst and portfolio manager with Colonial
Investment Management. Prior to 1994, he was an Assistant Vice President and
credit analyst with Moody's Investor Services. Subject to such policies as the
Trustees may determine, MFS makes investment decisions for the Fund. For these
services and facilities, MFS receives a management fee, computed and paid
monthly, in an amount equal to the sum of 0.30% of the first $1.3 billion of
the Fund's average daily net asset value and 0.25% of the amount in excess of
$1.3 billion plus 4.75% of the Fund's gross income (i.e., income other than
from the sale of securities), in each case on an annualized basis for the
Fund's then-current fiscal year.
For the Fund's fiscal year ended January 31, 1998, MFS received management
fees under the Fund's Investment Advisory Agreement of $7,934,130 (equivalent
on an annualized basis to 0.65% of the Fund's average daily net assets).
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds"), to MFS Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS
Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value Trust,
MFS Institutional Trust, MFS Variable Insurance Trust, MFS/Sun Life Series
Trust and seven variable accounts, each of which is a registered investment
company established by Sun Life Assurance Company of Canada (U.S.), 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 $84 billion on behalf of approximately 3.1 million investor
accounts as of April 30, 1998. As of such date, the MFS organization managed
approximately $6.5 billion of assets in municipal bond securities and
approximately $21.2 billion of assets in fixed income securities. MFS is a
subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings, Inc.,
which in turn is an indirect wholly owned subsidiary of Sun Life. The
Directors of MFS are Jeffrey L. Shames, Donald A. Stewart, John D. McNeil,
Arnold D. Scott and John W. Ballen. Mr. Shames is the Chairman, Chief
Executive Officer and President and Mr. Scott is a Senior Executive Vice
President and the Secretary 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 to
the Chairman of Sun Life.
Joan S. Batchelder, Robert J. Manning, Bernard Scozzafava, James T. Swanson,
W. Thomas London, James O. Yost, Ellen Moynihan, Mark E. Bradley, Stephen E.
Cavan 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, certain
dividend disbursing agency and other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A and Class B shares of the Fund may be purchased at the public offering
price through any dealer. 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 and B shares to the general public which bear
sales charges and distribution fees in different forms and amounts, as
described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus
an initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
SALES CHARGE* AS
PERCENTAGE OF:
----------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
- ------------------ -------------- ---------- -----------------
Less than $100,000 ............... 4.75% 4.99% 4.00%
$100,000 but less than $250,000 .. 4.00 4.17 3.20
$250,000 but less than $500,000 .. 2.95 3.04 2.25
$500,000 but less than $1,000,000 2.20 2.25 1.70
$1,000,000 or more ............... None** None** See Below**
- ------------
* Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above.
** A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the
sales charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge).
In the following five circumstances, Class A shares are offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of
the lesser of the value of the shares redeemed (exclusive of reinvested
dividend and capital gain distributions) or the total cost of such shares, in
the event of a share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if, prior to July 1, 1996: (a) the Plan had established
an account with the Shareholder Servicing Agent and (b) the
sponsoring organization has demonstrated to the satisfaction of MFD
that either (i) the employer had at least 25 employees or (ii) the
aggregate purchases by the retirement plan of Class A shares of the
MFS Funds would be in an amount of at least $250,000 within a
reasonable period of time, as determined by MFD in its sole
discretion;
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing
Agent (the "MFS Participant Recordkeeping System"); (b) the plan
establishes an account with the Shareholder Servicing Agent on or
after July 1, 1996; and (c) the aggregate purchases by the
retirement plan of Class A shares of the MFS Funds will be in an
aggregate amount of at least $500,000 within a reasonable period of
time, as determined by MFD in its sole discretion;
(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
regulation which results in a material adverse change to the tax advantaged
nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated under
ERISA or is liquidated or dissolved; or (iii) is acquired by, merged into, or
consolidated with, any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an
initial sales charge but 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 Fund's Distribution Plan. As discussed above, such retirement plans are
eligible to purchase Class A shares of the Fund at net asset value without an
initial sales charge but subject to a 1% CDSC if the plan has, at the time of
purchase, a market value of $500,000 or more invested in shares of any class
or classes of the MFS Funds. IN THIS EVENT, THE PLAN OR ITS SPONSORING
ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING AGENT THAT THE PLAN IS
ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY; THE SHAREHOLDER
SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH A
PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A SHARES.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class B shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class B shares is waived with respect to shares
held by a retirement plan whose sponsoring organization subscribes to the MFS
Participant Recordkeeping System and which has established an account with the
Shareholder Servicing Agent on or after July 1, 1996; provided, however, that
the CDSC will not be waived (i.e., it will be imposed) in the event that there
is a change in law or regulations which results in a material adverse change
to the tax advantaged nature of the plan, or in the event that the plan and/or
sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is terminated
under ERISA or is liquidated or dissolved; or (iii) is acquired by, merged
into, or consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain
outstanding for approximately eight years will convert to Class A shares of
the Fund. Shares purchased through the reinvestment of distributions paid in
respect of Class B shares will be treated as Class B shares for purposes of
the payment of the distribution and service fees under the Fund's Distribution
Plan applicable to Class B shares. See "Distribution Plan" below. However,
for purposes of conversion to Class A shares, all shares in a shareholder's
account that were purchased through the reinvestment of dividends and
distributions paid in respect of Class B shares (and which have not converted
to Class A shares as provided in the following sentence) will be held in a
separate sub-account. Each time any Class B shares in the shareholder's
account (other than those in the sub-account) convert to Class A shares, a
portion of the Class B shares then in the sub-account will also convert to
Class A shares. The portion will be determined by the ratio that the
shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares bears to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal
tax purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B
shares would continue to be subject to higher expenses than Class A shares for
an indefinite period.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases - Contingent Deferred Sales Charge" below for
further discussion of the CDSC.
GENERAL: The following information applies to purchases of all classes of
the Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other
than IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and
the minimum additional investment is $50 per account. Accounts being
established for participation in the Automatic Exchange Plan are subject to a
$50 minimum on initial and additional investments per account. There are also
other limited exceptions to these minimums for certain tax-deferred retirement
programs. Any minimums may be changed at any time at the discretion of MFD.
The Fund reserves the right to cease offering its shares at any time.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase
additional shares of any MFS Fund by telephoning the Shareholder Servicing
Agent toll-free at (800) 225-2606. The minimum purchase amount is $50 and the
maximum purchase amount is $100,000. Shareholders wishing to avail themselves
of this telephone purchase privilege must so elect on their Account
Application and designate thereon a bank and account number from which
purchases will be made. If a telephone purchase request is received by the
Shareholder Servicing Agent on any business day prior to the close of regular
trading on the Exchange (generally, 4:00 p.m., Eastern time), the purchase
will occur at the closing net asset value of the shares purchased on that day.
The Shareholder Servicing Agent may be liable for any losses resulting from
unauthorized telephone transactions if it does not follow reasonable
procedures designed to verify the identity of the caller. The Shareholder
Servicing Agent will request personal or other information from the caller,
and will normally also record calls. Shareholders should verify the accuracy
of confirmation statements immediately after their receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserves
the right to reject or restrict any specific purchase or exchange request. In
the event that the Fund or MFD rejects an exchange request, neither the
redemption nor the purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individudals, if (i) the individual or organization makes three or more
exchange requests out of the Fund per calendar year and (ii) any one of such
exchange requests represents shares equal in value to 1/2 of 1% or more of
the Fund's net assets at the time of the request. Accounts under common
ownership or control, including accounts administered by market timers, will
be aggregated for purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose
specific limitations with respect to market timers, including delaying for up
to seven days the purchase side of an exchange request by market timers or
specifically rejecting or otherwise restricting purchase or exchange requests
by market timers. In the event that any individual or entity is determined
either by the Fund or MFD, in its sole discretion, to be a market timer with
respect to any calendar year, the Fund and/or MFD will reject all exchange
requests into the Fund during the remainder of that calendar year. Other funds
in the MFS Family of Funds may have different and/or more restrictive policies
with respect to market timers than the Fund. These policies are disclosed in
the prospectuses of these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with
respect to sales of Class A and Class B shares. In addition, from time to
time, MFD may pay dealers 100% of the applicable sales charge on sales of
Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset
value of all of the Class B shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD,
at its expense, may provide additional commissions, compensation or
promotional incentives ("concessions") to dealers which sell 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 handheld calculator, or (ii) make a nominal
charitable contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting,
selling or distributing securities. Although the scope of the prohibition has
not been clearly defined, MFD believes that such Act should not preclude banks
from entering into agency agreements with MFD. If, however, a bank were
prohibited from so acting, the Trustees would consider what actions, if any,
would be necessary to continue to provide efficient and effective shareholder
services in respect of Shareholders who invested in the Fund through a
national bank. It is not expected that shareholders would suffer any adverse
financial consequence as a result of these occurrences. In addition, state
securities laws on this issue may differ from the interpretation of federal
law expressed herein and banks and financial institutions may be required to
register as broker-dealers pursuant to state law.
--------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services)
that the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e.,
an established account) may be exchanged for shares of the same class of any
of the other MFS Funds at net asset value (if available for sale). Shares of
one class may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING MFS MONEY MARKET FUNDS): No initial
sales charges or CDSC will be imposed in connection with an exchange from
shares of an MFS Fund to shares of any other MFS Fund, except with respect to
exchanges from an MFS money market fund to another MFS Fund which is not an
MFS money market fund (discussed below). With respect to an exchange
involving shares subject to a CDSC, the CDSC will be unaffected by the
exchange and the holding period for purposes of calculating the CDSC will
carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect
to the imposition of an initial sales charge or a CDSC for exchanges from an
MFS money market fund to another MFS Fund which is not an MFS money market
fund. These rules are described under the caption "Exchanges" in the
Prospectuses of those MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund
held by certain qualified retirement plans may be exchanged for units of
participation of the MFS Fixed Fund (a bank collective investment fund) (the
"Units"), and Units may be exchanged for Class A shares of any MFS Fund. With
respect to exchanges between Class A shares subject to a CDSC and Units, the
CDSC will carry over to the acquired shares or Units and will be deducted from
the redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units
and then exchanges into Class A shares subject to an initial sales charge of
an MFS Fund, the initial sales charge shall be due upon such exchange, but
will not be imposed with respect to any subsequent exchanges between such
Class A shares and Units with respect to shares on which the initial sales
charge has already been paid. In the event that a shareholder initially
purchases Units and then exchanges into Class A shares subject to a CDSC of an
MFS Fund, the CDSC period will commence upon such exchange, and the
applicability of the CDSC with respect to subsequent exchanges shall be
governed by the rules set forth above in this paragraph.
GENERAL: A shareholder should read the prospectuses of the other MFS Funds
into which an exchange is made, and consider the differences in objectives,
policies and restrictions before making any exchange. Exchanges will be made
only after instructions in writing or by telephone (an "Exchange Request") are
received for an established account by the Shareholder Servicing Agent in
proper form (i.e., if in writing -- signed by the record owner(s) exactly as
the shares are registered; if by telephone -- proper account identification is
given by the dealer or shareholder of record) and each exchange must involve
either shares having an aggregate value of at least $1,000 ($50 in the case of
retirement plan participants whose sponsoring organizations subscribe to the
MFS FUNDamental 401(k) Plan or another similar 401(k) recordkeeping system
made available by the Shareholder Servicing Agent) or all the shares in the
account. If an Exchange Request is received by the Shareholder Servicing Agent
on any business day prior to the close of regular trading on the New York
Stock Exchange (generally, 4:00 p.m., Eastern time) (the "Exchange"), the
exchange will occur on that day if all the requirements set forth above have
been complied with at that time and subject to the Fund's right to reject
purchase orders. No more than five exchanges may be made in any one Exchange
Request by telephone. Additional information concerning this exchange
privilege and prospectuses for any of the other MFS Funds may be obtained from
dealers or the Shareholder Servicing Agent. For federal and (generally) state
income tax purposes, an exchange is treated as a sale of the shares exchanged
and, therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to
most non-retirement plan accounts and certain retirement plan accounts. For
further information regarding exchanges by telephone, see "Redemptions by
Telephone." The exchange privilege (or any aspect of it) may be changed or
discontinued and is subject to certain limitations, including certain
restrictions on purchases by market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on
any date on which the Fund is open for business by redeeming shares at their
net asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however,
subject to a CDSC. See "Contingent Deferred Sales Charge" below. Because the
net asset value of shares of the account fluctuates, redemptions or
repurchases, which are taxable transactions, are likely to result in gains or
losses to the shareholder. When a shareholder withdraws an amount from his
account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except for shares purchased or received in
exchange for shares purchased by check (including certified checks or
cashier's checks). Payment of redemption proceeds may be delayed for up to 15
days from the purchase date in an effort to assure that such check has
cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the
shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power with a written request for
redemption or letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally
means that the stock power, written request for redemption, letter of
instruction or certificate must be endorsed by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed in the
manner set forth below under the caption "Signature Guarantee." In addition,
in some cases "good order" will require the furnishing of additional
documents. The Shareholder Servicing Agent may make certain de minimis
exceptions to the above requirements for redemption. Within seven days after
receipt of a redemption request in "good order" by the Shareholder Servicing
Agent, the Fund will make payment in cash of the net asset value of the shares
next determined after such redemption request was received, reduced by the
amount of any applicable CDSC described above and the amount of any income tax
required to be withheld, except during any period in which the right of
redemption is suspended or date of payment is postponed because the Exchange
is closed or trading on such Exchange is restricted or to the extent otherwise
permitted by the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his
account by telephoning the Shareholder Servicing Agent toll-free at (800)
225-2606. Shareholders wishing to avail themselves of this telephone
redemption privilege must so elect on their Account Application, designate
thereon a bank and account number to receive the proceeds of such redemption,
and sign the Account Application Form with the signature(s) guaranteed in the
manner set forth below under the caption "Signature Guarantee." The proceeds
of such a redemption, reduced by the amount of any applicable CDSC and the
amount of any income tax required to be withheld, are mailed by check to the
designated account, without charge, if the redemption proceeds do not exceed
$1,000, and are wired in federal funds to the designated account if the
redemption proceeds exceed $1,000. If a telephone redemption request is
received by the Shareholder Servicing Agent by the close of regular trading on
the Exchange on any business day, shares will be redeemed at the closing net
asset value of the Fund on that day. Subject to the conditions described in
this section, proceeds of a redemption are normally mailed or wired on the
next business day following the date of receipt of the order for redemption.
The Shareholder Servicing Agent will not be responsible for any losses
resulting from unauthorized telephone transactions if it follows reasonable
procedures designed to verify the identity of the caller. The Shareholder
Servicing Agent will request personal or other information from the caller,
and will normally also record calls. Shareholders should verify the accuracy
of confirmation statements immediately after their receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares
through his dealer (a repurchase), the shareholder can place a repurchase
order with his dealer, who may charge the shareholder a fee. IF THE DEALER
RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE
EXCHANGE AND COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME
DAY, THE SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY,
REDUCED BY THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX
REQUIRED TO BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A or Class B shares
("Direct Purchases") will be subject to a CDSC for a period of (i) with
respect to Class A shares, 12 months (however, the CDSC on Class A shares is
only imposed with respect to purchases of $1 million or more of Class A shares
or purchases by certain retirement plans of Class A shares) or (ii) with
respect to Class B shares, six years. Purchases of Class A shares made during
a calendar month, regardless of when during the month the investment occurred,
will age one month on the last day of the month and each subsequent month.
Class B shares purchased on or after January 1, 1993 will be aggregated on a
calendar month basis -- all transactions made during a calendar month,
regardless of when during the month they have occurred, will age one year at
the close of business on the last day of such month in the following calendar
year and each subsequent year. For Class B shares of the Fund purchased prior
to January 1, 1993, transactions will be aggregated on a calendar year basis
- -- all transactions made during a calendar year, regardless of when during the
year they have occurred, will age one year at the close of business on
December 31 of that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases
exceeds the sum of the six calendar year aggregations (12 months in the case
of purchases of $1 million or more of Class A shares or purchases by certain
retirement plans of Class A shares) of Direct Purchases may be redeemed
without charge ("Free Amount"). Moreover, no CDSC is ever assessed on
additional shares acquired through the automatic reinvestment of dividends or
capital gain distributions ("Reinvested Shares"). Therefore, at the time of
redemption of a particular class, (i) any Free Amount is not subject to the
CDSC and (ii) the amount of the redemption equal to the then-current value of
Reinvested Shares is not subject to the CDSC, but (iii) any amount of the
redemption in excess of the aggregate of the then-current value of Reinvested
Shares and the Free Amount is subject to a CDSC. The CDSC will first be
applied against the amount of Direct Purchases which will result in any such
charge being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases
of all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days
of the redemption pursuant to the Reinstatement Privilege. If the shares
credited for any CDSC paid are then redeemed within six years of the initial
purchase in the case of Class B shares or within 12 months of the initial
purchase for certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to
all limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund
solely in cash up to the lesser of $250,000 or 1% of the net asset value of
the Fund during any 90-day period for any one shareholder. The Fund has
reserved the right to pay other redemptions either totally or partially, by a
distribution in-kind of securities (instead of cash) from the Fund's
portfolio. The securities distributed in such a distribution would be valued
at the same amount as that assigned to them in calculating the net asset value
for the shares being sold. If a shareholder received a distribution in-kind,
the shareholder could incur brokerage or transaction charges when converting
the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in
any account for their then-current value if at any time the total investment
in such account drops below $500 because of redemptions or exchanges, except
in the case of accounts being established for monthly automatic investments
and certain payroll savings programs, Automatic Exchange Plan accounts and
tax-deferred retirement plans, for which there is a lower minimum investment
requirement. See "Purchases -- General -- Minimum Investment." Shareholders
will be notified that the value of their account is less than the minimum
investment requirement and allowed 60 days to make an additional investment
before the redemption is processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class B shares pursuant to
Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the "Distribution
Plan"), after having concluded that there is a reasonable likelihood that the
Plan would benefit the Fund and its Class B shareholders. In certain
circumstances, the fees described below may not be imposed or are being
waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
SERVICE FEES. The Distribution Plan for Class B shares provides that the
Fund may pay MFD a service fee of up to 0.25% of the average daily net assets
attributable to the Class B shares annually in order that MFD may pay expenses
on behalf of the Fund relating to the servicing of shares of the Class B
shares. The service fee is used by MFD to compensate dealers which enter into
a sales agreement with MFD in consideration for all personal services and/or
account maintenance services rendered by the dealer with respect to Class B
shares owned by investors for whom such dealer is the dealer or holder of
record. MFD may from time to time reduce the amount of the service fees paid
for shares sold prior to a certain date. Service fees may be reduced for a
dealer that is the holder or dealer of record for an investor who owns shares
of the Fund having an aggregate net asset value at or above a certain dollar
level. Dealers may from time to time be required to meet certain criteria in
order to receive service fees. MFD or its affiliates are entitled to retain
all service fees payable under the Distribution Plan for which there is no
dealer of record or for which qualification standards have not been met as
partial consideration for personal services and/or account maintenance
services performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay
MFD a distribution fee based on the average daily net assets attributable to
the Class B shares as partial consideration for distribution services
performed and expenses incurred in the performance of MFD's obligations under
its distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. While the amount of compensation received by MFD in
the form of distribution fees during any year may be more or less than the
expense incurred by MFD under its distribution agreement with the Fund, the
Fund is not liable to MFD for any losses MFD may incur in performing services
under its distribution agreement with the Fund.
OTHER FEATURES. Fees payable under the Distribution Plan are charged to,
and therefore reduce, income allocated to the Class B shares. The provisions
of the Distribution Plan relating to operating policies as well as initial
approval, renewal, amendment and termination are substantially identical as
they relate to each class of shares covered by the Distribution Plan.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class B
distribution and service fees for its current fiscal year are equal to 0.91%
per annum. Except in the case of the 0.25% per annum Class B service fee paid
by the Fund upon the sale of Class B shares, payment of the Class B service
fee will be suspended until such date as the Trustees of the Trust may
determine.
DISTRIBUTIONS
The Fund intends to declare daily and pay substantially all of its net
investment income to its shareholders as dividends on a monthly basis. In
determining the net investment income available for distributions, the Fund
may rely on projections of its anticipated net investment income over a longer
term, rather than its actual net investment income for the period in order to
provide more stable periodic distributions. The Fund may make one or more
distributions during the calendar year to its shareholders from any long-term
capital gains and may also make one or more distributions during the calendar
year to its shareholders from short-term capital gains. Shareholders may elect
to receive dividends and capital gain distributions in either cash or
additional shares of the same class with respect to which a distribution is
made. Reinvestments (net of any tax withholding) will be made in additional
full and fractional shares at the net asset value in effect at the close of
business on the last business day of the month. (See "Tax Status" and
"Shareholder Services -- Distribution Options" below.) Distributions paid by
the Fund with respect to Class A shares will generally be greater than those
paid with respect to Class B shares because expenses attributable to Class B
shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust
for federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). Because the Fund intends to distribute all
of its net investment income and net realized capital gains to its
shareholders in accordance with the timing requirements imposed by the Code,
it is not expected that the Fund will be required to pay any federal income or
excise taxes.
The Fund expects that none of its distributions will be eligible for the
dividends received deduction for corporations. The Fund expects that dividends
paid to shareholders from interest on Municipal Obligations will be exempt
from federal income tax because the Fund intends to satisfy certain
requirements of the Code. One such requirement is that at the close of each
quarter of its taxable year, at least 50% of the value of the Fund's total
assets consists of obligations whose interest is exempt from federal income
tax. Distributions of income from capital gains, from investments in taxable
securities, and from certain other transactions (including options and futures
transactions) will be taxable to the shareholders, whether the distribution is
paid in cash or reinvested in additional shares. Interest on indebtedness
incurred by shareholders to purchase or carry shares of the Fund will not be
deductible for federal income tax purposes. Exempt-interest dividends are
taken into account in calculating the amount of social security and railroad
retirement benefits that may be subject to federal income tax, and certain
distributions of exempt-interest dividends may also be a tax preference item
for purposes of the federal individual and corporate alternative minimum tax.
All exempt-interest dividends may affect a corporate shareholder's alternative
minimum tax liability. Depending on the nature of the distribution and the
residence of the shareholder, certain Fund distributions may be subject to
state and local income taxes. Entities or persons who are "substantial users"
(or persons related to "substantial users") of facilities financed by private
activity bonds should consult their tax advisers before purchasing shares of
the Fund. Shortly after the end of each calendar year, each shareholder will
be sent a statement setting forth the federal income tax status of all
dividends and distributions for that year, including the portion exempt from
federal income taxes as "exempt-interest dividends," the portion, if any, that
is a tax preference item under the federal alternative minimum tax, the
portion, if any, taxable as ordinary income, the portion, if any, taxable as
long-term capital gain (as well as the category or categories under which any
such gain is taxable), the portion, if any, representing a return of capital
(which is generally free of current taxes, but which results in a basis
reduction), and the amount, if any, of federal income tax withheld.
Fund distributions of net capital gains or net short-term capital gains will
reduce the Fund's net asset value per share. Shareholders who buy shares
shortly before the Fund makes such a distribution may thus pay the full price
for the shares and then effectively receive a portion of the purchase price
back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% (or
any lower rate permitted under an applicable treaty) on taxable dividends and
other payments that are subject to such withholding and that are made to
persons who are neither citizens nor residents of the U.S. The Fund is also
required in certain circumstances to apply backup withholding at the rate of
31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the U.S.)
who does not furnish to the Fund certain information and certifications or who
is otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
Prospective investors should read the Fund's Account Application for
additional information regarding backup withholding of federal income tax and
should consult their own tax advisers as to the tax consequences to them of an
investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of shares of the Fund is
determined each day during which the Exchange is open for trading. This
determination is made once during each such day as of the close of regular
trading on the Exchange by deducting the amount of the liabilities
attributable to the class from the value of the Fund's assets attributable to
the class and dividing the difference by the number of shares of the class
outstanding. Assets in the Fund's portfolio are valued on the basis of their
market or other fair value, as described in the SAI. The net asset value of
each class of shares is effective for orders received in "good order" by the
dealer prior to its calculation and received by MFD prior to the close of
business on that day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of two series of the Trust, has two classes of shares which it
offers to the general public, entitled Class A and Class B Shares of
Beneficial Interest (without par value). The Trust has reserved the right to
create and issue additional classes and series of shares, in which case each
class of shares of a series would participate equally in the earnings,
dividends and assets attributable to that class of that particular series.
Shareholders are entitled to one vote for each share held and shares of each
series would be entitled to vote separately to approve investment advisory
agreements or changes in investment restrictions, but shares of all series
would vote together in the election of Trustees and ratification of selection
of accountants. Additionally, each class of shares of a series will vote
separately on any material increases in the fees under its Rule 12b-1 plan (in
the case of Class B shares) or on any other matter that affects solely that
class of shares, but will otherwise vote together with all other classes of
shares of the series on all other matters. The Trust does not intend to hold
annual shareholder meetings. The Declaration of Trust provides that a Trustee
may be removed from office in certain instances (see "Description of Shares,
Voting Rights and Liabilities" in the SAI).
Each share of a class of the Fund represents an equal proportionate interest
in the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as
set forth above in "Purchases -- Conversion of Class B Shares"). Shares of the
Fund are fully paid and non-assessable. Should the Fund be liquidated,
shareholders of each class would be entitled to share pro rata in the net
assets attributable to that class available for distribution to shareholders.
Shares will remain on deposit with the Shareholder Servicing Agent and
certificates will not be issued except in connection with pledges and
assignments and in certain other limited circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed (e.g., fidelity bonding and errors and omission
insurance) and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate,
tax-equivalent yield and total rate of return quotations for each class of
shares and may also quote fund rankings in the relevant fund category from
various sources, such as the Lipper Analytical Securities Corporation and
Wiesenberger Investment Companies Service. Any yield and tax-equivalent yield
quotations are based on the annualized net investment income per share
allocated to each class of the Fund over a 30-day period stated as a percent
of the maximum public offering price of that class on the last day of that
period. Yield calculations for Class B shares assume no CDSC is paid. The
current distribution rate for each class is generally based upon the total
amount of dividends per share paid by the Fund to shareholders of that class
during the past twelve months and is computed by dividing the amount of such
dividends by the maximum public offering price of that class at the end of
such period. Current distribution rate calculations for Class B shares assume
no CDSC is paid. The current distribution rate differs from the yield
calculation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing,
short-term capital gains, and return of invested capital, and is calculated
over a different period of time. Total rate of return quotations reflect the
average annual percentage change over stated periods in the value of an
investment in each class of shares of the Fund made at the maximum public
offering price of the shares of that class with all distributions reinvested
and which will give effect to the imposition of any applicable CDSC assessed
upon redemptions of the Fund's Class B shares. Such total rate of return
quotations may be accompanied by quotations which do not reflect the reduction
in value of the initial investment due to the sales charge or the deduction of
a CDSC, and which will thus be higher. The Fund offers multiple classes of
shares which were initially offered for sale to, and purchased by, the public
on different dates (the class "inception date"). The calculation of total rate
of return for a class of shares which has a later class inception date than
another class of shares of the Fund is based both on (i) the performance of
the Fund's newer class from its inception date and (ii) the performance of the
Fund's oldest class from its inception date up to the class inception date of
the newer class. See the SAI for further information on the calculation of
total rate of return for share classes with different class inception dates.
All performance quotations are based on historical performance and are not
intended to indicate future performance. Yield and tax-equivalent yield
reflect only net portfolio income allocable to a class as of a stated time and
current distribution rate reflects only the rate of distributions paid by the
Fund over a stated period of time while total rate of return reflects all
components of investment return over a stated period of time. The Fund's
quotations may from time to time be used in advertisements, shareholder
reports or other communications to shareholders. For a discussion of the
manner in which the Fund will calculate its yield, current distribution rate,
tax-equivalent yield and total rate of return, see the SAI. For further
information about the Fund's performance for the fiscal year ended January 31,
1998, please see the Fund's Annual Report. A copy of the Annual Report may be
obtained without charge by contacting the Shareholder Servicing Agent (see
back cover for address and phone number). In addition to information provided
in shareholder reports, the Fund may, in its discretion, from time to time,
make a list of all or a portion of its holdings available to investors upon
request.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described
below or concerning other aspects of the Fund should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS: Each shareholder will receive
confirmation statements showing the transaction activity in his account. At
the end of each calendar year each shareholder will receive income tax
information regarding the tax status of all reportable dividends and
distributions for that year.
DISTRIBUTION OPTIONS: The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
o Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified.
o Dividends in cash; capital gain distributions reinvested in additional
shares.
o Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) of dividends and capital gain
distributions will be made in additional full and fractional shares of the
same class of shares of the Fund at the net asset value in effect at the close
of business on the record date. Dividends and capital gains distributions in
amounts less than $10 will automatically be reinvested in additional shares of
the Fund. If a shareholder has elected to receive dividends and/or capital
gain distributions in cash, and the postal or other delivery service is unable
to deliver checks to the shareholder's address of record, or the shareholder
does not respond to mailings from the Shareholder Servicing Agent with regard
to uncashed distribution checks, such shareholder's distribution option will
automatically be converted to having all dividends and other distributions
reinvested in additional shares. Any request for an option change must be
received by the Shareholder Servicing Agent by the record date for a dividend
or distribution in order to be effective for that dividend or distribution. No
interest will accrue on amounts represented by uncashed distribution or
redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS: For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $100,000 or more of Class A
shares of the Fund alone or in combination with shares of any class of other
MFS Funds or MFS Fixed Fund (a bank collective investment fund) within a 13-
month period (or 36-month period for purchases of $1 million or more), the
shareholder may obtain such shares of the Fund at the same reduced sales
charge as though the total quantity were invested in one lump sum, subject to
escrow agreements and the appointment of an attorney for redemptions from the
escrow amount if the intended purchases are not completed, by completing the
Letter of Intent section of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together
with the current offering price value of all holdings of Class A, B and C
shares of that shareholder in the MFS Funds or MFS Fixed Fund reaches a
discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of distributions of dividends and capital gains from
the same class of another MFS Fund. Furthermore, distributions made by the
Fund may be automatically invested at net asset value in shares of the same
class of any other MFS Fund, if shares of such Fund are available for sale
(without any applicable CDSC).
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic
payments based upon the value of his account. Each payment under a Systematic
Withdrawal Plan (a "SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B shares in any year
pursuant to a SWP will not be subject to a CDSC and generally are limited to
10% of the value of the account at the time of the establishment of the SWP.
The CDSC will not be waived in the case of SWP redemptions of Class A shares
which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS
Automatic Investment Plan: Cash investments of $50 or more may be made
through a shareholder's checking account on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur
on the first business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for shares of the same class
of shares of the other MFS Funds under the Automatic Exchange Plan if such
shares are available for sale. The Automatic Exchange Plan provides for
automatic exchanges of funds from the shareholder's account in an MFS Fund for
investment in the same class of shares of other MFS Funds selected by the
shareholder if such fund is available for sale. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to six different funds.
A shareholder should consider the objectives and policies of a fund and review
its prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund and Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales
charge. For federal and (generally) state income tax purposes, an exchange is
treated as a sale of the shares exchanged and, therefore, could result in a
capital gain or loss to the shareholder making the exchange. See the SAI for
further information concerning the Automatic Exchange Plan. Investors should
consult their tax advisers for information regarding the potential capital
gain and loss consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchase through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases.
--------------------
The SAI, dated June 1, 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, (ii) the Trustees, officers and investment adviser, (iii)
portfolio transactions and brokerage commissions, (iv) the method used to
calculate yield, tax-equivalent yield and total rate of return quotations of
the Fund, (v) the Distribution Plan and (vi) various services and privileges
provided by the Fund for the benefit of its shareholders, including additional
information with respect to the exchange privilege.
<PAGE>
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
contingent deferred sales charge ("CDSC") for Class A shares is waived
(Section II), and the CDSC for Class B shares is waived (Section III). 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 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) Plan or another similar recordkeeping
system made available by the Shareholder Servicing Agent; and
o Distributions from a 401(a) or ESP Plan that has invested its assets
in one or more of the MFS Funds for more than 10 years from the later
to occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP
Plan first invests its assets in one or more of the MFS Funds. The
sales charges will be waived in the case of a redemption of all of the
Plan's shares in all MFS Funds (i.e., all the assets of the 401(a) or
ESP Plan invested in the MFS Funds are withdrawn), unless immediately
prior to the redemption, the aggregate amount invested by the 401(a)
or ESP Plan in shares of the MFS Funds (excluding the reinvestment of
distributions) during the prior four years equals 50% or more of the
total value of the 401(a) or ESP Plan's assets in the MFS Funds, in
which case the sales charges will not be waived.
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 is 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 SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
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 ON SIMPLIFIED EMPLOYEE REDUCTION 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
TAXABLE EQUIVALENT YIELD TABLE
(UNDER FEDERAL INCOME TAX LAW AND RATES FOR 1998)
The table below shows the approximate taxable bond yields which are equivalent
to tax-exempt bond yields from 3% to 8% under federal income tax laws that
apply to 1998. (Such yields may differ under the laws applicable to subsequent
years.) Separate calculations, showing the applicable taxable income brackets,
are provided for investors who file joint returns and for those investors who
file individual returns.
<TABLE>
<CAPTION>
SINGLE RETURN JOINT RETURN INCOME TAX-EXEMPT YIELD
- ----------------------- -------------------- TAX ------------------------------------------------------------------
(TAXABLE INCOME)* BRACKET** 3% 4% 5% 6% 7% 8%
- --------------------------------------------- ------------ ------------------------------------------------------------------
1998 1998 EQUIVALENT TAXABLE YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-$ 25,350 $ 0-$ 42,350 0.15% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 25,350-$ 61,400 $ 42,350-$102,300 0.28 4.17 5.56 6.94 8.33 9.72 11.11
$ 61,400-$128,100 $102,300-$155,950 0.31 4.35 5.80 7.25 8.70 10.14 11.59
$128,100-$278,450 $155,950-$278,450 0.36 4.69 6.25 7.81 9.38 10.94 12.50
$278,450 & Over $278,450 & Over 0.396 4.97 6.62 8.28 9.93 11.59 13.25
* Net amount subject to Federal personal income tax after deductions and exemptions.
** Effective federal tax bracket.
</TABLE>
<PAGE>
APPENDIX C
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including the construction of a wide range of public
facilities such as bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
Municipal Bonds may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses, and obtaining funds to loan to
other public institutions and facilities. In addition, certain types of
industrial development bonds are issued by or on behalf of public authorities
to obtain funds to provide privately-operated housing facilities, sports
facilities, convention or trade show facilities, airport, mass transit, port
or parking facilities, air or water pollution control facilities and certain
local facilities for water supply, gas, electricity or sewage or solid waste
disposal. Such obligations are included within the term Municipal Bonds if the
interest paid thereon qualifies as exempt from federal income taxes. Other
types of industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated
industrial or commercial facilities, may constitute Municipal Bonds, although
the current federal tax laws place substantial limitations on the size of such
issues.
The two principal classifications of Municipal Bonds are "general obligation"
and "revenue" bonds. General obligation bonds are secured by the issuer's
pledge of its good faith, credit and taxing power for the payment of principal
and interest. The payment of such bonds may be dependent upon an appropriation
by the issuer's legislative body. The characteristics and enforcement of
general obligation bonds vary according to the law applicable to the
particular issuer. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Industrial
development bonds which are Municipal Bonds are in most cases revenue bonds
and do not generally constitute the pledge of the credit of the issuer of such
bonds. Municipal Bonds also include participations in municipal leases. These
are undivided interests in a portion of an obligation in the form of a lease
or installment purchase which is issued by state and local governments to
acquire equipment and facilities. Municipal leases frequently have special
risks not normally associated with general obligation or revenue bonds. Leases
and installment purchase or conditional sale contracts (which normally provide
for title to the leased asset to pass eventually to the governmental issuer)
have evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements for
the issuance of debt. The debt-issuance limitations are deemed to be
inapplicable because of the inclusion in many leases or contracts of "non-
appropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. Although the obligations will be secured by the
leased equipment or facilities, the disposition of the underlying property in
the event of non-appropriation or foreclosure might, in some cases, prove
difficult. In light of these concerns, the staff of the SEC has advised
investment companies to adopt and follow procedures for determining whether
municipal lease securities purchased are liquid and for monitoring the
liquidity of municipal lease securities held in such company's portfolio. The
Board of Trustees has adopted such procedures and has delegated to the Adviser
the authority to make determinations on the liquidity of municipal lease
securities in accordance with the procedures. The procedures require that the
Adviser use a number of factors in calculating the liquidity of a municipal
lease security, including, the frequency of trades and quotes for the
security, the number of dealers willing to purchase or sell the security and
the number of other potential purchasers, the willingness of dealers to
undertake to make a market in the security, the nature of the marketplace in
which the security trades, the credit quality of the security and other
factors which the Adviser may deem relevant. There are, of course, variations
in the security of Municipal Bonds, both within a particular classification
and between classifications, depending on numerous factors.
The yields on Municipal Bonds are dependent on a variety of factors, including
general money market conditions, supply and demand and general conditions of
the Municipal Bond market, size of a particular offering, the maturity of the
obligation and rating of the issue.
DESCRIPTION OF MUNICIPAL BOND RATINGS
The ratings of Moody's, S&P, Fitch and Duff & Phelps represent their opinions
as to the quality of various debt instruments.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
STANDARD & POOR'S RATINGS SERVICES
AAA: 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.
DUFF & PHELPS SHORT-TERM RATINGS
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1-: Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3: Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
<PAGE>
APPENDIX D
PORTFOLIO COMPOSITION CHART
MFS MUNICIPAL HIGH INCOME FUND
JANUARY 31, 1998
The table below shows the percentages of the Fund's assets at January 31, 1998
invested in bonds assigned to the various rating categories by S&P, Moody's,
Fitch, Duff & Phelps and in unrated securities determined by MFS to be of
comparable quality. The highest of the four rating services is used with
respect to each rating.
UNRATED
SECURITIES OF
COMPILED COMPARABLE
RATING RATINGS QUALITY TOTAL
- ------ ------- ------- -----
AAA/Aaa 15.20% 1.42% 16.62%
AA/Aa 6.52% 0.52% 7.04%
A/A 4.19% 0.41% 4.60%
BBB/Baa 17.75% 2.84% 20.60%
BB/Ba 0.88% 21.30% 22.17%
B/B 2.04% 10.97% 13.01%
CCC/Caa 0.00% 5.51% 5.51%
CC/Ca 0.00% 0.33% 0.33%
C/C 0.00% 0.22% 0.22%
Default 0.00% 0.27% 0.27%
-----
TOTAL 46.58% 43.79% 90.37%
=====
The chart does not necessarily indicate what the composition of the Fund's
portfolio will be in subsequent years. Rather, the Fund's investment
objective, policies and restrictions indicate the extent to which the Fund may
purchase securities in the various categories.
<PAGE>
Investment Adviser
Massachusetts Financial
Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
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
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
MMH-1-6/98/153M 25/225
<PAGE>
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
MFS(R) MUNICIPAL STATEMENT OF
HIGH INCOME FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) June 1, 1998
- --------------------------------------------------------------------------------
Page
1. Definitions ...................................................... 2
2. Investment Objective, Policies and Restrictions .................. 2
3. Management of the Fund ........................................... 9
Trustees ...................................................... 9
Officers ...................................................... 9
Trustee Compensation Table .................................... 10
Investment Adviser ............................................ 10
Administrator ................................................. 11
Custodian ..................................................... 11
Shareholder Servicing Agent ................................... 11
Distributor ................................................... 11
4. Portfolio Transactions and Brokerage Commissions ................. 12
5. Shareholder Services ............................................. 12
Investment and Withdrawal Programs ............................ 12
Exchange Privilege ............................................ 14
6. Tax Status ....................................................... 15
7. Determination of Net Asset Value and Performance ................. 16
8. Distribution Plan ................................................ 18
9. Description of Shares, Voting Rights and Liabilities ............. 19
10. Independent Auditors and Financial Statements .................... 20
Appendix A -- Performance Information ............................ A-1
MFS MUNICIPAL HIGH INCOME FUND
A Series of MFS Series Trust III
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time, (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus,
dated June 1, 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(R) Municipal High Income Fund,
a series of MFS Series Trust III
(the "Trust"), a Massachusetts
business trust. The Trust was
previously known as Massachusetts
Financial High Income Trust until
its name was changed on August 20,
1993. The Fund is the successor to
MFS High Yield Municipal Bond Fund
which was reorganized as a series
of the Trust on September 7, 1993.
"MFS" or the "Adviser" -- Massachusetts Financial Services
Company, a Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc., a
Delaware corporation.
"Prospectus" -- The Prospectus of the Fund, dated
June 1, 1998, as amended or
supplemented from time to time.
2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE. The investment objective of the Fund is to provide high
current income exempt from federal income taxes. Any investment involves risk
and there can be no assurance that the Fund will achieve its investment
objective.
INVESTMENT POLICIES. The Fund seeks to achieve its investment objective by
investing primarily (i.e., at least 80% of its assets under normal
circumstances) in debt securities issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia,
and their political subdivisions, agencies or instrumentalities, the interest
on which is exempt from federal income tax ("Municipal Bonds" or "tax-exempt
securities"). Under normal circumstances, the Fund will invest at least 65% of
its total assets in tax-exempt securities which offer a current yield above
that generally available on tax-exempt securities in the three highest rating
categories of the recognized rating agencies (commonly known as "junk bonds"
if rated below the four highest categories of recognized rating agencies).
Such high risk securities generally involve greater volatility of price and
greater risk of nonpayment of principal and interest (including the
possibility of default by or bankruptcy of the issuers of such securities)
than securities in higher rating categories. However, since available yields
and yield differentials vary over time, no specific level of income or yield
differential can ever be assured. Also, any income earned on portfolio
securities would be reduced by the Fund's expenses before it is distributed to
shareholders.
The Fund may invest in a relatively high percentage of municipal bonds issued
by entities having similar characteristics. The issuers may be located in the
same geographic area, or may pay their interest obligations from revenue of
similar projects such as hospitals, electric utility systems, multi-family
housing, nursing homes, commercial facilities (including hotels), steel
companies or life care facilities. This may make the Fund more susceptible to
similar economic, political, or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation of the net asset value of
shares of the Fund also increases.
The Fund reserves the right to invest more than 25% of its assets in
industrial revenue bonds such as industrial revenue bonds issued for electric
utility systems, multi-family housing, health care facilities, and steel
companies. Industrial revenue bonds are issued by various state and local
agencies to finance various projects. These investments might entail risks as
described below.
Electric utility systems face problems in financing large construction
programs in an inflationary period, cost increases and delay occasioned by
environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining fuel at reasonable prices, the cost of
competing fuel sources, difficulty in obtaining sufficient rate increases and
other regulatory problems, the effect of energy conservation and difficulty of
the capital market to absorb utility debt.
The financing of multi-family housing projects is affected by a variety of
factors, including satisfactory completion of construction within cost
constraints, the achievement and maintenance of a sufficient level of
occupancy, sound management of the developments, timely and adequate increases
in rents to cover increases in operating expenses, including taxes, utility
rates and maintenance costs, changes in applicable laws and governmental
regulations and social and economic trends.
Healthcare facilities include lifecare facilities, nursing homes and
hospitals. Lifecare facilities and nursing homes are alternative forms of
long-term housing for the elderly which offer residents the independence of
condominium life style and, if needed, the comprehensive care of nursing home
services. Bonds to finance lifecare facilities have been issued by various
state industrial development authorities. Since the bonds are secured only by
the revenues of each facility and not by state or local government tax
payments, they are subject to a wide variety of risks. Primarily, the projects
must maintain adequate occupancy levels to be able to provide revenues
adequate to maintain debt service payments. Moreover, in the case of life care
facilities, since a portion of housing, medical care and other services may be
financed by an initial deposit, there may be risk if the facility does not
maintain adequate financial reserves to secure estimated actuarial
liabilities. The ability of management to forecast inflationary cost pressures
accurately weighs importantly in this process. The facilities may also be
impacted by regulatory cost restrictions applied to health care delivery in
general, particularly state regulations or changes in Medicare and Medicaid
payments or qualifications, or restrictions imposed by medical insurance
companies. They may also face competition from alternative health care or
conventional housing facilities in the private or public sector. Hospital bond
ratings are often based on feasibility studies which contain projections of
expenses, revenues and occupancy levels. A hospital's gross receipts and net
income available to service its debt are influenced by demand for hospital
services, the ability of the hospital to provide the services required,
management and medical capabilities, economic developments in the service
area, efforts by insurers and government agencies to limit rates and expenses,
confidence in the hospital, service area economic developments, competition,
availability and expense of malpractice insurance, Medicaid and Medicare
funding, and possible federal legislation limiting the rates of increase of
hospital charges.
The Fund may also invest in bonds for other commercial facilities (including
hotels) and industrial projects. Financing for such projects will be subject
to inflation and other general economic factors as well as construction risks
including labor problems, difficulties with construction sites and the ability
of contractors to meet specifications in a timely manner.
If a revenue bond is secured by payments generated from a project, and the
revenue bond is also secured by a lien on the real estate comprising the
project, foreclosure by the indenture trustee on the lien for the benefit of
the bondholders creates additional risks associated with owning real estate,
including environmental risks.
RESTRICTED SECURITIES: The Fund may invest in restricted securities of
companies which the Adviser believes have significant growth potential. These
securities are subject to legal or contractual restrictions on resale.
Consequently, there is no public trading market for these securities and
market quotations are not readily available. As a result, the Fund might not
be able to sell these securities when the Adviser wishes to do so, or might
have to sell them at less than fair value. The Fund may not invest more than
15% of its net assets in restricted securities (as described in the Fund's
investment restrictions) (restricted securities the Board of Trustees has
determined are liquid are not included in this amount). See "Investment
Objective, Policies and Restrictions -- Investment Restrictions."
REPURCHASE AGREEMENTS: As described in the Prospectus, the Fund may enter into
repurchase agreements with sellers who are member firms (or a subsidiary
thereof) of the New York Stock Exchange (the "Exchange"), members of the
Federal Reserve System, recognized primary U.S. Government securities dealers
or institutions which the Adviser has determined to be of comparable
creditworthiness. The securities that the Fund purchases and holds through its
agent are U.S. Government securities, the values of which are equal to or
greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same,
with interest at a standard rate due to the Fund together with the repurchase
price on repurchase. In either case, the income to the Fund is unrelated to
the interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay
the price agreed upon on the agreed upon delivery date or upon demand, as the
case may be, the Fund will have the right to liquidate the securities. If at
the time the Fund is contractually entitled to exercise its right to liquidate
the securities, the seller is subject to a proceeding under the bankruptcy
laws or its assets are otherwise subject to a stay order, the Fund's exercise
of its right to liquidate the securities may be delayed and result in certain
losses and costs to the Fund. The Fund has adopted and follows procedures
which are intended to minimize the risks of repurchase agreements. For
example, the Fund only enters into repurchase agreements after the Adviser has
determined that the seller is creditworthy, and the Adviser monitors that
seller's creditworthiness on an ongoing basis. Moreover, under such
agreements, the value of the securities (which are marked to market every
business day) is required to be greater than the repurchase price, and the
Fund has the right to make margin calls at any time if the value of the
securities falls below the agreed upon margin.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and other
direct claims against a borrower. In purchasing loans, the Fund acquires some
or all of the interest of a bank or other lending institution in a loan to a
corporate borrower. Many such loans are secured, although some may be
unsecured. Such loans may be in default at the time of purchase. Loans that
are fully secured offer the Fund more protection than an unsecured loan in the
event of non-payment of scheduled interest or principal. However, there is no
assurance that the liquidation of collateral from a secured loan would satisfy
the corporate borrower's obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which
the Fund would assume all of the rights of the lending institution in a loan,
or as an assignment, pursuant to which the Fund would purchase an assignment
of a portion of a lender's interest in a loan either directly from the lender
or through an intermediary. The Fund may also purchase trade or other claims
against companies, which generally represent money owed by the company to a
supplier of goods or services. These claims may also be purchased at a time
when the company is in default.
Certain of the loans acquired by the Fund may involve revolving credit
facilities or other standby financing commitments which obligate the Fund to
pay additional cash on a certain date or on demand. These commitments may have
the effect of requiring the Fund to increase its investment in a company at a
time when the Fund might not otherwise decide to do so (including at a time
when the company's financial condition makes it unlikely that such amounts
will be repaid). To the extent that the Fund is committed to advance
additional funds, it will at all times hold and maintain in a segregated
account cash or other high grade debt obligations in an amount sufficient to
meet such commitments.
The Fund's ability to receive payments of principal, interest and other
amounts due in connection with these investments will depend primarily on the
financial condition of the borrower. In selecting the loans and other direct
investments which the Fund will purchase, the Adviser will rely upon its (and
not that of the original lending institution's) own credit analysis of the
borrower. As the Fund may be required to rely upon another lending institution
to collect and pass on to the Fund amounts payable with respect to the loan
and to enforce the Fund's rights under the loan, an insolvency, bankruptcy or
reorganization of the lending institution may delay or prevent the Fund from
receiving such amounts. In such cases, the Fund will evaluate as well the
creditworthiness of the lending institution and will treat both the borrower
and the lending institution as an "issuer" of the loans for purposes of
certain investment restrictions pertaining to the diversification of the
Fund's portfolio investments. The highly leveraged nature of many such loans
may make such loans especially vulnerable to adverse changes in economic or
market conditions. Investments in such loans may involve additional risks to
the Fund. For example, if a loan is foreclosed, the Fund could become part
owner of any collateral, and would bear the costs and liabilities associated
with owning and disposing of the collateral. In addition, it is conceivable
that under emerging legal theories of lender liability, the Fund could be held
liable as a co-lender. It is unclear whether loans and other forms of direct
indebtedness offer securities law protections against fraud and
misrepresentation. In the absence of definitive regulatory guidance, the Fund
relies on the Adviser's research in an attempt to avoid situations where fraud
or misrepresentation could adversely affect the Fund. In addition, loans and
other direct investments may not be in the form of securities or may be
subject to restrictions on transfer, and only limited opportunities may exist
to resell such instruments. As a result, the Fund may be unable to sell such
investments at an opportune time or may have to resell them at less than fair
market value. To the extent that the Adviser determines that any such
investments are illiquid, the Fund will include them in the investment
limitations described below.
"WHEN-ISSUED" SECURITIES: The Fund may purchase securities on a "when-issued"
or on a "forward delivery" basis. When the Fund commits to purchase a security
on a "when-issued" or "forward delivery" basis, it will set up procedures
consistent with the General Statement of Policy of the Securities and Exchange
Commission (the "SEC") concerning such purchases. Since that policy currently
recommends that an amount of the Fund's assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment, the
Fund will always have liquid assets sufficient to cover any commitments or to
limit any potential risk. However, although the Fund does not intend to make
such purchases for speculative purposes and intends to adhere to the
provisions of the SEC policy, purchases of securities on such bases may
involve more risk than other types of purchases. For example, the Fund may
have to sell assets which have been set aside in order to meet redemptions.
Also, if the Fund determines it is necessary to sell the "when-issued" or
"forward delivery" securities before delivery, it may incur a loss because of
market fluctuations since the time the commitment to purchase such securities
was made and any gain or loss would not be tax-exempt.
INVERSE FLOATING RATE OBLIGATIONS: The Fund may invest in so called "inverse
floating rate obligations" or "residual interest" bonds or certificates
structured to have similar features. In creating such an obligation, a
municipality issues a certain amount of debt and pays a fixed interest rate. A
portion of the debt is issued as variable rate short-term obligations, the
interest rate of which is reset at short intervals, typically ranging from
thirty-five days to one year. The other half of the debt is issued as inverse
floating rate obligations, the interest rate of which is calculated based on
the difference between the entire amount of interest paid by the issuer on all
of the debt and the interest paid on the short-term obligation. Under usual
circumstances, the holder of the inverse floating rate obligation can
generally purchase an equal principal amount of the short-term obligation and
link the two obligations in order to create long-term fixed-rate bonds.
Because the interest rate on the inverse floating rate obligation is
determined by subtracting the short-term rate from a fixed amount, the
interest rate will decrease as the short-term rate increases and will increase
as the short-term rate decreases. The magnitude of increases and decreases in
the market value of inverse floating rate obligations may be approximately
twice as large (or more if the inverse instrument is issued in principal
amount greater than the principal amount of the short-term piece) as the
comparable change in the market value of an equal principal amount of long-
term bonds which bear interest at the rate paid by the issuer and have similar
credit quality, redemption and maturity provisions.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed
to the prices of other securities, securities indices, precious metals or
other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity (i.e., principal value) or coupon rate is determined by reference to
a specific instrument or statistic. Gold-indexed securities, for example,
typically provide for a maturity value that depends on the price of gold,
resulting in a security whose price tends to rise and fall together with gold
prices.
The performance of indexed securities depends to a great extent on the
performance of the security or other instrument to which they are indexed, and
may also be influenced by interest rate changes in the U.S. and abroad. At the
same time, indexed securities are subject to the credit risks associated with
the issuer of the security, and their values may decline substantially if the
issuer's creditworthiness deteriorates. Recent issuers of indexed securities
have included banks, corporations, and certain U.S. government agencies.
OPTIONS: The Fund intends to write covered put and call options and purchase
put and call options on fixed income securities that are traded on U.S.
securities exchanges and over-the-counter. Call options written by the Fund
give the holder the right to buy the underlying securities from the Fund at a
fixed exercise price; put options written by the Fund give the holder the
right to sell the underlying securities to the Fund at a fixed exercise price.
A call option written by the Fund is "covered" if the Fund owns the underlying
security covered by the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion
or exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if liquid assets
representing the difference are maintained 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 or
is less than the exercise price of the put written if liquid assets
representing the difference are segregated by the Fund. Put and call options
written by the Fund may also be covered in such other manner as may be in
accordance with the requirements of the exchange on which, or the counter
party with which, the option is traded, and applicable laws and regulations.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the
case of a put option, since with regard to certain options, the writer may be
assigned an exercise notice at any time prior to the expiration of the option.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case
of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by deposited liquid
assets. Such transactions permit the Fund to generate additional premium
income, which will partially offset declines in the value of portfolio
securities or increases in the cost of securities to be acquired. Also,
effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
Fund investments. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than
the premium received from writing the option or is less than the premium paid
to purchase the option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying
security, any loss resulting from the closing out of a call option is likely
to be offset in whole or in part by appreciation of the underlying security
owned by the Fund.
An option position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not exist,
it might not be possible to effect closing transactions in particular options
with the result that the Fund would have to exercise options purchased in
order to realize any profit or maintain options written until exercise or
expiration. If the Fund is unable to effect a closing purchase transaction in
a secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market include the following:
(i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by a national securities exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or the Options Clearing Corporation (the "OCC") may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the OCC as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
The Fund may write options in connection with buy-and-write transactions
(i.e., the Fund may purchase a security and then write a call option against
that security). The exercise price of the call the Fund determines to write
will depend upon the expected price movement of the underlying security. The
exercise price of a call option may be below ("in-the-money"), equal to ("at-
the-money") or above ("out-of-the-money") the current value of the underlying
security at the time the option is written. If the call options are exercised
in such transactions, the Fund's maximum gain will be the premium received by
it for writing the option, adjusted upwards or downwards by the difference
between the Fund's purchase price of the security and the exercise price. If
the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely, by
the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options may be used by the
Fund in the same market environments that call options are used in equivalent
buy-and-write transactions.
The Fund may write combinations of put and call options on the same security,
a practice known as a "straddle." By writing a straddle, the Fund undertakes a
simultaneous obligation to sell and purchase the same security in the event
that one of the options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the amount
of the premium and transaction costs, the call will likely be exercised and
the Fund will be required to sell the underlying security at a below market
price. This loss may be offset, however, in whole or in part, by the premiums
received on the writing of the two options. Conversely, if the price of the
security declines by a sufficient amount, the put will likely be exercised.
The writing of straddles will likely be effective, therefore, only where the
price of a security remains stable and neither the call nor the put is
exercised. In an instance where one of the options is exercised, the loss on
the purchase or sale of the underlying security may exceed the amount of the
premiums received.
The Fund may purchase put options to hedge against a decline in the value of
its portfolio. By using put options in this way, the Fund will reduce any
profit it might otherwise have realized in the underlying security by the
amount of the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the price
of securities that the Fund anticipates purchasing in the future. The premium
paid for the call option plus any transaction costs will reduce the benefit,
if any, realized by the Fund upon exercise of the option, and, unless the
price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
The Fund may also purchase warrants on fixed income securities. A warrant on a
fixed income security is a long-dated call option that provides the holder
with the right, but not the obligation, to purchase from an issuer a fixed
income security with a specified par value, coupon, and maturity at a fixed
exercise price on a specified date or between specified dates. Typically, the
fixed income securities that are deliverable pursuant to the warrant will be
noncallable securities. Warrants may be issued as entirely separate securities
or they may be attached to, but subsequently detachable from, a fixed income
security of the same issuer.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a
certain percentage (the "SEC illiquidity ceiling") of the Fund's assets.
Although the Adviser disagrees with this position, the Adviser intends to
limit the Fund's writing of over-the-counter options in accordance with the
following procedure. Except as provided below, the Fund intends to write over-
the-counter options only with primary U.S. Government securities dealers
recognized by the Federal Reserve Bank of New York. Also, the contracts which
the Fund has in place with such primary dealers will provide that the Fund has
the absolute right to repurchase an option it writes at any time at a price
which represents the fair market value, as determined in good faith through
negotiation between the parties, but which in no event will exceed a price
determined pursuant to a formula in the contract. Although the specific
formula may vary between contracts with different primary dealers, the formula
will generally be based on a multiple of the premium received by the Fund for
writing the option, plus the amount, if any, of the option's intrinsic value
(i.e., the amount that the option is in-the-money). The formula may also
include a factor to account for the difference between the price of the
security and the strike price of the option if the option is written out-of-
the-money. The Fund will treat all or a portion of the formula price as
illiquid for purposes of the SEC illiquidity ceiling imposed by the SEC staff.
The Fund may also write over-the-counter options with non-primary dealers and
will treat the assets used to cover these options as illiquid for purposes of
such SEC illiquidity ceiling.
The Fund may purchase detachable call options on municipal securities, which
are options issued by an issuer of the underlying municipal securities giving
the purchaser the right to purchase the securities at a fixed price, up to a
stated time in the future or, in some cases, on a future date. The Fund may
purchase detachable call options either in connection with its purchase of the
underlying municipal securities or in separate transactions unrelated to
purchases of the underlying municipal securities. In general, however, the
Fund will only purchase detachable call options that are issued at the same
time as the underlying municipal securities. The Fund may or may not purchase
the underlying municipal securities. Because detachable call options may be
long term instruments, their value could be subject to greater volatility and,
if the Fund seeks to sell an option it has purchased, it could sustain a loss
of all or a portion of the amount paid to purchase the option. In this regard,
detachable call options have only recently been introduced and there is not
yet an established market for the sale of such instruments. In addition,
depending on changes in the value of the underlying municipal security, it may
not be profitable for the Fund to exercise an option it has purchased. In that
event, the Fund will lose the amount of the purchase price paid for the
option.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities or contracts based on municipal
bond or other financial indices, including any index of fixed income
securities, as such contracts become available for trading ("Futures
Contracts"). A "sale" of a Futures Contract means a contractual obligation to
deliver the securities called for by the contract at a specified price in a
fixed delivery month or, in the case of a Futures Contract on an index of
securities, to make or receive a cash settlement. A "purchase" of a Futures
Contract means a contractual obligation to acquire the securities called for
by the contract at a specified price in a fixed delivery month or, in the case
of a Futures Contract on an index of securities, to make or receive a cash
settlement. Futures Contracts have been designed by exchanges which have been
designated as "contract markets" by the Commodity Futures Trading Commission
(the "CFTC"), and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market. Existing
contract markets include the Chicago Board of Trade and the International
Monetary Market of the Chicago Mercantile Exchange. Futures Contracts are
traded on these markets, and, through their clearing corporations, the
exchanges guarantee performance of the contracts as between the clearing
members of the exchange.
At the same time a Futures Contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment ("initial deposit"). The
initial deposit varies but may be as low as 5% or less of the value of the
contract. Daily thereafter, the Futures Contract is valued and the payment of
"variation margin" may be required since each day the Fund would provide or
receive cash that reflects any decline or increase in the contract's value.
At the time of delivery of securities pursuant to a Futures Contract based on
fixed income securities, adjustments are made to recognize differences in
value arising from the delivery of securities with a different interest rate
from that specified in the contract. In some (but not many) cases, securities
called for by a Futures Contract may not have been issued when the contract
was written.
A Futures Contract based on an index of securities, such as a municipal bond
index Futures Contract, provides for a cash payment, equal to the amount, if
any, by which the value of the index at maturity is above or below the value
of the index at the time the contract was entered into, times a fixed index
"multiplier". The index underlying such a Futures Contract is generally a
broad based index of securities designed to reflect movements in the relevant
market as a whole. The index assigns weighted values to the securities
included in the index, and its composition is changed periodically.
Although Futures Contracts call for the actual delivery of securities or, in
the case of Futures Contracts based on an index, the making or acceptance of a
cash settlement at a specified future time, the contractual obligation is
usually fulfilled before such date by buying or selling, as the case may be,
on a commodities exchange, an identical Futures Contract calling for
settlement in the same month, subject to the availability of a liquid
secondary market. The Fund incurs brokerage fees when it purchases and sells
Futures Contracts.
One purpose of the purchase or sale of a Futures Contract entered into for
hedging purposes, in the case of a portfolio such as that of the Fund, which
holds or intends to acquire long-term fixed income securities, is to attempt
to protect the Fund from fluctuations in interest rates without actually
buying or selling long-term fixed income securities. For example, if the Fund
owns long-term bonds, and interest rates were expected to increase, the Fund
might enter into Futures Contracts for the sale of debt securities. Such a
sale would have much the same effect as selling an equivalent value of the
long-term bonds owned by the Fund. If interest rates did increase, the value
of the debt securities in the portfolio would decline, but the value of the
Futures Contracts would increase at approximately the same rate, thereby
keeping the net asset value of the Fund from declining as much as it otherwise
would have. The Fund could accomplish similar results by selling bonds with
long maturities and investing in bonds with short maturities when interest
rates are expected to increase. However, the use of Futures Contracts as an
investment technique allows the Fund to maintain a hedging position without
having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to attempt to hedge against anticipated purchases
of long-term bonds at higher prices. Since the fluctuations in the value of
Futures Contracts should be similar to that of long-term bonds, the Fund could
take advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the
Futures Contracts could be liquidated and the Fund could then buy long-term
bonds on the cash market. To the extent the Fund enters into Futures Contracts
for this purpose, the assets in the segregated asset account maintained to
cover the Fund's obligations with respect to such Futures Contracts will
consist of liquid assets from its portfolio in an amount equal to the
difference between the fluctuating market value of such Futures Contracts and
the aggregate value of the initial and variation margin payments made by the
Fund with respect to such Futures Contracts.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close out Futures Contracts through
offsetting transactions which could distort the normal relationship between
the cash and futures markets. Second, the liquidity of the futures market
depends on participants entering into offsetting transactions rather than
making or taking delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus producing
distortion. Third, from the point of view of speculators, the margin deposit
requirements in the futures market are less onerous than margin requirements
in the securities market. Therefore, increased participation by speculators in
the futures market may cause temporary price distortions. Due to the
possibility of distortion, a correct forecast of general interest rate trends
by the Adviser may still not result in a successful transaction.
In addition, Futures Contracts entail risks. Although the Fund believes that
use of such contracts will benefit the Fund, if the Adviser's investment
judgment about the general direction of interest rates is incorrect, the
Fund's overall performance would be poorer than if it had not entered into any
such contract. For example, if the Fund has hedged against the possibility of
an increase in interest rates which would adversely affect the price of bonds
held in its portfolio and interest rates decrease instead, the Fund will lose
part or all of the benefit of the increased value of its bonds which it has
hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Fund has insufficient cash, it may have
to sell bonds from its portfolio to meet daily variation margin requirements.
Such sales of bonds may be, but will not necessarily be, at increased prices
which reflect the rising market. The Fund may have to sell securities at a
time when it may be disadvantageous to do so. The Fund may also enter into
transactions in Futures Contracts for non-hedging purposes, to the extent
permitted by applicable law, which involves greater risks.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options on
Futures Contracts ("Options on Futures Contracts") for hedging purposes and
for non-hedging purposes, to the extent permitted by applicable law. An Option
on a Futures Contract provides the holder with the right to enter into a
"long" position in the underlying Futures Contract, in the case of a call
option, or a "short" position in the underlying Futures Contract, in the case
of a put option, at a fixed exercise price up to a stated expiration date or,
in the case of certain options, on such date. Such Options on Futures
Contracts will be traded on contract markets regulated by the CFTC. Depending
on the pricing of the option compared to either the price of the Futures
Contract upon which it is based or the price of the underlying debt
securities, it may or may not be less risky than ownership of the Futures
Contract or underlying debt securities. As with the purchase of Futures
Contracts, when the Fund is not fully invested, it may purchase a call Option
on a Futures Contract to hedge against a market advance due to declining
interest rates.
The writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the securities which are deliverable upon exercise
of the Futures Contract. If the futures price at expiration of the option is
below the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. The writing of a put Option on a
Futures Contract constitutes a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the Futures Contract. If the
futures price at expiration of the option is higher than the exercise price,
the Fund will retain the full amount of the option premium, less related
transaction costs, which provides a partial hedge against any increase in the
price of securities which the Fund intends to purchase. If a put or call
option the Fund has written is exercised, the Fund will incur a loss which
will be reduced by the amount of the premium it receives, less related
transaction costs. Depending on the degree of correlation between changes in
the value of its portfolio securities and changes in the value of its futures
positions, the Fund's losses from existing Options on Futures Contracts may to
some extent be reduced or increased by changes in the value of portfolio
securities. The writer of an Option on a Futures Contract is subject to the
requirement of initial and variation margin payments.
The Fund may cover the writing of call Options on Futures Contracts (a)
through purchases of the underlying Futures Contract, (b) through ownership of
the security, or securities included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract
and in the same principal amount as the call written where the exercise price
of the call held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call written if
liquid assets representing the difference are segregated by the Fund. The Fund
may cover the writing of put Options on Futures Contracts (a) through sales of
the underlying Futures Contract, (b) through segregation of liquid assets in
an amount equal to the value of the security or index underlying the Futures
Contract, or (c) through the holding of a put on the same Futures Contract and
in the same principal amount as the put written where the exercise price of
the put held is equal to or greater than the exercise price of the put written
or is less than the exercise price of the put written if liquid assets
representing the difference are segregated by the Fund. Put and call Options
on Futures Contracts written by the Fund may also be covered in such other
manner as may be in accordance with the requirements of the exchange on which
they are traded and applicable laws and regulations.
The purchase of a put Option on a Futures Contract is similar in some respects
to the purchase of protective put options on portfolio securities. The Fund
will purchase a put Option on a Futures Contract to hedge the Fund's portfolio
against the risk of rising interest rates.
The amount of risk the Fund assumes when it purchases an Option on a Futures
Contract is the premium paid for the option plus related transaction costs,
although in order to realize a profit it may be necessary to exercise the
option and close out the underlying Futures Contract. In addition to the
correlation risks discussed above, the purchase of an option also entails the
risk that changes in the value of the underlying Futures Contract will not be
fully reflected in the value of the option purchased.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS: Various additional risks exist with respect to the trading
of options and futures. For example, the Fund's ability effectively to hedge
all or a portion of its portfolio through transactions in such instruments
will depend on the degree to which price movements in the underlying index or
instrument correlate with price movements in the relevant portion of the
Fund's portfolio. The trading of futures and options entails the additional
risk of imperfect correlation between movements in the futures or option price
and the price of the underlying index or obligation, while the trading of
options also entails the risk of imperfect correlation between securities used
to cover options written and the securities underlying such options. The
anticipated spread between the prices may be distorted because of various
factors, which are set forth under "Futures Contracts" above. The Fund may
also enter into transactions in such instruments for non-hedging purposes,
which involves greater risks and could result in losses which are not offset
by gains on other portfolio assets.
The Fund's ability to engage in options and futures strategies will also
depend on the availability of liquid markets in such instruments. "Options"
above sets forth certain reasons why a liquid secondary market may not exist.
The liquidity of a secondary market in a Futures Contract or option thereon
may be adversely affected by "daily price fluctuation limits" established by
exchanges which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limit. In
addition, the exchanges on which futures and options are traded may impose
limitations governing the maximum number of positions on the same side of the
market and involving the same underlying instrument which may be held by a
single investor, whether acting alone or in concert with others (regardless of
whether such contracts are held on the same or different exchanges or held or
written in one or more accounts or through one or more brokers).
Options on securities may be traded over-the-counter. In an over-the-counter
trading environment, many of the protections afforded to exchange participants
will not be available. For example, there are no clearing house performance
guarantees. In addition, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost.
----------------
The investment objective and policies described above and the policies with
respect to portfolio management described below may be changed without
shareholder approval.
PORTFOLIO MANAGEMENT: Although in many cases the Fund will hold securities
(particularly, those which are unrated or which are in the medium and lower
rating categories) until maturity, the Fund intends to manage its portfolio by
buying and selling securities to the fullest extent practicable.
In managing its portfolio, the Fund seeks to take advantage of market
developments and yield disparities, which may include use of the following
strategies:
(1) shortening the average maturity of its portfolio in anticipation of a
rise in interest rates so as to minimize depreciation of principal;
(2) lengthening the average maturity of its portfolio in anticipation of a
decline in interest rates so as to maximize tax-exempt yield;
(3) selling one type of debt security (e.g., revenue bonds) and buying
another (e.g., general obligation bonds) when disparities arise in the
relative values of each; and
(4) changing from one debt security to an essentially similar debt
security when their respective yields are distorted due to market factors.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
shares of the Fund (which means the lesser of (i) more than 50% of its
outstanding shares of the Trust or a series or class, as applicable, or (ii)
67% or more of the outstanding shares of the Trust or a series or class, as
applicable, present at a meeting at which holders of more than 50% of the
outstanding shares of the Trust or a series or class, as applicable, are
represented in person or by proxy). Except for Investment Restriction (1) and
the Fund's nonfundamental investment policy regarding illiquid securities,
these investment restrictions 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.
The Fund may not:
(1) borrow money or pledge, mortgage or hypothecate in excess of
1/3 of its assets, except as a temporary measure for extraordinary or
emergency purposes (the Fund intends to borrow money only from banks and
only to accommodate requests for the repurchase of shares of the Fund while
effecting an orderly liquidation of portfolio securities) (for the purpose
of this restriction, collateral arrangements with respect to options on
fixed income securities, Futures Contracts and Options on Futures Contracts
and payments of initial and variation margin in connection therewith are not
considered a pledge of assets);
(2) purchase any security or evidence of interest therein on margin,
except that the Fund may obtain such short-term credit as may be necessary
for the clearance of purchases and sales of securities and except that the
Fund may make deposits on margin in connection with options on fixed income
securities, Futures Contracts and Options on Futures Contracts;
(3) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent the writing, purchasing and selling of
puts, calls or combinations thereof with respect to securities and Futures
Contracts;
(4) underwrite securities issued by other persons except insofar as the
Fund may technically be deemed an underwriter under the Securities Act of
1933, as amended, in selling a portfolio security;
(5) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except Futures Contracts and Options on Futures Contracts) in the ordinary
course of the business of the Fund (the Fund reserves the freedom of action
to hold and to sell real estate acquired as a result of the ownership of
securities);
(6) purchase securities of any issuer if such purchase at the time thereof
would cause more than 10% of the voting securities of such issuer to be held
by the Fund;
(7) issue any senior security (as that term is defined in the Investment
Company Act of 1940, as amended (the "1940 Act")), if such issuance is
specifically prohibited by the 1940 Act or the rules and regulations
promulgated thereunder; and
(8) make loans to other persons except through the use of repurchase
agreements, the purchase of commercial paper or the purchase of all or a
portion of an issue of debt securities in accordance with its investment
objective, policies and restrictions, and provided that not more than 10% of
the Fund's assets will be invested in repurchase agreements maturing in more
than seven days.
As a matter of non-fundamental policy, the Fund may not knowingly invest in
securities (other than repurchase agreements), which are subject to legal or
contractual restrictions on resale unless the Board of Trustees has determined
that such securities are liquid based upon trading markets for the specific
security, if more than 15% of the Fund's net assets (taken at market value)
would be so invested.
For purposes of the investment restrictions described above and the state and
federal restrictions described below, the issuer of a tax-exempt security is
deemed to be the entity (public or private) ultimately responsible for the
payment of the principal of and interest on the security.
STATE AND FEDERAL RESTRICTIONS: In order to comply with certain state and
federal statutes, the Fund will not, as a matter of operating policy, (i)
invest more than 5% of its total assets at the time of investment in unsecured
obligations of issuers which, including predecessors, controlling persons,
general partners and guarantors, have a record of less than three years'
continuous business operation or relevant business experience, (ii) purchase
or retain in its portfolio any securities issued by an issuer any of whose
officers, directors, trustees or security holders is an officer or Trustee of
the Fund, or is a member, partner, officer or Director of the Adviser if,
after the purchase of the securities of such issuer by the Fund, one or more
of such persons owns beneficially more than 1/2 of 1% of the shares or
securities, or both, (all taken at market value) of such issuer and such
persons owning more than 1/2 of 1% of such shares or securities together own
beneficially more than 5% of such shares or securities, or both, (all taken at
market value), (iii) sell any security which it does not own unless by virtue
of its ownership of other securities the Fund has at the time of sale a right
to obtain securities, without payment of further consideration, equivalent in
kind and amount to the securities sold and provided that if such right is
conditional the sale is made upon the same conditions, (iv) invest for the
purpose of exercising control or management, or (v) purchase securities issued
by any registered investment company except by purchase in the open market
where no commission or profit to a sponsor or dealer results from such
purchase other than the customary broker's commission, or except when such
purchase, though not made in the open market, is part of a plan of merger or
consolidation, provided, however, that the Fund shall not purchase the
securities of any registered investment company if such purchase at the time
thereof would cause more than 10% of the total assets of the Fund (taken at
market value) to be invested in the securities of such issuers or would cause
more than 3% of the outstanding voting securities of any such issuer to be
held by the Fund, and provided further, that the Fund shall not purchase
securities issued by any open-end investment company. These policies are not
fundamental and may be changed by the Fund without shareholder approval in
response to changes in the various state and federal requirements.
3. MANAGEMENT OF THE FUND
The Board of Trustees provides broad supervision over the affairs of the Fund.
The Adviser is responsible for the management of the Fund's assets, and the
officers of the Trust are responsible for its operations. The Trustees and
officers of the Trust are listed below, together with their principal
occupations during the past five years (their titles may have varied during
that period).
TRUSTEES
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, President, Chairman, 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
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September,
1996); Deloitte & Touch LLP, Senior Manager (until September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March, 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994)
- ----------
*"Interested persons" (as defined in the Investment Company Act of 1940 (the
"1940 Act")) of the Adviser, whose address is 500 Boylston Street, Boston,
Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS
affiliates or with certain other funds of which MFS or a subsidiary of MFS is
the investment adviser or distributor. 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 $3,250 per year plus $165 per meeting and $130 per
committee meeting attended, together with such Trustees' out-of-pocket
expenses) and has adopted a retirement plan for non-interested Trustees and
Mr. Bailey. Under this plan, a Trustee will retire upon reaching age 73 and if
the Trustee has completed at least five years of service, he would be entitled
to annual payments during his lifetime of up to 50% of such Trustee's average
annual compensation (based on the three years prior to his retirement)
depending on his length of service. A Trustee may also retire prior to age 73
and receive reduced payments if he has completed at least five years of
service. Under the plan, a Trustee (or his beneficiaries) will also receive
benefits for a period of time in the event the Trustee is disabled or dies.
These benefits will also be based on the Trustee's average annual compensation
and length of service. There is no retirement plan provided by the Trust for
Messrs. Scott and Shames. The Fund will accrue its allocable share of
compensation expenses each year to cover current year's service and amortize
past service cost.
Set forth below is certain information concerning the cash compensation paid
to the Trustees and benefits accrued, and estimated benefits payable, under
the retirement plan.
TRUSTEE COMPENSATION TABLE
RETIREMENT
BENEFIT TOTAL TRUSTEE
ACCRUED AS ESTIMATED FEES FROM FUND
TRUSTEE FEES PART OF FUND CREDITED YEARS AND FUND
TRUSTEE FROM FUND(1) EXPENSE(1) OF SERVICE(2) COMPLEX(3)
- -----------------------------------------------------------------------------
Richard B. Bailey $5,655 $1,596 8 $283,647
Peter G. Harwood 6,045 1,173 5 121,105
J. Atwood Ives 5,490 1,612 17 108,720
Lawrence T. Perera 6,305 2,844 24 127,055
William J. Poorvu 6,045 2,905 24 121,105
Charles W. Schmidt 6,045 2,894 17 121,105
Arnold D. Scott --0-- --0-- N/A --0--
Jeffrey L. Shames --0-- --0-- N/A --0--
David B. Stone 6,305 2,428 11 127,055
Elaine R. Smith 6,495 1,781 27 132,035
- ------------
(1) For fiscal year ended January 31, 1998.
(2) Based on normal retirement age of 73. See the table below for the
estimated annual benefits payable upon retirement by the Fund to a Trustee
based on his or her estimated credited years of service.
(3) Information provided is for calendar year 1997. All Trustees receiving
compensation served as Trustees of 27 funds within the MFS fund complex
(having aggregate net assets at December 31, 1997, of approximately $28.9
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 $47.8 billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
----------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- ------------------------------------------------------------------------------
$4,941 $ 741 $1,235 $1,729 $2,471
5,382 807 1,345 1,884 2,691
5,822 873 1,456 2,038 2,911
6,263 939 1,566 2,192 3,132
6,704 1,006 1,676 2,346 3,352
7,145 1,072 1,786 2,501 3,572
- ------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of April 30, 1998, all Trustees and officers as a group owned less than 1%
of the outstanding shares of the Fund. As of April 30, 1998, Merrill Lynch,
Pierce, Fenner & Smith Inc., P.O. Box 45286, Jacksonville, FL was the record
owner of approximately 13.73% of the total outstanding Class A shares of the
Fund, and was the record owner of approximately 29.38% of the total
outstanding Class B shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, unless, as to liabilities to the Trust or its shareholders, it is
finally adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
with respect to any matter, unless it is adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interest of the Trust. In the case of settlement, such indemnification will
not be provided unless it has been determined, pursuant to the Declaration of
Trust, that such officers or Trustees have not engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management
dating from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial
Services Holdings, Inc., which is an indirect wholly owned subsidiary of Sun
Life Assurance Company of Canada ("Sun Life"). The Prospectus contains
information with respect to the management of the Adviser and other investment
companies for which MFS serves as investment adviser.
The Adviser manages the assets of the Fund pursuant to an Investment Advisory
Agreement, dated September 1, 1993, as amended (the "Advisory Agreement").
Under the Advisory Agreement, the Adviser provides the Fund with overall
investment advisory services. Subject to such policies as the Trustees may
determine, the Adviser makes investment decisions for the Fund. For these
services and facilities, under the Advisory Agreement, the Adviser receives a
management fee, computed and paid monthly, in an amount equal to the sum of
0.30% of the first $1.3 billion of the Fund's average daily net asset value
and 0.25% of the amount in excess of $1.3 billion plus 4.75% of the Fund's
gross income (i.e., income other than gains from the sale of securities), in
each case on an annualized basis, for the Fund's then-current fiscal year.
For the Fund's fiscal years ended January 31, 1996, 1997 and 1998, management
fees amounted to $6,996,766, $7,154,011 and $7,934,130, equivalent on an
annualized basis to 0.67%, 0.67% and 0.65%, respectively, of the Fund's daily
net assets. In order to comply with the expense limitations of certain state
securities commissions, the Adviser will reduce its management fee or
otherwise reimburse the Fund for any expense, exclusive of interest, taxes and
brokerage commissions, incurred by the Fund in any fiscal year to the extent
such expenses exceed the most restrictive of such state expense limitations.
The Adviser will make appropriate adjustments to such reimbursements in
response to any amendment or rescission of the various state requirements.
The Fund pays all of its expenses (other than those assumed by MFS or MFD),
including: Trustee fees discussed above, governmental fees; interest charges;
taxes; membership dues in the Investment Company Institute allocable to the
Fund; fees and expenses of independent auditors, of legal counsel, and of any
transfer agent, registrar or dividend disbursing agent of the Fund; expenses
of repurchasing and redeeming shares; expenses of preparing, printing and
mailing share certificates, shareholder reports, notices, proxy statements to
shareholders and reports to governmental officers and commissions; brokerage
and other expenses connected with the execution, recording and settlement of
portfolio security transactions; insurance premiums; fees and expenses of
State Street Bank and Trust Company, the Fund's custodian, for all services to
the Fund, including safekeeping of funds and securities and maintaining
required books and accounts; expenses of calculating the net asset value of
the Fund's shares; and expenses of shareholder meetings. Expenses relating to
the issuance, registration and qualification of shares of the Fund and the
preparation, printing and mailing of prospectuses for such purposes are borne
by the Fund except that the Fund's Distribution Agreement with MFD requires
MFD to pay for prospectuses that are to be used for sales purposes. Expenses
of the Trust which are not attributable to a specific series are allocated
among the series in a manner believed by management of the Trust to be fair
and equitable. For a list of the Fund's expenses, including the compensation
paid to the Trustees who are not officers of MFS, for the fiscal year ended
January 31, 1998, see "Statement of Operations" in the Fund's Annual Report to
shareholders incorporated by reference into this SAI.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing the investments of the Fund, effecting the
portfolio transactions.
The Advisory Agreement will remain in effect until August 1, 1998, and will
continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority
of the shares of the Fund (as defined in "Investment Restrictions") and, in
either case, by a majority of the Trustees who are not parties to the Advisory
Agreement or interested persons of any such party. The Advisory Agreement
terminates automatically if assigned and may be terminated without penalty by
vote of a majority of the shares of the Fund (as defined in "Investment
Restrictions") or by either party to the Advisory Agreement on not more than
60 days' nor less than 30 days' written notice. The Advisory Agreement
provides that if MFS ceases to serve as the Adviser to the Fund, the Fund will
change its name so as to delete the initials "MFS". The Advisory Agreement
further provides that MFS may render services to others and may permit fund
clients in addition to the Fund to use the initials "MFS" in their names. The
Advisory Agreement also provides that neither the Adviser nor its personnel
shall be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution and
management of the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its or their duties or by reason of reckless
disregard of its or their obligations and duties under the Advisory Agreement.
ADMINISTRATOR
MFS provides the Fund with certain 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. For the period commencing March
1, 1997 through the period ended January 31, 1998, MFS received fees under the
Administrative Services Agreement of $155,713.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery
of securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and
trust accounting and other required books and accounts, and calculating the
daily net asset value of each class of shares of the Fund. The Custodian does
not determine the investment policies of the Fund or decide which securities
the Fund will buy or sell. The Fund may, however, invest in securities,
including repurchase agreements, issued by the Custodian and may deal with the
Custodian as principal in securities transactions. The Custodian also acts as
the dividend disbursing agent of the Fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement, effective August 1, 1985, as amended
(the "Agency Agreement") with the Trust. The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and
performing transfer agent functions, and the keeping of records in connection
with the issuance, transfer and redemption of the shares of each class of the
Fund. For these services, the Shareholder Servicing Agent will receive a fee
calculated as a percentage of the average daily net assets of the Fund at an
effective annual rate of 0.1125%. 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 (the "Distribution Agreement"), with the
Trust. Prior to January 1, 1995, MFS Financial Services, Inc. ("FSI"), another
wholly owned subsidiary of MFS, was the Fund's distributor. Where this SAI
refers to MFD in relation to the receipt or payment of money with respect to a
period or periods prior to January 1, 1995, such reference shall be deemed to
include FSI, as the predecessor in interest to MFD. Prior to that date, MFS
served as the Fund's principal underwriter pursuant to a distribution
agreement, dated January 18, 1984, with the Fund's predecessor. Except for the
periods from March 1, 1989 to the close of business on March 23, 1989,
February 6, 1990 to the close of business on February 7, 1990, and on June 3,
1994 only shareholders of the Fund have been permitted to purchase additional
Fund shares since June, 1985. As of the close of business on February 28,
1990, through November 4, 1990, shares of the Fund were also not available for
sale to existing shareholders (except through the reinvestment of dividends
and capital gains of the Fund). On August 5, 1996, Class A shares and Class B
shares of the Fund became available for sale to new shareholders.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of Class A shares of the Fund is their net
asset value next computed after the sale plus a sales charge which varies
based upon the quantity purchased. The public offering price of a Class A
share of the Fund is calculated by dividing the net asset value of a Class A
share by the difference (expressed as a decimal) between 100% and the sales
charge percentage of offering price applicable to the purchase (see
"Purchases" in the Prospectus). The sales charge scale set forth in the
Prospectus applies to purchases of Class A shares of the Fund alone or in
combination with shares of all classes of certain other funds in the MFS
Family of Funds (the "MFS Funds") and other funds (as noted under Right of
Accumulation) by any person, including members of a family unit (e.g.,
husband, wife, and minor children) and bona fide trustees, and also applies to
purchases made under the Right of Accumulation or a Letter of Intent (see
"Investment and Withdrawal Programs" below). A group might qualify to obtain
quantity sales charge discounts (see "Investment and Withdrawal Programs"
below).
If shares of the Fund are made available for sale, Class A shares may be sold
at their net asset value to certain persons or in certain circumstances as
described in the Prospectus. Such sales are made without a sales charge to
promote good will with employees and others with whom MFS, MFD and/or the Fund
have business relationships, and because the sales effort, if any, involved in
making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may
be more or less than the sales charge calculated using the sales charge
expressed as a percentage of the offering price or as a percentage of the net
amount invested as listed in the Prospectus. In the case of the maximum sales
charge, the dealer retains 4% and MFD retains approximately 3/4 of 1% of the
public offering price. In addition, MFD, on behalf of the Fund, pays a
commission to dealers who initiate and are responsible for purchases of $1
million or more as described in the Prospectus.
CLASS B SHARES: MFD acts as agent in selling Class B shares of the Fund to
dealers. The public offering price of Class B shares is their net asset value
next computed after the sale (see "Purchases" in the Prospectus).
GENERAL: Neither MFD nor dealers are permitted to delay the placement of
orders to benefit themselves by a price change. On occasion, MFD may obtain
brokers loans from various banks, including the custodian banks for the MFS
Funds, to facilitate the settlement of sales of shares of the Fund to dealers.
MFD may benefit from its temporary holding of funds paid to it by investment
dealers for the purchase of Fund shares.
For the Fund's fiscal year ended January 31, 1998, gross sales charges on
sales of Class A shares of the Fund amounted to $6,296,882, of which
$1,044,362 was retained by MFD and $5,252,520 by dealers, banks and certain
other financial institutions. The Fund received $227,503,232, representing the
aggregate net asset value of such shares. For the Fund's fiscal year ended
January 31, 1997, gross sales charges on sales of Class A shares of the Fund
amounted to $3,806,205, of which $667,359 was retained by MFD and $3,138,846
by dealers, banks and certain other financial institutions. The Fund received
$151,098,464, representing the aggregate net asset value of such shares. For
the Fund's fiscal year ended January 31, 1996, gross sales charges on sales of
Class A shares of the Fund amounted to $3,940,592, of which $670,957 was
retained by MFD and $3,269,635 by dealers, banks and certain other financial
institutions. The Fund received $145,062,665, representing the aggregate net
asset value of such shares.
For the Fund's fiscal years ended January 31, 1998, 1997 and 1996 the CDSC
imposed on redemption of Class A shares was $42,903, $23,523 and $61,548,
respectively. For the Fund's fiscal years ended January 31, 1998, 1997 and
1996, the CDSC imposed on redemption of Class B shares was $397,579, $190,546
and $196,890, respectively.
The Distribution Agreement will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority
of the Trust's shares (as defined in "Investment Restrictions") and, in either
case, by a majority of the Trustees who are not parties to the Distribution
Agreement or interested persons of any such party. The Distribution Agreement
terminates automatically if it is assigned and may be terminated without
penalty by either party on not more than 60 days' nor less than 30 days'
notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by a
portfolio committee consisting of employees of the Adviser who are appointed
and supervised by its senior officers. Changes in the investments of the Fund
are reviewed by its Board of Trustees. Members of the Fund's portfolio
committee may serve other clients of the Adviser or any subsidiary of the
Adviser in a similar capacity.
The primary consideration in portfolio security transactions for the Fund is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in which, and the broker-dealers through which, it seeks this
result. Municipal Bonds and other debt securities are traded principally in
the over-the-counter market on a net basis through dealers acting for their
own account and not as brokers. The cost of securities purchased from
underwriters includes an underwriter's commission or concession, and the
prices at which securities are purchased and sold from and to dealers include
a dealer's mark-up or mark-down. The Adviser normally seeks to deal directly
with the primary market makers unless, in its opinion, better prices are
available elsewhere. Subject to the requirement of seeking execution at the
most favorable price, securities may, as authorized by the Advisory Agreement,
be bought from or sold to dealers who have furnished statistical, research and
other information or services to the Adviser or who have sold shares of funds
for which MFS serves as investment adviser. At present no arrangements to
recapture commission payments are in effect.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the
Adviser or any subsidiary of the Adviser. Investment decisions for the Fund
and for such other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by, or bought or sold
for, other clients. Likewise, a particular security may be bought for one or
more clients when one or more other clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client.
When two or more clients are simultaneously engaged in the purchase or sale of
the same security, the securities are allocated among clients in a manner
believed by the Adviser to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of
the security as far as the Fund is concerned. In other cases, however, the
Fund believes that its ability to participate in volume transactions will
produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or
withdraw from it with a minimum of paper work. These are described below and,
in certain cases, in the Fund's prospectus. The programs involve no extra
charge to shareholders (other than a sales charge in the case of certain Class
A share purchases) and may be changed or discontinued at any time by a
shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with shares of Class B of the Fund or any of the
classes of other MFS Funds or MFS Fixed Fund within a 13-month period (or 36-
month period, in the cases of purchases of $1 million or more), the
shareholder may obtain Class A shares of the Fund at the same reduced sales
charge as though the total quantity were invested in one lump sum by
completing the Letter of Intent section of the Fund's Account Application or
filing a separate Letter of Intent application (available from the Shareholder
Servicing Agent) within 90 days of the commencement of purchases. Subject to
acceptance by MFD and the conditions mentioned below, each purchase will be
made at a public offering price applicable to a single transaction of the
dollar amount specified in the Letter of Intent application. The shareholder
or his dealer must inform MFD that the Letter of Intent is in effect each time
shares are purchased. The shareholder makes no commitment to purchase
additional shares, but if his purchases within 13 months (or 36 months in the
case of purchases of $1 million or more) plus the value of shares credited
toward completion of the Letter of Intent do not total the sum specified, he
will pay the increased amount of the sales charge as described below.
Instructions for issuance of shares in the name of a person other than the
person signing the Letter of Intent application must be accompanied by a
written statement from the dealer stating that the shares were paid for by the
person signing such Letter. Neither income dividends nor capital gain
distributions taken in additional shares will apply toward the completion of
the Letter of Intent. Dividends and distributions of other MFS Funds
automatically reinvested in shares of the Fund at net asset value pursuant to
the Distribution Investment Program will also not apply toward completion of
the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder
or to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month or 36-month period, as applicable), the
shareholder will be notified and the escrowed shares will be released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released
by the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in
the premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when that shareholder's new
investment, together with the current offering price value of all holdings of
Class A, B and C shares of that shareholder in the MFS Funds or MFS Fixed Fund
reaches a discount level. See "Purchases" in the Prospectus for the sales
charges on quantity purchases. For example, if a shareholder owns shares
valued at $75,000 and purchases $25,000 of Class A shares of the Fund, the
sales charge for the $25,000 purchase would be at the rate of 4% (the rate
applicable to single transactions of $100,000). A shareholder must provide the
Shareholder Servicing Agent (or his investment dealer must provide MFD) with
information to verify that the quantity sales charge discount is applicable at
the time the investment is made.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-
free at (800) 225-2606. The minimum purchase amount is $50 and the maximum
purchase amount is $100,000. Shareholders wishing to avail themselves of this
telephone purchase privilege must so elect on their Account Application and
designate thereon a bank and account number from which purchases will be made.
If a telephone purchase request is received by the Shareholder Servicing Agent
on any business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the closing
net asset value of the shares purchased on that day. The Shareholder Servicing
Agent may be liable for any losses resulting from unauthorized telephone
transactions if it does not follow reasonable procedures designed to verify
the identity of the caller. The Shareholder Servicing Agent will request
personal or other information from the caller, and will normally also record
calls. Shareholders should verify the accuracy of confirmation statements
immediately after their receipt.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital
gains made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of such fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and not subject to any CDSC.
Distributions will be invested at the close of business of the payable date
for distribution. A shareholder considering the Distribution Investment
Program should obtain and read the prospectus of the other MFS fund and
consider the differences in objectives and policies before making any
investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic
payments, based upon the value of his account. Each payment under a Systematic
Withdrawal Plan ("SWP") must be at least $100 except in certain limited
circumstances. The aggregate withdrawals of Class B shares in any year
pursuant to a SWP generally are limited to 10% of the value of the account at
the time of establishment of the SWP. SWP payments are drawn from the proceeds
of share redemptions (which would be a return of principal and, if reflecting
a gain, would be taxable). Redemptions of Class B shares will be made in the
following order: (i) to the extent necessary, any "Free Amount"; (ii) any
"Reinvested Shares"; (iii) to the extent necessary, the "Direct Purchase"
subject to the lowest CDSC (as such terms are defined in "Contingent Deferred
Sales Charge" in the Prospectus). The CDSC will be waived in the case of
redemptions of Class B shares pursuant to a SWP, but will not be waived in the
case of SWP redemptions of Class A shares which are subject to a CDSC. To the
extent that redemptions for such periodic withdrawals exceed dividend income
reinvested in the account, such redemptions will reduce and may eventually
exhaust the number of shares in the shareholder's account. All dividend and
capital gain distributions for an account with a SWP will be reinvested in
full and fractional shares of the Fund at the net asset value in effect as of
the close of business on the record date for such distributions. To initiate
this service, shares generally having an aggregate value of at least $5,000
either must be held on deposit by, or certificates for such shares must be
deposited with, the Shareholder Servicing Agent. With respect to Class A
shares, maintaining a withdrawal plan concurrently with an investment program
would be disadvantageous because of the sales charges included in share
purchases and the imposition of a CDSC on certain redemptions. The shareholder
may deposit into the account additional shares of the Fund, change the payee
or change the dollar amount of each payment. The Shareholder Servicing Agent
may charge the account for services rendered and expenses incurred beyond
those normally assumed by the Fund with respect to the liquidation of shares.
No charge is currently assessed against the account, but one could be
instituted by the Shareholder Servicing Agent on 60 days' notice in writing to
the shareholder in the event that the Fund ceases to assume the cost of these
services. The Fund may terminate any SWP for an account if the value of the
account falls below $5,000 as a result of share redemptions (other than as a
result of a SWP) or an exchange of shares of the Fund for shares of another
MFS Fund. Any SWP may be terminated at any time by either the shareholder or
the Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any
time by mailing a check payable to the Fund directly to the Shareholder
Servicing Agent. The shareholder's account number and the name of his
investment dealer must be included with each investment.
GROUP PURCHASES: A bona fide group and all of its members may be treated as
a single purchaser and, under the Right of Accumulation (but not a Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the
investment program so it may be used by the investment dealer to facilitate
solicitation of the membership, thus effecting economies of sales effort; (2)
has been in existence for at least six months and has a legitimate purpose
other than to purchase mutual fund shares at a discount; (3) is not a group of
individuals whose sole organizational nexus is as credit cardholders of a
company, policyholders of an insurance company, customers of a bank or broker-
dealer, clients of an investment adviser or other similar group; and (4)
agrees to provide certification of membership of those members investing money
in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares
of other MFS Funds, if available for sale, under the Automatic Exchange Plan.
The Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of
shares of other MFS Funds selected by the shareholder. Under the Automatic
Exchange Plan, exchanges of at least $50 each may be made to up to six
different funds effective on the seventh day of each month or of every third
month, depending whether monthly or quarterly exchanges are elected by the
shareholder. If the seventh day of the month is not a business day, the
transaction will be processed on the next business day. Generally, the initial
exchange will occur after receipt and processing by the Shareholder Servicing
Agent of an application in good order. Exchanges will continue to be made from
a shareholder's account in any MFS Fund, as long as the balance of the account
is sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to
be made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market
Fund, MFS Government Money Market Fund and Class A shares of MFS Cash Reserve
Fund will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions
in writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as shares of the Fund are registered; if by
telephone -- proper account identification is given by the dealer or
shareholder of record). Each Exchange Change Request (other than termination
of participation in the program) must involve at least $50. Generally, if an
Exchange Change Request is received before the close of business on the last
business day of a month, the Exchange Change Request will be effective for the
following month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds,
to make exchanges of shares from one MFS Fund to another and to withdraw from
an MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the exchange privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the
other MFS Funds (except MFS Money Market Fund, MFS Government Money Market
Fund and holders of Class A shares of MFS Cash Reserve Fund in the case where
such shares are acquired through direct purchase or reinvested dividends) who
have redeemed their shares have a one-time right to reinvest the redemption
proceeds in the same class of shares of any of the MFS Funds (if shares of the
fund are available for sale) at net asset value (without a sales charge) and,
if applicable, with credit for any CDSC paid; however, only shareholders who
are also shareholders of the Fund may reinvest their proceeds in the Fund (if
available for sale). In the case of proceeds reinvested in shares of MFS Money
Market Fund, MFS Government Money Market Fund and Class A shares of MFS Cash
Reserve Fund, the shareholder has the right to exchange the acquired shares
for shares of another MFS Fund at net asset value pursuant to the exchange
privilege described below. Such a reinvestment must be made within 90 days of
the redemption and is limited to the amount of the redemption proceeds. If the
shares credited for any CDSC paid are then redeemed within six years of the
initial purchase for Class B shares (or within 12 months of the initial
purchase of certain Class A shares), a CDSC will be imposed upon redemption.
Although redemptions and repurchases of shares are taxable events, a
reinvestment within a certain period of time in the same fund may be
considered a "wash sale" and may result in the inability to recognize
currently all or a portion of any loss realized on the original redemption for
federal income tax purposes. Please see your tax adviser for further
information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of
the other MFS Funds (if available for sale and if the purchaser is eligible to
purchase the class of shares) at their net asset value. Exchanges will be made
only after instructions in writing or by telephone (an "Exchange Request") are
received for an established account by the Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by telephone --
proper identification is given by the dealer or shareholder of record), and
each exchange must involve either shares having an aggregate value of at least
$1,000 ($50 in the case of retirement plan participants whose sponsoring
organizations subscribe to the MFS FUNDamental 401(k) Plan or another similar
401(k) record keeping system made available by the Shareholder Servicing
Agent) or all the shares in the account. Each exchange involves the redemption
of the shares of the Fund to be exchanged and the purchase at net asset value
(i.e., without a sales charge) of shares of the same class of the other MFS
Fund. Any gain or loss on the redemption of the shares exchanged is reportable
on the shareholder's federal income tax return. No more than five exchanges
may be made in any one Exchange Request by telephone. If an Exchange Request
is received by the Shareholder Servicing Agent prior to the close of regular
trading on the Exchange, the exchange usually will occur on that day if all
the requirements set forth above have been complied with at that time.
However, payment of the redemption proceeds by the Fund, and thus the purchase
of shares of the other MFS Fund, may be delayed for up to seven days if the
Fund determines that such a delay would be in the best interest of all its
shareholders. Investment dealers which have satisfied criteria established by
MFD may also communicate a shareholder's Exchange Request to MFD by facsimile
subject to the requirements set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for
the CDSC is carried forward to the exchanged shares. For purposes of
calculating the CDSC upon redemption of shares acquired in an exchange, the
purchase of shares acquired in one or more exchanges is deemed to have
occurred at the time of the original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy
of its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should
obtain and read the prospectus of the other MFS Fund and consider the
differences in objectives and policies before making any exchange.
Shareholders of the other MFS Funds who are shareholders of the Fund (except
holders of shares of MFS Money Market Fund, MFS Government Market Fund, and
Class A shares of the Cash Reserve Fund acquired through direct purchase and
dividends reinvested prior to June 1, 1992) have the right to exchange their
shares for Class A shares of the Fund. subject to the conditions, if any, set
forth in their respective prospectuses. In addition, unitholders of the MFS
Fixed Fund have the right to exchange their units (except units acquired
through direct purchases) for shares of the Fund, subject to the conditions,
if any, imposed upon such unitholders by the MFS Fixed Fund.
Any state income tax advantages for investment in state-specific shares of
each series of MFS Municipal Series Trust may only benefit residents of such
states. Investors should consult with their own tax advisers to be sure this
is an appropriate investment, based on their residency and each state's income
tax laws.
The exchange privilege (or any aspect of it) may be changed or discontinued
and is subject to certain limitations, including certain restrictions on
purchases by market timer accounts (see "Purchases" in the Prospectus).
6. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), by meeting all applicable requirements
of Subchapter M, including requirements as to the nature of the Fund's gross
income, the amount of Fund distributions (as a percentage of both the Fund's
overall income and its tax-exempt income), and the composition of the Fund's
portfolio assets. Because the Fund intends to distribute all of its net
investment income and net realized capital gains to its shareholders in
accordance with the timing requirements imposed by the Code, it is not
expected that the Fund will be required to pay any federal income or excise
taxes. If the Fund should fail to qualify as a "regulated investment company"
in any year, the Fund would incur a regular corporate federal income tax upon
its taxable income and Fund distributions would generally be taxable as
ordinary dividend income to the shareholders.
The portion of the Fund's distributions of net investment income that is
attributable to interest from tax-exempt securities will be designated by the
Fund as an "exempt-interest dividend" under the Code and will generally be
exempt from federal income tax in the hands of the shareholders so long as at
least 50% of the total value of the Fund's assets consists of tax-exempt
securities at the close of each quarter of the Fund's taxable year.
Distributions of tax-exempt interest earned from certain securities may,
however, be treated as an item of tax preference for shareholders under the
federal alternative minimum tax, and all exempt-interest dividends may
increase a corporate shareholder's alternative minimum tax. The percentage of
income designated as tax-exempt will be applied uniformly to all distributions
by the Fund of net investment income made during each fiscal year of the Fund
and may differ from the percentage of distributions consisting of tax-exempt
interest in any particular month. Shareholders are required to report exempt-
interest dividends received from the Fund on their federal income tax returns.
The Fund may also recognize some net investment income that is not tax-exempt,
as well as capital gains and losses as a result of the disposition of
securities and from certain options and futures transactions. Shareholders of
the Fund normally will have to pay federal income taxes, and any state or
local taxes, on the non exempt-interest dividends and capital gain
distributions they receive from the Fund; however, the Fund does not expect
that the non-tax-exempt portion of its net investment income, if any, will be
substantial. That portion of net investment income distributions not
designated exempt-interest dividends and any distributions from net short-term
capital gains are taxable to shareholders as ordinary income for federal
income tax purposes whether the distributions are paid in cash or reinvested
in additional shares. Because the Fund expects to earn primarily tax-exempt
interest income, it is expected that no Fund dividends will qualify for the
dividends received deduction for corporations. Distributions of net capital
gains (i.e., the excess of net long-term capital gains over net short-term
capital losses), whether paid in cash or reinvested in additional shares, are
taxable to shareholders as long-term capital gains for federal income tax
purposes, without regard to the length of time the shareholders have held
their shares. 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 that is declared in
October, November, or December of any calendar year, that is payable to
shareholders of record in such a month, and that is paid the following January
will be treated as if received by the shareholders on December 31 of the year
in which the dividend is declared. The Fund will notify shareholders regarding
the federal tax status of its distributions after the end of each calendar
year.
Any Fund distribution of net capital gains or net short-term capital gains
will have the effect of reducing the per share net asset value of shares in
the Fund by the amount of the distribution. Shareholders purchasing shares
shortly before the record date of any such distribution may thus pay the full
price for the shares and then effectively receive a portion of the purchase
price back as a taxable distribution.
Interest on indebtedness incurred by shareholders to purchase or carry shares
of the Fund will not be deductible for federal income tax purposes. Exempt-
interest dividends are taken into account in calculating the amount of social
security and railroad retirement benefits that may be subject to federal
income tax. Entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by private activity
bonds should consult their tax advisers before purchasing shares of the Fund.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss; 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 eighteen
months. However, any loss realized upon a disposition of shares in the Fund
held for six months or less will be disallowed to the extent of any exempt-
interest dividends received with respect to those shares. If not disallowed,
any such loss will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within 90 days after their purchase
followed by any purchase without payment of an additional sales charge
(including purchases by exchange or by reinvestment) 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 and certain securities purchased at a market discount will cause
the Fund to recognize income prior to the receipt of cash payments with
respect to these securities. In order to distribute this income and avoid a
tax on the Fund, the Fund may be required to liquidate portfolio securities
that it might otherwise have continued to hold, potentially resulting in
additional taxable gain or loss to the Fund.
The Fund's transactions in options and Futures Contracts will be subject to
special tax rules that may affect the amount, timing, and character of Fund
income and distributions to shareholders. For example, certain positions held
by the Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on that day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40% short-
term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods
of Fund securities, and conversion of short-term into long-term capital
losses. Certain tax elections exist for straddles that may alter the effects
of these rules. The Fund will limit its activities in options and Futures
Contracts to the extent necessary to meet the requirements of Subchapter M of
the Code.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at 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. The
exemption of exempt-interest dividends for federal income tax purposes does
not necessarily result in exemption under the tax laws of any state or local
taxing authority. Some states do exempt from tax that portion of an exempt-
interest dividend which represents interest received by a regulated investment
company on its holdings of tax-exempt securities of that state and its
political subdivisions and instrumentalities. Therefore, the Fund will report
annually to its shareholders the percentage of interest income earned by the
Fund during the preceding year on Municipal Bonds and will indicate, on a
state-by-state basis only, the source of such income. Each shareholder is
advised to consult his own tax adviser regarding the exemption of exempt-
interest dividends under applicable state and local law.
7. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for
the following holidays or the day on which they are observed: New Year's Day,
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 during each day as of the close of regular trading
on the Exchange by deducting the amount of the liabilities attributable to the
class from the value of the assets attributable to the class and dividing the
difference by the number of shares of the class outstanding. Debt securities
(other than short-term obligations), including listed issues, are valued on
the basis of valuations furnished by a pricing service, which utilizes both
dealer-supplied valuations and electronic data processing techniques which
take into account appropriate factors such as institutional-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data, without exclusive
reliance upon exchange or over-the-counter prices, since such valuations are
believed to reflect the fair value of such securities. Use of the pricing
services has been approved by the Board of Trustees. Positions in listed
options, Futures Contracts and Options on Futures Contracts will normally be
valued at the closing settlement price on the exchange on which they are
primarily traded. Short-term obligations with a remaining maturity in excess
of 60 days will be valued based upon dealer supplied valuations. Other short-
term obligations are valued at amortized cost, unless the Board of Trustees
determines that this does not constitute fair value. Positions in over-the-
counter options will be valued using dealer supplied valuations. Portfolio
securities for which there are no such valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for
each class of shares for certain periods by determining the average annual
compounded rates of return over those periods that would cause an investment
of $1,000 (made with all distributions reinvested and reflecting the CDSC or
the maximum offering price) to reach the value of that investment at the end
of the periods. The Fund may also calculate (i) a total rate of return, which
is not reduced by the CDSC (4% maximum for Class B shares) and therefore may
result in a higher rate of return, (ii) a total rate of return assuming an
initial account value of $1,000, which will result in a higher rate of return
since the value of the initial account will not be reduced by the current
maximum sales charge (currently 4.75%), and/or (iii) total rates of return
which represent aggregate performance over a period or year-by-year
performance, and which may or may not reflect the effect of the maximum or
other sales charge or CDSC. The Fund offers multiple classes of shares which
were initially offered for sale to, and purchased by, the public on different
dates (the class "inception date"). The calculation of total rate of return
for a class of shares which has a later class inception date than another
class of shares of the Fund is based both on (i) the performance of the Fund's
newer class from its inception date and (ii) the performance of the Fund's
oldest class from its inception date up to the class inception date of the
newer class.
As discussed in the Prospectus, the sales charges, expenses and expense
ratios, and therefore the performance, of the Fund's classes of shares differ.
In calculating total rate of return for a newer class of shares in accordance
with certain formulas required by the SEC, the performance will be adjusted to
take into account the fact that the newer class is subject to a different
sales charge than the oldest class (e.g., if the newer class is Class A
shares, the total rate of return quoted will reflect the deduction of the
initial sales charge applicable to Class A shares; if the newer class is Class
B shares, the total rate of return quoted will reflect the deduction of the
CDSC applicable to Class B shares). However, the performance will not be
adjusted to take into account the fact that the newer class of shares bears
different class specific expenses than the oldest shares (e.g., Rule 12b-1
fees). Therefore, the total rate of return quoted for a newer class of shares
will differ from the return that would be quoted had the newer class of shares
been outstanding for the entire period over which the calculation is based
(i.e., the total rate of return quoted for the newer class will be higher than
the return that would have been quoted had the newer class of shares been
outstanding for the entire period over which the calculation is based if the
class specific expenses for the newer class are higher than the class specific
expenses of the oldest class, and the total rate of return quoted for the
newer class will be lower than the return that would be quoted had the newer
class of shares been outstanding for this entire period if the class specific
expenses for the newer class are lower than the class specific expenses of the
oldest class).
Total rate of return quotations for each class are presented in Appendix A
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS: The performance results for Class A shares presented in
Appendix A attached hereto under the heading "Performance Results" assume an
initial investment of $10,000 in Class A shares, and cover the period from
January 1, 1988 to December 31, 1997. It has been assumed that dividends and
capital gain distributions were reinvested in additional shares. These
performance results, as well as any yield, tax-equivalent yield or total rate
of return quotation provided by the Fund, should not be considered as
representative of the performance of the Fund in the future since the net
asset value and public offering price of shares of the Fund will vary based
not only on the type, quality and maturities of the securities held in the
Fund's portfolio, but also on changes in the current value of such securities
and on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate yields, tax-equivalent yields and
total rates of return should be considered when comparing the yield, tax-
equivalent yield and total rate of return of the Fund to yields, tax-
equivalent yields and total rates of return published for other investment
companies or other investment vehicles. Total rate of return reflects the
performance of both principal and income. Current net asset value of shares of
the Fund as well as account balance information may be obtained by calling
1-800-MFS-TALK (637-8255).
YIELD: Any yield quotation for a class of shares of the Fund is based on the
annualized net investment income per share of that class of the Fund over a
30-day period. The yield for each class of the Fund is calculated by dividing
the net investment income allocated to that class earned during the period by
the maximum offering price per share of that class of the Fund on the last day
of that period. The resulting figure is then annualized. Net investment income
per share of a class is determined by dividing (i) the dividends and interest
allocated to that class during the period, minus accrued expenses of that
class for the period, by (ii) the average number of shares of the class
entitled to receive dividends during the period multiplied by the maximum
offering price per share of such class on the last day of the period. The
Fund's yield calculations for Class A shares assume a maximum sales charge of
4.75%. The yield calculation for Class B shares assumes no CDSC is paid. Yield
quotations for each class of shares are presented in Appendix A attached
hereto under the heading "Performance Quotations."
TAX-EQUIVALENT YIELD: The Fund's tax-equivalent yield for each class is
calculated by determining the rate of return that would have to be achieved on
a fully taxable investment to produce the after-tax equivalent of the yield
for that class. In calculating tax-equivalent yield, the Fund assumes certain
federal tax brackets for shareholders and does not take into account state
taxes. Tax-equivalent yield quotations for each class of shares are presented
in Appendix A attached hereto under the heading "Performance Quotations."
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the Securities and Exchange Commission, is not indicative of the
amounts which were or will be paid to the Fund's shareholders. Amounts paid to
shareholders of each class are reflected in the quoted "current distribution
rate" for that class. The current distribution rate for a class is computed by
dividing the total amount of dividends per share paid by the Fund to
shareholders of that class during the past twelve months by the maximum public
offering price of that class at the end of such period. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be
appropriate to annualize the dividends paid over the period such policies were
in effect, rather than using the dividends during the past twelve months. The
current distribution rate differs from the yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income for option writing, short-term capital gains
and return of invested capital, and is calculated over a different period of
time. The Fund's current distribution rate calculation for Class A shares
assumes a maximum sales charge of 4.75%. The Fund's current distribution rate
calculation for Class B shares assumes no CDSC is paid. Current distribution
rate quotations for each class of shares are presented in Appendix A attached
hereto under the heading "Performance Quotations."
From time to time the Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund performance and operations appearing
in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily,
Newsweek, Financial World, Financial Planning, Investment Advisor, USA Today,
Pensions and Investments, SmartMoney, Forbes, Global Finance, Registered
Representative, Institutional Investor, the Investment Company Institute,
Johnson's Charts, Morningstar, Lipper Analytical Securities Corporation, CDA
Wiesenberger, Shearson Lehman and Salomon Bros. Indices, Ibbotson, Business
Week, Lowry Associates, Media General, Investment Company Data, The New York
Times, Your Money, Strangers Investment Advisor, Financial Planning on Wall
Street, Standard and Poor's, Individual Investor, The 100 Best Mutual Funds
You Can Buy, by Gordon K. Williamson, Consumer Price Index, and Sanford C.
Bernstein & Co. Fund performance may also be compared to the performance of
other mutual funds tracked by financial or business publications or
periodicals. The Fund may also quote evaluations mentioned in independent
radio or television broadcasts, and use charts and graphs to illustrate the
past performance of various indices such as those mentioned above and
illustrations using hypothetical rates of return to illustrate the effects of
compounding and tax-deferral. The Fund may advertise examples of the effects
of periodic investment plans, including the principle of dollar cost
averaging. In such a program, an investor invests a fixed dollar amount in a
fund at periodic intervals, thereby purchasing fewer shares when prices are
high and more shares when prices are low. While such a strategy does not
assure a profit or guard against a loss in a declining market, the investor's
average cost per share can be lower than if fixed numbers of shares are
purchased at the same intervals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers;
investment philosophies, strategies, techniques and criteria used in the
selection of securities to be purchased or sold for the Fund; the Fund's
portfolio holdings; the investment research and analysis process; the
formulation and evaluation of investment recommendations; and the assessment
and evaluation of credit, interest rate, market and economic risks, and
similar or related matters.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from
surveys, regarding individual and family financial planning. Such views may
include information regarding: retirement planning; tax management strategies;
estate planning; general investment techniques (e.g., asset allocation and
disciplined saving and investing); business succession; ideas and information
provided through the MFS Heritage Planningsm program, an inter-generational
financial planning assistance program; issues with respect to insurance (e.g.,
disability and life insurance and Medicare supplemental insurance); issues
regarding financial and health care management for elderly family members; and
other similar or related matters.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established
as the first open-end mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first
mutual fund to make full public disclosure of its
operations in shareholder reports.
-- 1932 -- One of the first internal research departments
is established to provide in-house analytical
capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first
mutual fund to register under the Securities Act of
1933 ("Truth in Securities Act" or "Full Disclosure
Act").
-- 1936 -- Massachusetts Investors Trust is the first
mutual fund to allow shareholders to take capital gain
distributions either in additional shares or cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first
municipal bond funds established.
-- 1979 -- Spectrum becomes the first combination fixed/
variable annuity with no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as
America's first globally diversified fixed/income
mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first
open-end mutual fund to seek high tax-free income from
lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first
mutual fund to target and shift investments among
industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first
closed-end, high-yield municipal bond fund traded on
the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first
closed-end, multimarket high income fund listed on the
New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-
qualified market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first
global balanced fund.
-- 1993 -- MFS World Growth Fund is the first global
emerging markets fund to offer the expertise of two
sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union
Standard(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.
8. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class B shares (the
"Distribution Plan") pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Rule") after having concluded that there is a reasonable
likelihood that the Distribution Plan would benefit the Fund and each
respective class of shareholders. The provisions of the Distribution Plan are
severable with respect to Class B shares offered by the Fund. The Distribution
Plan is designed to promote sales, thereby increasing the net assets of the
Fund attributable to Class B shares. Such an increase may reduce the Fund's
Class B expense ratio to the extent the Fund's fixed costs are spread over a
larger net asset base. Also, an increase in net assets may lessen the adverse
effects that could result were the Fund required to liquidate portfolio
securities to meet redemptions. There is, however, no assurance that the net
assets of the Fund will increase or that the other benefits referred to above
will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: Except in the case of the first year service fee, no service
fees will be paid to any securities dealer who is the holder or dealer of
record for investors who own Class B shares having an aggregate net asset
value of less than $750,000, or such other amount as may be determined from
time to time by MFD (MFD, however, may waive this minimum amount requirement
from time to time). Dealers may from time to time be required to meet certain
other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable
under the Distribution Plan for which there is no dealer of record or for
which qualification standards have not been met as partial consideration for
personal services and/or account maintenance services performed by MFD or its
affiliates for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended January 31, 1998, the Fund paid the following
Distribution Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
CLASS OF SHARES BY FUND BY MFD BY DEALERS
- --------------- ------- ------ ----------
Class B Shares $1,592,405 $1,421,803 $170,602
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the
Trustees shall review, at least quarterly, a written report of the amounts
expended (and purposes therefor) under the Plan. The Distribution Plan may be
terminated at any time by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the Fund's shares (as defined in "Investment Restrictions"). All
agreements relating to the Distribution Plan entered into between the Fund or
MFD and other organizations must be approved by the Board of Trustees,
including a majority of the Distribution Plan Qualified Trustees. Agreements
under the Distribution Plan must be in writing, will be terminated
automatically if assigned, and may be terminated at any time without payment
of any penalty, by vote of a majority of the Distribution Plan Qualified
Trustees or by vote of the holders of a majority of the respective class of
the Fund's shares. The Distribution Plan may not be amended to increase
materially the amount of permitted distribution expenses without the approval
of a majority of the Class B shares of the Fund (as defined in "Investment
Restrictions") or may not be materially amended in any case without a vote of
the Trustees and a majority of the Distribution Plan Qualified Trustees. The
selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office. No
Trustee who is not an "interested person" has any financial interest in the
Distribution Plan or in any related agreement.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one
or more separate series and to divide or combine the shares of any series into
a greater or lesser number of shares without thereby changing the
proportionate beneficial interests in that series. The Trustees have currently
authorized shares of the Fund and 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 two classes of shares of the Fund, Class A shares and Class B
shares. The Trust's other series also issue Class C shares and Class I
shares. Each share of a class of the Fund represents an equal proportionate
interest in the assets of the Fund allocable to that class. Upon liquidation
of the Fund, shareholders of each class of the Fund are entitled to share pro
rata in the net assets of the Fund allocable to such class available for
distribution to its shareholders. The Trust reserves the right to create and
issue additional classes or series of shares, in which case the shares of each
class or series would participate equally in the earnings, dividends and
assets allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of
shareholders. Although Trustees are not elected annually by the shareholders,
shareholders have under certain circumstances the right to remove one or more
Trustees in accordance with the provisions of section 16(c) of the 1940 Act.
No material amendment may be made to the Trust's Declaration of Trust without
the affirmative vote of a majority of the shares of the Trust or by an
instrument in writing without a meeting signed by a majority of Trustees and
consented to by more than 50% of the shares of the Fund. Shares have no pre-
emptive or conversion rights (except as described in "Purchases -- Conversion
of Class B Shares" in the Prospectus). Shares are fully paid and non-
assessable. The Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the holders
of two-thirds of the Trust's outstanding shares voting as a single class, or
of the affected series of the Trust, as the case may be, except that if the
Trustees of the Trust recommend such merger, consolidation or sale, the
approval by vote of the holders of a majority of the Trust's or the affected
series' outstanding shares (as defined in "Investment Restrictions") will be
sufficient. The Trust or any series of the Trust may also be terminated (i)
upon liquidation and distribution of its assets, if approved by the vote of
the holders of two-thirds of its outstanding shares, or (ii) by the Trustees
by written notice to the shareholders of the Trust or the affected series. If
not so terminated the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Trust and provides for
indemnification and reimbursement of expenses out of the Trust property for
any shareholder held personally liable for the obligations of the Trust. The
Declaration of Trust also provides that the Trust shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance)
for the protection of the Trust, its shareholders, Trustees, officers,
employees and agents covering possible tort and other liabilities. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which both inadequate insurance
existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are
not binding upon the Trustees individually but only upon the property of the
Trust and that the Trustees will not be liable for any action or failure to
act, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Ernst & Young LLP are the Fund's independent auditors, providing audit
services, tax services, and assistance and consultation with respect to the
preparation of filings with the SEC.
The Portfolio of Investments and Statement of Assets and Liabilities at
January 31, 1998, the Statement of Operations for the year ended January 31,
1998, the Statement of Changes in Net Assets for each of the two years in the
period ended January 31, 1998, the Notes to the Financial Statements and the
Independent Auditors' Report, each of which is included in the Annual Report
to shareholders of the Fund, are incorporated by reference into this SAI in
reliance upon the report of Ernst & Young LLP, independent auditors, given
upon their authority as experts in accounting and auditing. A copy of the
Annual Report accompanies this SAI.
<PAGE>
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net
asset value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
PERFORMANCE RESULTS -- CLASS A SHARES
- ------------------------------------------------------------------------------
VALUE OF VALUE OF VALUE OF
INITIAL $10,000 CAP. GAIN REINVESTED TOTAL
DATE INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
------ --------------- ------------- ---------- -------
12/31/88 $9,463 $ 77 $ 850 $10,391
12/31/89 9,572 132 1,794 11,499
12/31/90 9,075 125 2,661 11,862
12/31/91 9,214 127 3,760 13,102
12/31/92 9,165 127 4,858 14,150
12/31/93 9,324 129 6,073 15,526
12/31/94 8,389 116 6,567 15,073
12/31/95 9,065 125 8,322 17,513
12/31/96 8,787 121 9,335 18,244
12/31/97 8,956 124 10,767 19,847
- ------------
Explanatory Notes: The results in the table assume that income dividends and
capital gain distributions were invested in additional shares. The results
also assume that the initial investment in Class A shares was reduced by the
current maximum applicable sales charge. No adjustment has been made for
income taxes, if any, payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are as of January 31, 1998.
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS
<CAPTION>
TAX EQUIVALENT
ACTUAL 30-DAY YIELD
30-DAY 30-DAY (WITHOUT ANY
10 YEAR YIELD YIELD WAIVERS)-TAX
AND/OR (INCLUDING (WITHOUT BRACKETS: CURRENT
LIFE OF ANY ANY -------------- DISTRIBUTION
1 YEAR 5 YEAR FUND WAIVERS) WAIVERS) 28% 31% RATE
------ ------ ---- -------- -------- --- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Shares with sales charge ........ 5.50% 5.98% 7.03% N/A 5.89% 8.18% 8.54% 5.99%
Class A Shares without sales charge ..... 10.81% 7.01% 7.55% N/A N/A N/A N/A N/A
Class B Shares with CDSC ................ 5.87% 5.80%(1) 7.10%(1) N/A N/A N/A N/A N/A
Class B Shares without CDSC ............. 9.87% 6.11%(1) 7.10%(1) N/A 5.33% 7.40% 7.72% 5.40%
(1) Class B share performance includes the performance of the Fund's Class A shares for periods prior to the inception of Class B
shares on September 7, 1993. Sales charges, expenses and expense ratios, and therefore performance, for Class A and Class B
shares differ. Class B share performance has been adjusted to reflect that Class B shares generally are subject to a CDSC
(unless the performance quotation does not give effect to the CDSC) whereas Class A shares generally are subject to an
initial sales charge. Class B share performance has not, however, been adjusted to reflect differences in operating expenses
(e.g., Rule 12b-1 fees), which generally are lower for Class A shares.
</TABLE>
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street, Boston, MA 02116
MFS(R)
MUNICIPAL HIGH
INCOME FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MMH-13-6/98/.5M 25/225
<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
MFS HIGH INCOME FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PART A: For each of the
years in the ten-year period ended January 31, 1998:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At January 31, 1998:
Statement of Assets and Liabilities*
Portfolio of Investments*
For the year ended January 31, 1998:
Statement of Operations*
For the two years ended January 31, 1998:
Statement of Changes in Net Assets*
MFS MUNICIPAL HIGH INCOME FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PART A: For each of the
years in the ten-year period ended January 31, 1998.
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At January 31, 1998:
Statement of Assets and Liabilities**
Portfolio of Investments**
For the year ended January 31, 1998:
Statement of Operations**
For the two years ended January 31, 1998:
Statement of Changes in Net Assets**
- -----------------------------
* Incorporated herein by reference to the Fund's Annual Report to shareholders
dated January 31, 1998, filed via EDGAR with the SEC on April 8, 1998.
** Incorporated herein by reference to the Fund's Annual Report to shareholders
dated January 31, 1998, filed via EDGAR with the SEC on April 7, 1998.
<PAGE>
(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. (15)
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. (15)
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. (15)
(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.
(15)
11 (a) Consent of Deloitte & Touche LLP - MFS High Income
Fund; filed herewith.
(b) Consent of Ernst & Young LLP - MFS Municipal High
Income Fund; filed herewith.
12 Not Applicable.
13 Not Applicable.
14 (a) Forms for Individual Retirement Account Disclosure
Statement as currently in effect. (4)
(b) Forms for MFS 403(b) Custodial Account Agreement as
currently in effect. (4)
(c) Forms for MFS Prototype Paired Defined Contribution
Plans and Trust Agreement as currently in effect.
(4)
(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 Financial Data Schedules for each class of each
operational series; filed herewith.
18 Plan pursuant to Rule 18f-3(d) under the Investment
Company Act of 1940 effective September 6, 1996, as
amended (Exhibit A dated May 2, 1998); filed herewith.
Power of Attorney, dated September 21, 1994. (1)
Power of Attorney, dated February 19, 1998. (15)
- -----------------------------
(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.
(15) Incorporated by reference to Registrant's Post-Effective Amendment No. 25
filed with the SEC via EDGAR on May 15, 1998.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
FOR MFS HIGH INCOME FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 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)
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 certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 27th 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 27, 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* Trustee
- --------------------------
Lawrence T. Perera
WILLIAM J. POORVU* Trustee
- --------------------------
William J. Poorvu
CHARLES W. SCHMIDT* Trustee
- --------------------------
Charles W. Schmidt
ARNOLD D. SCOTT* Trustee
- --------------------------
Arnold D. Scott
JEFFREY L. SHAMES* Trustee
- --------------------------
Jeffrey L. Shames
ELAINE R. SMITH* Trustee
- --------------------------
Elaine R. Smith
DAVID B. STONE* Trustee
- --------------------------
David B. Stone
*By: JAMES R. BORDEWICK, JR.
-----------------------
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr. on
behalf of those indicated pursuant to (i)
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, incorporated by reference to the
Registrant's Post-Effective Amendment No.
25 filed with the Securities and Exchange
Commission via EDGAR on May 15, 1998.
<PAGE>
MFS SERIES TRUST III
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
11 (a) Consent of Deloitte & Touche LLP -
MFS High Income Fund.
(b) Consent of Ernst & Young LLP - MFS
Municipal High Income Fund.
17 Financial Data Schedules for each class
of each operational series.
18 Plan pursuant to Rule 18f-3(d) under
the Investment Company Act of 1940
effective September 6, 1996, as
amended (Exhibit A dated May 2, 1998).
<PAGE>
EXHIBIT NO. 99.11(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 26 to Registration Statement No. 2-60491 of MFS Series Trust III
of our report dated March 6, 1998 appearing in the annual report to shareholders
for the year ended January 31, 1998, of MFS High Income Fund, a series of MFS
Series Trust III, and to the references to us under the headings "Condensed
Financial Information" in the Prospectus and "Independent Auditors and Financial
Statements" in the Statement of Additional Information, both of which are part
of such Registration Statement.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Boston, Massachusetts
May 26, 1998
<PAGE>
EXHIBIT NO. 99.11(b)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference made to our firm under the captions "Condensed
Financial Information" in the Prospectus and "Independent Auditors and Financial
Statements" in the Statement of Additional Information and to the incorporation
by reference in this Post-Effective Amendment No. 26 to Registration Statement
No. 2-60491 on Form N-1A of our report dated March 6, 1998, on the financial
statements and financial highlights of MFS Municipal High Income Fund, included
in the 1998 Annual Report to Shareholders.
ERNST & YOUNG LLP
Ernst & Young LLP
Boston, Massachusetts
May 26, 1998
<PAGE>
EXHIBIT NO. 99.18
MFS FUNDS
PLAN PURSUANT TO RULE 18F-3(D) UNDER THE
INVESTMENT COMPANY ACT OF 1940
Effective September 6, 1996, as amended
This Plan relating to Multiple Classes of Shares (the "Plan") has been
adopted by each of the registered investment companies (the "Trust" or
"Trusts"), identified on behalf of its various series from time to time on
Exhibit A hereto, severally and not jointly, pursuant to Rule 18f-3(d) under the
Investment Company Act of 1940, as amended (the "1940 Act"), and sets forth the
differences in expenses among the classes of shares representing interests in
the same portfolio issued by the Trusts under a multiple distribution
arrangement and the conversion and exchange feature, if any, of each such class
of shares (the "Multiple Distribution System").
A. THE TRUSTS AND FUNDS
Each Trust is an open-end management investment company registered under
the 1940 Act, some consisting of multiple investment portfolios or series,
each of which has separate investment objectives and policies and
segregated assets (the "Fund" or "Funds").
Each Trust (if it has no series) and each Trust on behalf of each Fund (if
it has series) has entered into an investment advisory agreement with
Massachusetts Financial Services Company or an affiliate thereof ("MFS")
pursuant to which MFS, subject to the general supervision of the Board of
Trustees of the Trust, provides portfolio management services. Each Trust
has also entered into an administrative services agreement with MFS
pursuant to which MFS provides financial operations, legal and other
administrative services to each Fund. Each Trust has also entered into a
distribution agreement with MFS Fund Distributors, Inc. ("MFD") to provide
certain distribution services for the Fund, pursuant to which MFD acts as
each Fund's distributor. Certain Funds have adopted a distribution plan (a
"Rule 12b-1 Plan") in accordance with Rule 12b-1 under the 1940 Act.
Transfer agency and recordkeeping functions are provided to each Fund by
MFS Service Center, Inc. ("MFSC") pursuant to a shareholder servicing
agent agreement.
B. THE MULTIPLE DISTRIBUTION SYSTEM
Under the Multiple Distribution System, each Fund may provide investors
with the option of purchasing shares either (1) with a front-end sales
load (except sales of $1 million or more and purchases by certain
retirement plans, which are subject to a contingent deferred sales charge
("CDSC")) which may vary among Funds and, in some cases, a distribution
fee and/or service fee pursuant to a Rule 12b-1 Plan ("Class A shares") or
(2) without a front-end sales load, but subject to a CDSC as well as a
distribution fee and/or a service fee pursuant to a Rule 12b-1 Plan
("Class B shares") or (3) without a front-end load, but subject to a CDSC,
(which may differ from the CDSC applicable to Class B shares) as well as a
distribution fee and/or service fee pursuant to a Rule 12b-1 Plan ("Class
C shares") or (iv) without a front-end load or CDSC and without a
distribution or service fee pursuant to a Rule 12b-1 plan ("Class I
shares"). Some of the Funds presently offer only certain of these classes
of shares to investors. This Plan shall apply to the classes of shares of
each Fund only to the extent each Trust has designated particular classes
of shares for that Fund. The Funds may from time to time create one or
more additional classes of shares, the terms of which may differ from the
Class A shares, Class B shares, Class C shares and Class I shares
described below.
1. Class A Shares
Class A shares are offered to investors at net asset value plus a
front-end sales load (except for certain sales, which are subject to
a CDSC). The sales load is at rates competitive in the industry and
is subject to reduction for larger purchases and under a right of
accumulation or a letter of intention. In accordance with Section
22(d) of the 1940 Act, the front-end sales load is waived for
certain types of investors or in connection with certain classes of
transactions. Class A shareholders are assessed an ongoing service
fee and/or distribution fee under a Rule 12b-1 Plan based upon a
percentage of the average daily net asset value of the Class A
shares. Proceeds from the front-end load, service fee and
distribution fee are used by MFD primarily to pay initial
commissions, ongoing service fees and certain distribution-related
expenses, respectively. Amounts payable under the Rule 12b-1 Plan
are subject to such further limitations as the Trustees may from
time to time determine and as set forth in the registration
statement of each Trust as from time to time in effect.
2. Class B Shares
Class B shares are offered to investors at net asset value without
the imposition of a sales load at the time of purchase. However, an
investor's proceeds from a redemption of Class B shares (on which a
dealer commission has been paid) within a specified period of time
after purchase may be subject to a CDSC. The CDSC is paid to and
retained by MFD. The amount of any applicable CDSC will be based
upon the lower of the net asset value at the time of purchase or at
the time of redemption as required by Rule 6c-10 under the 1940 Act.
Class B shares that are redeemed will not be subject to a CDSC to
the extent that the shares represent (1) reinvestment of dividends
or capital gain distributions, (2) shares redeemed after a defined
period of time, or (3) increases in the value of an account due to
capital appreciation. Class B shareholders are assessed a
distribution fee and/or service fee pursuant to a Rule 12b-1 Plan.
Class B shares that are outstanding for a specified period of time
will convert to Class A shares of the Fund. See "Conversion
Features" below. Amounts payable under the Rule 12b-1 Plan are
subject to such further limitations as the Trustees may from time to
time determine and as set forth in the registration statement of
each Trust as from time to time in effect.
3. Class C Shares
Class C shares are offered to investors at net asset value without
the imposition of a front-end sales load. Class C shareholders are
assessed a distribution fee and/or service fee pursuant to a Rule
12b-1 Plan. In addition, an investor's proceeds from a redemption of
Class C shares (on which a dealer commission has been paid) within a
specified period of time after purchase may be subject to a CDSC.
The CDSC is paid to and retained by MFD. Class C shares that are
redeemed will not be subject to a CDSC to the extent that the shares
represent (i) reinvestment of dividends or capital gains
distributions, (ii) shares redeemed after a defined period of time,
or (iii) increases in the value of an account due to capital
appreciation. Class C shares differ from Class B shares in that (i)
the Class C shares would be subject to a lower CDSC than the Class B
shares (ii) the CDSC would be imposed on the Class C shares for a
shorter period of time than the Class B shares and (iii) Class C
shares do not convert to any other class of shares. Amounts payable
under the Rule 12b-1 Plan are subject to such further limitations as
the Trustees may from time to time determine and as set forth in the
registration statement of each Trust as from time to time in effect.
4. Class I Shares
Class I shares are offered to certain investors at net asset value
without the imposition of a front-end load or a CDSC and without a
distribution fee and/or service fee pursuant to a Rule 12b-1 Plan.
C. EXPENSES
Under the Multiple Distribution System, all expenses incurred by a Fund
are borne proportionately by each class of shares based on the relative
net assets attributable to each such class, except for the (i) different
distribution and service fees (and any other costs relating to
implementing the Rule 12b-1 Plan or an amendment to such Plan including
obtaining shareholder approval of the Rule 12b-1 Plan or an amendment to
such Plan); (ii) printing and postage expenses; and (iii) shareholder
servicing fees attributable to a class, which will be borne directly by
each respective class.
D. CONVERSION FEATURES
1. Conversion of Class B shares
If a shareholder's Class B shares of a Fund remain outstanding for a
specified period of time, they will automatically convert to Class A
shares of that Fund at the relative net asset values of each of the
classes, and will thereafter be subject to the lower fee under the
Class A Rule 12b-1 Plan. 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 Rule 12b-1 Plan applicable to Class B
shares. However, for purposes of conversion to Class A, all shares
in a shareholder's account that were purchased through the
reinvestment of distributions paid in respect of Class B shares (and
which have not converted to Class A shares as provided above) 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, a portion of the Class B shares then in the
sub-account will also convert to Class A. The portion will be
determined by the ratio that the shareholder's Class B shares not
acquired through distributions that are converting to Class A bears
to the shareholder's total Class B shares not acquired through
distributions.
2. Conversion of Other Classes
Any other class of shares may provide that shares in that class (the
"Purchase Class") will, after a period of time, automatically
convert into another class of shares (the "Target Class") in
accordance with the provisions of Rule 18f-3. Such a conversion
feature would be described in the relevant Fund's prospectus.
3. General
Any conversion of shares of one class to shares of another class
would be subject to the continuing availability of a ruling of the
Internal Revenue Service or an opinion of legal counsel to the
effect that the conversion of these shares does not constitute a
taxable event under federal tax law. Any such conversion may be
suspended if such a ruling or opinion is no longer available. In the
event such conversion does not occur, these shares would continue to
be subject for an indefinite period to the higher distribution fees
and, in some cases, higher shareholder servicing fees of the class.
E. EXCHANGE FEATURES
Each class of shares may have different exchange features applicable to
the shares of that class. Currently, Class A shares of a Fund may be
exchanged, either all or in part, at net asset value for Class A shares of
another Fund. Class A shares of MFS Cash Reserve Fund may be exchanged for
Class A shares of another Fund at net asset value plus that Fund's normal
front-end load (except in certain situations described in MFS Cash Reserve
Fund's prospectus). Class B shares may be exchanged, either all or in
part, at net asset value for Class B shares of another Fund. Class C
shares may be exchanged, either all or in part, at net asset value for
Class C shares of another Fund. 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. Each exchange is subject to share availability and
must involve shares having an aggregate minimum value as set forth in the
Fund's prospectus. Shares of one class may not be exchanged for shares of
any other class.
F. PLAN DURATION
This Plan shall continue in effect indefinitely unless terminated or
amended as provided herein.
G. TERMINATION AND AMENDMENT PROCEDURE
This Plan may be terminated at any time by a vote of a majority of the
Trustees who are not "interested persons" of the Trust ("Disinterested
Trustees") or by a vote of the holders of a "majority of the outstanding
voting securities" of the Trust. No material amendment may be made to this
Plan without the approval of a majority of the Trustees, including a
majority of the Disinterested Trustees, after a finding that the Plan is
in the best interests of each class of shares individually and each Fund
as a whole. This Plan may be amended without Trustee approval to make a
change that is not material which includes, by way of example, to supply
any omission, to cure, correct or supplement any ambiguous, defective or
inconsistent provision hereof.
H. SCOPE OF TRUST'S OBLIGATIONS
A copy of the Declaration of Trust of each Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. It is
acknowledged that the obligations of or arising out of this Plan 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 in accordance with its proportionate interest
hereunder. If this Plan is adopted by the Trust on behalf of one or more
series of the Trust, it is further acknowledged 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 Plan are binding solely upon the
assets or property of the series on whose behalf the Trust has adopted
this Plan. If the Trust has adopted this Plan on behalf of more than one
series of the Trust, it is also acknowledged that the obligations of each
series hereunder shall be several and not joint, in accordance with its
proportionate interest hereunder, and no series shall be responsible for
the obligations of another series.
I. MISCELLANEOUS PROVISIONS
As used in this Plan, the terms "interested person" and "majority of the
outstanding voting securities" are used as defined in the 1940 Act. This
Plan shall be administered and construed in accordance with the laws of
The Commonwealth of Massachusetts and the applicable provisions of the
1940 Act and the Rules and Regulations promulgated thereunder. If any
provision of this Plan shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of the Plan shall not be
affected thereby.
<PAGE>
EXHIBIT A
Dated: May 12, 1998
MFS SERIES TRUST I:
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
MFS Research International Fund
MFS Real Estate Investment Fund
MFS SERIES TRUST II:
MFS Emerging Growth Fund
MFS Large Cap Growth Fund
MFS Intermediate Income Fund
MFS Charter Income Fund
MFS SERIES TRUST III:
MFS High Income Fund
MFS Municipal High Income Fund
MFS High Yield Opportunities Fund
MFS SERIES TRUST IV:
MFS Municipal Bond Fund
MFS Mid Cap Growth Fund
MFS SERIES TRUST V:
MFS Total Return Fund
MFS Research Fund
MFS International Opportunities Fund
MFS International Strategic Growth Fund
MFS International Value Fund
MFS Asia Pacific Fund
MFS SERIES TRUST VI:
MFS World Total Return Fund
MFS Utilities Fund
MFS World Equity Fund
MFS SERIES TRUST VII:
MFS World Governments Fund
MFS Capital Opportunities Fund
MFS SERIES TRUST VIII:
MFS Strategic Income Fund
MFS World Growth Fund
MFS SERIES TRUST IX:
MFS Bond Fund
MFS Limited Maturity Fund
MFS Municipal Limited Maturity Fund
MFS SERIES TRUST X:
MFS Government Mortgage Fund
MFS/Foreign & Colonial Emerging Markets Equity Fund
MFS International Growth Fund
MFS International Growth and Income Fund
MFS Strategic Value Fund
MFS Small Cap Value Fund
MFS Emerging Markets Debt Fund
MFS SERIES TRUST XI:
MFS Union Standard Equity Fund
Vertex All Cap Fund
Vertex Contrarian Fund
Vertex Research All Cap Fund
Vertex Growth Fund
Vertex Discovery Fund
MFS MUNICIPAL SERIES TRUST:
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
MFS Municipal Income Fund
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS Growth Opportunities Fund
MFS Government Securities Fund
MFS Government Limited Maturity Fund
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000225604
<NAME> MFS SERIES TRUST III
<SERIES>
<NUMBER> 011
<NAME> MFS HIGH INCOME FUND CLASS A
<MULTIPLIER> 1
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000225604
<NAME> MFS SERIES TRUST III
<SERIES>
<NUMBER> 012
<NAME> MFS HIGH INCOME FUND CLASS B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000225604
<NAME> MFS SERIES TRUST III
<SERIES>
<NUMBER> 013
<NAME> MFS HIGH INCOME FUND CLASS C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
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<INVESTMENTS-AT-COST> 1155649524
<INVESTMENTS-AT-VALUE> 1196203993
<RECEIVABLES> 69716109
<ASSETS-OTHER> 8714
<OTHER-ITEMS-ASSETS> 270574
<TOTAL-ASSETS> 1266199390
<PAYABLE-FOR-SECURITIES> 43774948
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<OTHER-ITEMS-LIABILITIES> 7304107
<TOTAL-LIABILITIES> 51079055
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1406461599
<SHARES-COMMON-STOCK> 10679900
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<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (2800915)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (229189864)
<ACCUM-APPREC-OR-DEPREC> 40649515
<NET-ASSETS> 1215120335
<DIVIDEND-INCOME> 2073899
<INTEREST-INCOME> 100057256
<OTHER-INCOME> 0
<EXPENSES-NET> (13139543)
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<NET-CHANGE-IN-ASSETS> 210822977
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<OVERDISTRIB-NII-PRIOR> (258150034)
<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 13454156
<AVERAGE-NET-ASSETS> 1071883418
<PER-SHARE-NAV-BEGIN> 5.36
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<PER-SHARE-GAIN-APPREC> .28
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<PER-SHARE-NAV-END> 5.64
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000225604
<NAME> MFS SERIES TRUST III
<SERIES>
<NUMBER> 014
<NAME> MFS HIGH INCOME FUND CLASS I
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
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<RECEIVABLES> 69716109
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<OTHER-ITEMS-LIABILITIES> 7304107
<TOTAL-LIABILITIES> 51079055
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1406461599
<SHARES-COMMON-STOCK> 642700
<SHARES-COMMON-PRIOR> 572355
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (2800915)
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<OVERDISTRIBUTION-GAINS> (229189864)
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<NET-ASSETS> 1215120335
<DIVIDEND-INCOME> 2073899
<INTEREST-INCOME> 100057256
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<EXPENSES-NET> (13139543)
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000225604
<NAME> MFS SERIES TRUST III
<SERIES>
<NUMBER> 021
<NAME> MFS MUNICIPAL HIGH INCOME FUND CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000225604
<NAME> MFS SERIES TRUST III
<SERIES>
<NUMBER> 022
<NAME> MFS MUNICIPAL HIGH INCOME FUND CLASS B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
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