<PAGE> 1
As filed with the Securities and Exchange Commission on March 30, 1995
1940 Act File No. 811-3090
1933 Act File No. 2-68918
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 19
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 20
MFS SERIES TRUST VII
(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 March 30, 1995 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on [date] pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2, the registrant has registered an indefinite number of
securities under the Securities Act of 1933. The Registrant filed a Rule 24f-2
Notice for its fiscal year ended November 30, 1994 on January 30, 1995.
================================================================================
<PAGE> 2
MFS SERIES TRUST VII
--------------------
MFS WORLD GOVERNMENTS FUND
MFS VALUE FUND
CROSS REFERENCE SHEET
---------------------
(Pursuant to Rule 404 showing location in Prospectus and/or Statement of
Additional Information of the responses to the Items in Parts A and B of Form
N-1A)
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
----------------- ------------------ -----------------------
<S> <C> <C> <C>
1 (a), (b) Front Cover Page *
2 (a) Expense Summary *
(b), (c) * *
3 (a) Condensed Financial *
Information
(b) * *
(c) Information Concerning Shares *
of Fund - Performance
Information
(d) Condensed Financial Information *
4 (a) Front Cover Page; The Fund; *
Investment Objective and Policies
(b), (c) Investment Objective and *
Policies
5 (a) The Fund; Management of the *
Fund - Investment Adviser
(b) Front Cover Page; Management *
of the Fund - Investment
Adviser; Back Cover Page
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
----------------- ------------------ -----------------------
<S> <C> <C> <C>
(c) Management of the Fund - *
Investment Adviser
(d) Management of the Fund - *
Investment Adviser; Back Cover
Page
(e) Management of the Fund - Back *
Cover Page
(f) Expense Summary *
(g) Information Concerning Shares of *
the Fund - Purchases
5A (a), (b), (c) ** **
6 (a) Information Concerning Shares of *
the Fund - Description of Shares,
Voting Rights and Liabilities;
Information Concerning Shares of
the Fund - Redemptions and
Repurchases; Information
Concerning Shares of the Fund -
Purchases; Information
Concerning Shares of the Fund -
Exchanges
(b), (c), (d) * *
(e) Shareholder Services *
(f) Information Concerning Shares of *
the Fund - Distributions;
Shareholder Services - Distribution
Options; Tax Status
(g) Information Concerning Shares of *
the Fund - Tax Status;
Information Concerning Shares of
the Fund - Distributions
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
----------------- ------------------ -----------------------
<S> <C> <C> <C>
7 (a) Front Cover Page; Management *
of the Fund - Distributor;
Back Cover Page
(b) Information Concerning Shares of *
the Fund - Purchases;
Information Concerning Shares
of the Fund - Net Asset Value
(c) Information Concerning Shares of *
the Fund - Purchases;
Information Concerning Shares
of the Fund - Exchanges;
Shareholder Services;
Information Concerning Shares
of the Fund - Redemptions and
Repurchases; Shareholder Services
(d) Front Cover Page; Information *
Concerning Shares of the Fund -
Purchases; Shareholder Services
(e) Information Concerning Shares of *
the Fund - Distribution Plans;
Information Concerning Shares of
the Fund - Purchases; Expense
Summary
(f) Information Concerning Shares of *
the Fund - Distribution Plans
8 (a) Information Concerning Shares of *
the Fund - Purchases;
Information Concerning Shares
of the Fund - Redemptions and
Repurchases; Shareholder
Services
(b), (c), (d) Information Concerning Shares *
of the Fund - Redemptions and
Repurchases
9 * *
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
----------------- ------------------ -------------------------
<S> <C> <C> <C>
10 (a), (b) * Front Cover Page
11 * Front Cover Page
12 The Fund Definitions
13 (a), (b) * Investment Objective,
Policies and Restrictions
(c), (d) * *
14 (a), (b), (c) * Management of the Fund -
Trustees and Officers
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
(e) * Portfolio Transactions and
Brokerage Commissions
(f) * Distribution Plans
(g) * *
(h) * Management of the Fund -
Custodian; Independent
Auditors and Financial
Statements; Back Cover
Page
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
----------------- ------------------ -------------------------
<S> <C> <C> <C>
(i) * Management of the Fund -
Shareholder Servicing Agent
17 (a) * Portfolio Transactions and
Brokerage Commissions
(b) * *
(c), (d), (e) * Portfolio Transactions and
Brokerage Commissions
18 (a) Information Concerning Shares Description of Shares,
of the Fund - Description of Voting Rights and
Shares, Voting Rights and Liabilities
Liabilities
(b) * *
19 (a) Information Concerning Shares Shareholder Services
of the Fund - Purchases;
Shareholder Services
(b) Information Concerning Management of the Fund -
Shares of the Fund - Distributor; Determination
Net Asset Value; Net Asset Value and
Information Concerning Performance - Net Asset
Shares of the Fund - Value
Purchases
(c) * *
20 * Tax Status
21 (a), (b) * Management of the Fund -
Distributor; Distribution
Plans
(c) * *
22 (a) * *
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
----------------- ------------------ -------------------------
<S> <C> <C> <C>
22 (b) * Determination of Net Asset
Value and Performance
23 * Independent Auditors and
<FN> Financial Statements
-----------------------------
* Not Applicable
** Contained in Annual Report
</TABLE>
<PAGE> 8
PROSPECTUS
April 1, 1995
MFS(R) WORLD Class A Shares of Beneficial Interest
GOVERNMENTS FUND Class B Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) Class C Shares of Beneficial Interest
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Expense Summary.................................................. 2
2. The Fund......................................................... 3
3. Condensed Financial Information.................................. 3
4. Investment Objective and Policies................................ 5
5. Management of the Fund........................................... 13
6. Information Concerning Shares of the Fund........................ 14
Purchases........................................................ 14
Exchanges........................................................ 20
Redemptions and Repurchases...................................... 21
Distribution Plans............................................... 23
Distributions.................................................... 25
Tax Status....................................................... 25
Net Asset Value.................................................. 25
Description of Shares, Voting Rights and Liabilities............. 26
Performance Information.......................................... 26
7. Shareholder Services............................................. 27
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS WORLD GOVERNMENTS FUND
500 BOYLSTON STREET, BOSTON, MASSACHUSETTS 02116 (617) 954-5000
The investment objective of the MFS World Governments Fund (the "Fund") is to
seek not only preservation, but also growth of capital, together with moderate
current income. The Fund is a non-diversified series of MFS Series Trust VII
(the "Trust"), an open-end investment company. THE FUND IS DESIGNED FOR
INVESTORS WHO WISH TO SPREAD THEIR INVESTMENTS BEYOND THE UNITED STATES AND WHO
ARE PREPARED TO ACCEPT THE RISKS ENTAILED IN SUCH INVESTMENTS WHICH MAY BE
HIGHER THAN THOSE ASSOCIATED WITH CERTAIN U.S. INVESTMENTS. See "Investment
Objective and Policies." The minimum initial investment is generally $1,000 per
account (see "Purchases"). 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.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
This Prospectus sets forth concisely the information concerning the Fund and the
Trust 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 April 1, 1995, which
contains more detailed information about the Trust and the Fund and is
incorporated into this Prospectus by reference. See page 28 for a further
description of the information set forth in the Statement of Additional
Information. A copy of the Statement of Additional Information may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 9
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of
Fund Shares (as a percentage of offering price)............... 4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as applicable) See Below(1) 4.00% 0.00%
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Management Fees................................................. 0.90% 0.90% 0.90
Rule 12b-1 Fees (after applicable fee reduction)................ 0.25%(2) 1.00%(3) 1.00%(3)
Other Expenses.................................................. 0.38% 0.45% 0.38%(4)
Total Operating Expenses (after applicable fee reduction)....... 1.53%(5) 2.35% 2.28%
<FN>
---------------
(1) Purchases of $1 million or more are not subject to an initial sales charge; however, a contingent deferred sales charge
"CDSC") of 1% will be imposed on such purchases in the event of certain redemption transactions within 12 months following such
purchases (see "Purchases").
(2) The Fund has adopted a Distribution Plan for its Class A shares in accordance with Rule 12b-1 under the Investment Company Act
of 1940, as amended (the "1940 Act"), which provides that it will pay distribution/service fees aggregating up to (but not
necessarily all of) 0.35% per annum of the average daily net assets attributable to the Class A shares (see "Distribution
Plans"). Currently, 0.10% of the distribution/service fee is being waived. After a substantial period of time distribution
expenses paid under this Plan, together with the initial sales charge, may total more than the maximum sales charge that would
have been permissible if imposed entirely as an initial sales charge.
(3) The Fund has adopted separate Distribution Plans for its Class B and its Class C shares in accordance with Rule 12b-1 under the
1940 Act, which provide that it will pay distribution/service fees aggregating up to (but not necessarily all of) 1.00% per
annum of the average daily net assets attributable to the Class B shares under the Class B Distribution Plan and the Class C
shares under the Class C Distribution Plan (see "Distribution Plans"). After a substantial period of time, distribution expenses
paid under these Plans, together with any CDSC payable upon redemption of Class B shares, may total more than the maximum sales
charge that would have been permissible if imposed entirely as an initial sales charge.
(4) Except for the shareholder servicing agent fee component, "Other Expenses" for Class C shares is based on Class A expenses
incurred during the fiscal year ended November 30, 1994. The shareholder servicing agent fee component of "Other Expenses" is a
predetermined percentage based upon the Fund's net assets attributable to each class.
(5) Absent any expense reduction, "Total Operating Expenses" for Class A shares would be 1.63%.
</TABLE>
2
<PAGE> 10
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
------ ------- ------------------ -------
(1)
<S> <C> <C> <C> <C>
1 year......................................... $ 62 $ 64 $ 24 $ 23
3 years........................................ 94 103 73 71
5 years........................................ 127 146 126 122
10 years........................................ 221 248(2) 248(2) 262
<FN>
---------------
(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.
</TABLE>
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. More complete descriptions of the following expenses are set
forth in the following sections: (i) varying sales charges on share
purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii) management
fees -- "Investment Adviser"; and (iv) Rule 12b-1 (i.e., distribution plan)
fees -- "Distribution Plans".
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
2. THE FUND
The Fund is a non-diversified series of the Trust, an open-end management
investment company which was organized in 1981 as a business trust under the
laws of The Commonwealth of Massachusetts. The Trust presently consists of two
series, each of which represents a portfolio with separate investment policies.
Shares of the Fund are continuously sold to the public and the Fund then uses
the proceeds to buy securities (primarily debt securities) for its portfolio.
Three classes of shares of the Fund currently are offered to the general public.
Class A shares are offered at net asset value plus an initial sales charge (a
CDSC in the case of certain purchases of $1 million or more) and subject to a
Distribution Plan, providing for an annual distribution fee and service fee.
Class B shares are offered at net asset value without an initial sales charge
but subject to a CDSC and a Distribution Plan, providing for an annual
distribution fee and service fee which are greater than the Class A annual
distribution fee and service fee; Class B shares will convert to Class A shares
approximately eight years after purchase. Class C shares are offered at net
asset value without an initial sales charge or a CDSC but subject to a
Distribution Plan providing for an annual distribution fee and service fee which
are equal to the Class B annual distribution fee and service fee. Class C shares
do not convert to any other class of shares of the Fund.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the management of the Fund's assets and the
officers of the Trust are responsible for the Fund's operations. The Adviser
manages the portfolio daily in accordance with the Fund's investment objective
and policies. A majority of the Trustees of the Trust are not affiliated with
the Adviser. The selection of investments and the way they are managed depends
on the conditions and trends in the economies of the principal countries of the
world, their financial markets and the relationship of their currencies to the
U.S. dollar. The Fund also offers to buy back (redeem) its shares from its
shareholders at any time at net asset value, less any applicable CDSC.
3. CONDENSED FINANCIAL INFORMATION
The following information should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the Statement of Additional Information in
reliance upon the report of Ernst & Young LLP, independent auditors, as experts
in accounting and auditing. The Financial Highlights table has been included in
3
<PAGE> 11
reliance upon the report of Ernst & Young LLP for the year ended November 30,
1994. For the period from January 1, 1991 to November 30, 1993, Coopers &
Lybrand LLP served as the Fund's independent accountants and were responsible
for auditing the Fund's financial statements and issuing reports for those
fiscal years. From the Fund's commencement of investment operations on February
25, 1981 to December 31, 1990, Deloitte & Touche LLP served as the Fund's
independent accountants and were responsible for auditing the Fund's financial
statements and issuing reports for those fiscal years.
FINANCIAL HIGHLIGHTS
CLASS A, CLASS B AND CLASS C SHARES
<TABLE>
<CAPTION>
Year Ended
November 30, Year Ended December 31,
------------------ ------------------------------------------------------
1994 1993* 1992 1991 1990 1989 1988
---- ----- ---- ---- ---- ---- ----
Class A
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net assets value -- beginning of period... $ 13.37 $ 11.50 $ 12.63 $ 12.00 $ 11.45 $ 11.11 $ 11.87
-------- --------- -------- -------- -------- -------- --------
Income from investment operations++ --
Net investment income sec............... $ 0.63 $ 0.58 $ 0.87 $ 0.94 $ 0.98 $ 1.07 $ 0.94
Net realized and unrealized gain (loss)
on investments........................ (1.17) 1.29 (0.70) 0.67 1.07 (0.26) (0.42)
-------- --------- -------- -------- -------- -------- --------
Total from investment operations.... $ (0.54) $ 1.87 $ 0.17 $ 1.61 $ 2.05 $ 0.81 $ 0.52
-------- --------- -------- -------- -------- -------- --------
Less distributions declared to
shareholders --
From net investment income................ $ (1.15) $ -- $ (1.30) $ (0.75) $ (0.95) $ (0.47) $ (0.90)
From net realized gain on investments..... (0.29) -- -- -- (0.50) -- (0.32)
From paid-in capital...................... -- -- -- (0.23) (0.05) -- (0.06)
Total distributions declared to
shareholders...................... $ (1.44) $ -- $ (1.30) $ (0.98) $ (1.50) $ (0.47) $ (1.28)
-------- --------- -------- -------- -------- -------- --------
Net asset value -- end of period.......... $ 11.39 $ 13.37 $ 11.50 $ 12.63 $ 12.00 $ 11.45 $ 11.11
======== ========= ======== ======== ======== ======== ========
Total return#............................. (4.63)% 17.77%+ 1.35% 13.42% 17.90% 7.27% 3.68%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL
DATASEC.:
Expenses.................................. 1.54% 1.54%+ 1.53% 1.61% 1.44% 1.42% 1.12%
Net investment income..................... 5.45% 5.66%+ 6.78% 7.75% 8.06% 8.42% 7.91%
PORTFOLIO TURNOVER++........................ 358% 179% 163% 208% 220% 282% 232%
NET ASSETS AT END OF PERIOD (000 OMITTED)... $370,110 $443,304 $340,347 $286,089 $145,202 $124,935 $190,590
<FN>
---------------
* For the eleven months ended November 30, 1993.
+ Annualized.
++ The portfolio turnover for 1985 and subsequent years includes portfolio activity applicable to U.S. government securities,
while the preceding years do not.
# Total returns for Class A shares do not include the applicable sales charge (except for reinvested dividends prior to October
1, 1989). If the charge had been included, the results would have been lower.
++ Per share data for the year ended November 30, 1994 is based on average shares outstanding.
sec. The distributor waived a portion of the distribution fee for the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Net investment income..................... $0.62 $0.58 -- -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses................................ 1.64% 1.57%+ -- -- -- -- --
Net investment income................... 5.35% 5.63%+ -- -- -- -- --
</TABLE>
4
<PAGE> 12
FINANCIAL HIGHLIGHTS
CLASS A, CLASS B AND CLASS C SHARES (CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended November 30,
------------------------------------------ ---------------------------------
1987 1986 1985 1984 1994 1993* 1994**
---- ---- ----- ---- ---- ----- ------
Class A Class B Class C
------------------------------------------ -------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net assets value -- beginning of
period............................... $ 11.45 $ 10.70 $ 9.40 $ 9.92 $ 13.35 $ 13.22 $12.30
-------- -------- ------- ------- ------- ------- ------
Income from investment operations++ --
Net investment income................ $ 0.91 $ 0.82 $ 0.75 $ 0.78 $ 0.56 $ 0.07 $ 0.50
Net realized and unrealized gain
(loss) on investments.............. 1.86 2.35 1.94 (0.51) (1.19) 0.06 (1.35)
-------- -------- ------- ------- ------- ------- ------
Total from investment
operations..................... $ 2.77 $ 3.17 $ 2.69 $ 0.27 $ (0.63) $ 0.13 $(0.85)
-------- -------- ------- ------- ------- ------- ------
Less distributions declared to
shareholders --
From net investment income........... $ (0.90) $ (0.82) $ (0.74) $ (0.79) $ (1.11) $ -- $(0.14)
From net realized gain on
investments........................ (1.40) (1.52) (0.65) -- (0.29) -- --
From paid-in capital................. (0.05) (0.08) -- -- -- -- --
-------- -------- ------- ------- ------- ------- ------
Total distributions declared to
shareholders................... $ (2.35) $ (2.42) $ (1.39) $ (0.79) $ (1.40) $ -- $(0.14)
-------- -------- ------- ------- ------- ------- ------
Net asset value -- end of period......... $ 11.87 $ 11.45 $ 10.70 $ 9.40 $ 11.32 $ 13.35 $11.31
======== ======== ======= ======= ======= ======= ======
Total return#............................ 23.29% 29.36% 28.72% 2.36% (5.39)% 4.32%+ (6.92)%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Expenses............................... 1.13% 1.17% 1.43% 1.40% 2.38% 2.48%+ 2.32%+
Net investment income.................. 7.54% 6.57% 7.45% 7.98% 4.81% 4.72%+ 5.06%+
PORTFOLIO TURNOVER++..................... 378% 371% 307% 135% 358% 179%+ 358%
NET ASSETS AT END OF PERIOD (000
OMITTED)............................... $182,738 $142,183 $69,581 $35,486 $73,458 $24,590 $8,687
</TABLE>
---------------
<TABLE>
<C> <S>
* For the period from the commencement of offering of Class B shares, September 7, 1993 to November 30, 1993.
** For the period from the commencement of offering of Class C shares, January 3, 1994 to November 30, 1994.
+ Annualized.
++ The portfolio turnover for 1985 and subsequent years includes portfolio activity applicable to U.S. government
securities, while the preceding years do not.
# The returns for Class A shares do not include the applicable sales charge (except for reinvested dividends prior
to October 1, 1989). If the charge had been included, the results would have been lower.
++ Per share data for the year ended November 30, 1994 is based on average shares outstanding.
</TABLE>
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The Fund's investment objective is to seek not only
preservation, but also growth of capital, together with moderate current income.
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
through a professionally managed, internationally diversified portfolio
consisting primarily of debt securities and to a lesser extent equity
securities. The Fund attempts to provide investors with an opportunity to
enhance the value and increase the protection of their investment against
inflation and otherwise by taking advantage of investment opportunities in the
United States as well as in other countries where opportunities may be more
rewarding. It is believed that diversification of assets on an international
basis decreases the degree to which events in any one country, including the
United States, can affect the entire portfolio. Although the percentage of the
Fund's assets invested in securities issued abroad and denominated in foreign
currencies ("non-dollar securities") will vary depending on the state of the
economies of the principal countries of the world, their financial markets and
the relationship of their currencies to the U.S. dollar, under normal conditions
the Fund's portfolio is internationally diversified. However, for defensive
reasons or during times of international political or economic uncertainty or
turmoil, most or all of the Fund's investments may be in the United States.
5
<PAGE> 13
Under normal economic and market conditions at least 80% of the Fund's portfolio
is invested in debt securities, such as bonds, debentures, mortgage securities,
notes, commercial paper, obligations issued or guaranteed by a government or any
of its political subdivisions, agencies or instrumentalities, certificates of
deposit, as well as debt obligations which may have a call on common stock by
means of a conversion privilege or attached warrants. Debt securities in which
the Fund may invest may also include zero coupon bonds. Zero coupon bonds do not
require the periodic payment of interest and 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 at a rate of
interest reflecting the market rate of the security at the time of issuance.
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 than debt obligations which make regular payments of
interest. The Fund will accrue income on such investments for tax and accounting
purposes, which is distributable to shareholders.
Up to 20% of the Fund's assets may be invested in equity securities. When
unfavorable economic or market conditions exist, the Fund may, until favorable
conditions return, invest all or a portion of its assets in cash (or foreign
currency) or cash equivalents (such as certificates of deposit, bankers'
acceptances and time deposits), commercial paper, short-term obligations,
repurchase agreements and obligations issued or guaranteed by the U.S. or any
foreign government or any of their agencies or instrumentalities. U.S.
Government securities also include interests in trusts or other entities
representing interests in obligations that are backed by the full faith and
credit of the U.S. Government, its agencies, authorities or instrumentalities.
The Fund may invest up to 100% (and expects generally to invest between 10% to
80%) of its total assets in foreign securities which are not traded on a U.S.
exchange (not including American Depositary Receipts). The Adviser will
determine the amount of the Fund's assets to be invested in the United States
and the amount to be invested abroad. The U.S. assets will be invested in high
quality debt securities and the remainder of the assets will be diversified
among countries where opportunities for total return are expected to be most
attractive. It is currently expected that investments within foreign countries
will be primarily in government securities to minimize credit risks. The Fund
has registered as a "non-diversified" investment company. As a result, the
proportion of its assets that may be invested in the securities of any one
issuer is limited only by the Fund's own investment restrictions and the
diversification requirements of the Internal Revenue Code of 1986, as amended
(the "Code"). U.S. Government securities are not subject to any investment
limitation. The Fund will not invest 25% or more of the value of its assets in
the securities of any one foreign government. The portfolio will be managed
actively and the asset allocations modified as the Adviser deems necessary.
The Fund will purchase non-dollar securities denominated in the currency of
countries where the interest rate environment as well as the general economic
climate provide an opportunity for declining interest rates and currency
appreciation. If interest rates decline, such non-dollar securities will
appreciate in value. If the currency also appreciates against the dollar, the
total investment in such non-dollar securities would be enhanced further.
Conversely, a rise in interest rates or decline in currency exchange rates would
adversely affect the Fund's return. Investments in non-dollar securities are
evaluated primarily on the strength of a particular currency against the dollar
and on the interest rate climate of that country. Currency is judged on the
basis of fundamental economic criteria (e.g., relative inflation levels and
trends, growth rate forecasts, balance of payments status, and economic
policies) as well as technical and political data. In addition to the foregoing,
interest rates are evaluated on the basis of differentials or anomalies that may
exist between different countries. The Fund may hold foreign currency received
in connection with investments in foreign securities when, in the judgment of
the Adviser, it would be beneficial to convert such currency into U.S. dollars
at a later date, based on anticipated changes in the relevant exchange rate. The
Fund may also hold foreign currency in anticipation of purchasing foreign
securities.
The phrase "preservation of capital" when applied to a domestic investment
company is generally understood to imply that the portfolio is invested in very
low risk securities and that the major risk is loss of purchasing power through
the effects of inflation or major changes in interest rates. However, while the
Fund invests in securities which are believed to have minimal credit risk, an
error of judgment in selecting a currency or an interest rate environment could
result in a loss of capital.
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<PAGE> 14
It is contemplated that the Fund's long-term debt investments will consist
primarily of securities which are believed by the Adviser to be of relatively
high quality. If after the Fund purchases such a security, the quality of the
security deteriorates significantly, the security will be sold only if the
Adviser believes it is advantageous to do so.
EMERGING MARKET SECURITIES: The Fund may invest, as described below, in
countries or regions with relatively low gross national product per capita
compared to the world's major economies, and in countries or regions with the
potential for rapid economic growth (emerging markets). Emerging markets will
include any country: (i) having an "emerging stock market" as defined by the
International Finance Corporation; (ii) with low- to middle-income economies
according to the International Bank for Reconstruction and Development (the
World Bank); (iii) listed in World Bank publications as developing; or (iv)
determined by the Adviser to be an emerging market as defined above. The Fund
may invest in securities of: (i) companies the principal securities trading
market for which is an emerging market country; (ii) companies organized under
the laws of, and with a principal office in, an emerging market country; (iii)
companies whose principal activities are located in emerging market countries;
or (iv) companies traded in any market that derive 50% or more of their total
revenue from either goods or services produced in an emerging market or sold in
an emerging market.
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, Ecuador, Mexico, Nigeria, the Philippines, Poland, Uruguay and
Venezuela. Brady Bonds have been issued only recently, and for that reason do
not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the U.S.
dollar) and are actively traded in over-the-counter secondary markets. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed-rate bonds or
floating-rate bonds, are generally collateralized in full as to principal by
U.S. Treasury zero coupon bonds having the same maturity as the bonds. Brady
Bonds are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
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 (see the Statement of Additional Information).
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 a 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.
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (in the case of securities guaranteed by
the
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<PAGE> 15
Government National Mortgage Association ("GNMA"); or guaranteed by agencies or
instrumentalities of the U.S. Government (such as the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"),
and are not guaranteed by the U.S. Government). Mortgage pass-through securities
may also be issued by nongovernmental issuers (such as commercial banks, savings
and loan institutions, private mortgage insurance companies, mortgage bankers
and other secondary market issuers). Some of these mortgage pass-through
securities may be supported by various forms of 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 referred to as "Mortgage Assets"). The Fund may also invest a
portion of its assets in multiclass pass-through securities which are interests
in a trust composed of Mortgage Assets. CMOs (which include multiclass
pass-through securities) may be issued by agencies, authorities or
instrumentalities of the U.S. 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. 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.
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 part of the premium if any has been paid.
Certain classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
the Fund invests, the investment may be subject to a greater or lesser risk of
prepayment than other types of mortgage-related securities.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. PAC Bonds generally
require payments of a specified amount of principal on each payment date. PAC
Bonds are always parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes. For a further description of CMOs, parallel pay CMOs and PAC Bonds and
the risks related to transactions therein, see the Statement of Additional
Information.
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 usually structured with two classes that receive different
proportions of the interest and principal distributions from an underlying pool
of mortgage assets. The Fund may only invest in SMBS issued or guaranteed by the
U.S. Government, its agencies, authorities or instrumentalities. In addition,
the Fund will only invest in SMBS whose mortgage assets are U.S. Government
securities. For a further description of SMBS and the risks related to
transactions therein, see the Statement of Additional Information.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn additional income on available cash or as a temporary defensive measure.
Under a repurchase agreement, the Fund acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Fund's right to liquidate the securities
may be restricted (during which time the value of the securities could decline).
As discussed in the Statement of Additional Information, the Fund has adopted
certain procedures intended to minimize any risk.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933 (the "1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a continuing
review of the
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<PAGE> 16
trading markets for a specific Rule 144A security, whether such security is
illiquid and thus subject to the Fund's limitations on investing not more than
15% of its net assets is illiquid investments, or liquid and thus not subject to
such limitation. The Board of Trustees has adopted guidelines and delegated to
MFS the daily function of determining and monitoring the liquidity of Rule 144A
securities. The Board, however, will retain sufficient oversight and be
ultimately responsible for the determinations. The Board will carefully monitor
the Fund's investments in Rule 144A securities, focusing on such important
factors, among others, as valuation, liquidity and availability of information.
This investment practice could have the effect of increasing the level of
illiquidity in 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 may
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.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities to entities deemed creditworthy by the Adviser.
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, cash equivalents or U.S. Treasury securities maintained on a current
basis at an amount at least equal to the market value of the securities loaned.
If the Adviser determines to make securities loans, it is intended that the
value of the securities loaned would not exceed 25% of the value of the net
assets of the Fund.
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.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call options on
securities ("Options") and purchase put and call Options. The Fund will write
such Options for the purpose of increasing its return and/or to protect the
value of its portfolio. In particular, where the Fund writes an Option which
expires unexercised or is closed out by the Fund at a profit, it will retain the
premium paid for the Option, which will increase its gross income and will
offset in part the reduced value of a portfolio security in connection with
which the Option may have been written or the increased cost of portfolio
securities to be acquired. In contrast, however, if the price of the security
underlying the Option moves adversely to the Fund's position, the Option may be
exercised and the Fund will be required to purchase or sell the security at a
disadvantageous price, resulting in losses which may only be partially offset by
the amount of the premium. The Fund may also write combinations of put and call
Options on the same security, known as "straddles." Such transactions can
generate additional premium income but also present increased risk.
The Fund may purchase Options in anticipation of declines in the value of
portfolio securities or increases in the value of securities to be acquired. In
the event that the expected changes occur, the Fund may be able to offset the
resulting adverse effect on its portfolio, in whole or in part, through the
Options purchased. The risk assumed by the Fund in connection with such
transactions is limited to the amount of the premium and related transaction
costs associated with the Option, although the Fund may be required to forfeit
such amounts in the event that the prices of securities underlying the Options
do not move in the direction or to the extent anticipated.
The Fund may also enter into options on the yield "spread," or yield
differential between two 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 securities rather than the actual prices of the individual
securities. Yield curve options written by the Fund will be "covered" but could
involve additional risks, as discussed in the Statement of Additional
Information.
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<PAGE> 17
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 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 by the Federal
Reserve Bank of New York. Also, the contracts 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 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: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities or foreign currencies or
contracts based on indexes of securities or currencies (including any index of
U.S. or foreign securities as such instruments become available for trading)
("Futures Contracts"). Such transactions will be entered into for hedging
purposes, in order to protect the Fund's current or intended investments from
the effects of changes in interest or exchange rates or declines in securities
markets, as well as for non-hedging purposes, to the extent permitted by
applicable law. The Fund will incur brokerage fees when it purchases and sells
Futures Contracts, and will be required to maintain margin deposits. In
addition, Futures Contracts entail risks. Although the Fund believes that use of
such contracts will benefit the Fund, if its investment judgment about the
general direction of interest or exchange rates is incorrect, the Fund's overall
performance may be poorer than if it had not entered into any such contract and
the Fund may realize a loss. The Fund will not enter into any Futures Contract
if immediately thereafter the value of all such Futures Contracts would exceed
50% of the value of its total assets.
OPTIONS ON FUTURES CONTRACTS: The Fund may also purchase and write options on
Futures Contracts ("Options on Futures Contracts") for the purpose of protecting
against declines in the value of portfolio securities or against increases in
the cost of securities to be acquired. Purchases of Options on Futures Contracts
may present less risk in hedging the portfolio of the Fund than the purchase or
sale of the underlying Futures Contracts, since the potential loss is limited to
the amount of the premium paid for the option, plus related transaction costs.
The writing of such options, however, does not present less risk than the
trading of Futures Contracts, and will constitute only a partial hedge, up to
the amount of the premium received, less related transaction costs. In addition,
if an option is exercised, the Fund may suffer a loss on the transaction. The
Fund may also purchase and write Options on Futures Contracts for non-hedging
purposes, to the extent permitted by applicable law.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase and sale of a fixed quantity of a foreign currency at
a future date ("Forward Contracts"). The Fund may enter into Forward Contracts
for hedging purposes as well as for non-hedging purposes. By entering into
transactions in Forward Contracts, however, the Fund may be required to forego
the benefits of advantageous changes in exchange rates and, in the case of
Forward Contracts entered into for non-hedging purposes, the Fund may sustain
losses which will reduce its gross income. 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. Forward
Contracts are traded over-the-counter, and not on organized commodities or
securities exchanges. As a result, such contracts operate in a manner distinct
from exchange-traded instruments, and their use involves certain risks beyond
those associated with transactions in Futures Contracts or options traded on
exchanges. The Fund has established procedures consistent with Statements of the
SEC and its Staff regarding the use of
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<PAGE> 18
Forward Contracts by registered investment companies, which requires use of
segregated assets or "cover" in connection with the purchase and sale of such
contracts.
OPTIONS ON FOREIGN CURRENCIES: The Fund may also purchase and write options on
foreign currencies ("Options on Foreign Currencies") for the purpose of
protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. As in the
case of other types 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 may 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 paid for
the option plus related transaction costs.
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 or interest rates rise or fall
according to the change in one or more specified underlying instruments. Indexed
securities may include securities that have embedded swap agreements (see "Swaps
and Related Transactions"). Indexed securities may be positively or negatively
indexed (i.e., their value 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.
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 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 will tend 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 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. As a
result, 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 Statement of Additional Information on the risks involved
in, these activities.
RISK FACTORS: Although the Fund will enter into transactions in Options, Futures
Contracts, Options on Futures Contracts, Forward Contracts and Options on
Foreign Currencies in part for hedging purposes, such transactions nevertheless
involve certain risks.
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<PAGE> 19
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, Options on Futures Contracts and Forward Contracts for other than
hedging purposes, to the extent permitted by applicable law, which involves
greater risk. In particular, such transactions may result in losses for the Fund
which are not offset by gains on other portfolio positions, thereby reducing
gross income. In addition, foreign currency markets may be extremely volatile
from time to time. 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 Fund may also be required or may elect to receive delivery
of the foreign currencies underlying Forward Contracts or Options on Foreign
Currencies, which may involve certain risks. In such instances, the Fund may
hold the foreign currency 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 Appendix to this
Prospectus contains a description of the nature and trading mechanics of
Options, Futures Contracts, Options on Futures Contracts, Forward Contracts and
Options on Foreign Currencies, and the Statement of Additional Information
includes a discussion of the risks related to transactions therein.
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 Commodity Futures
Trading Commission (the "CFTC") and on foreign exchanges. In addition, the
securities underlying options and Futures Contracts traded by the Fund will
include U.S. Government securities as well as foreign securities.
Investors should recognize that transactions involving foreign securities or
foreign currencies, and transactions entered into in foreign countries, involve
considerations and risks not typically associated with investing in U.S.
markets. Such investments may be favorably or unfavorably affected by changes in
interest rates, currency exchange rates and exchange control regulations, and
costs may be incurred in connection with conversions between various currencies.
In addition, investments in foreign countries could be affected by other factors
generally not thought to be present in the United States, including the
possibility of heavy taxation, less publicly available financial and other
information, different or lesser regulatory protection, political or social
instability, limitations on the removal of funds or other assets of the Fund,
expropriation of assets, diplomatic developments adverse to U.S. investments and
difficulties in enforcing contractual obligations. U.S. Government policies have
in the past, through taxation and other restrictions, discouraged certain
investments abroad by U.S. investors such as the Fund. While no such
restrictions are currently in effect, they could be reinstituted. In such event
it might become necessary for the Fund to invest all or substantially all of its
assets in U.S. securities, or the Fund might be liquidated. Over-the-counter
transactions also involve certain risks which may not be present in an exchange
environment.
Because of the Fund's international investment policies and the risks discussed
above, as well as other considerations, an investment in shares of the Fund may
not be appropriate for all investors, and an investment in shares of the Fund
should not be considered a complete investment program. Each prospective
purchaser should take into account his investment objectives as well as his
other investments when considering the purchase of shares of the Fund.
The risks of investing in foreign securities may be intensified in the case of
investments in emerging markets. Securities prices 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 either in losses to the Fund due to subsequent declines in value of the
portfolio security 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. Securities prices in emerging markets
can be significantly more volatile than in the more developed nations of the
world, reflecting the
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<PAGE> 20
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 foreign 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.
PORTFOLIO TRADING: Although the Fund does not intend to seek short-term profits,
securities in its portfolio will be sold whenever the Adviser believes it is
appropriate to do so without regard to the length of time the particular asset
may have been held. A high turnover rate involves greater expenses to the Fund.
The Fund engages in portfolio trading if it believes a transaction net of costs
(including custodian charges) will help in achieving its investment objective.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. Consistent with the foregoing primary
consideration, the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD") and such other policies as the Trustees
may determine, the Adviser may consider sales of shares of the Fund and of the
other investment company clients of MFD, the Fund's distributor, as a factor in
the selection of broker-dealers to execute the Fund's portfolio transactions.
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 the Statement of Additional
Information.
The policies described above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective.
The Statement of Additional Information includes a discussion of investment
policies and a listing of specific investment restrictions which govern the
Fund's investment policies. The specific investment restrictions listed in the
Statement of Additional Information may not be changed without shareholder
approval. See "Investment Restrictions" in the Statement of Additional
Information. The Fund's investment limitations, policies and rating standards
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
5. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement, dated May 20, 1982, as amended (the "Advisory Agreement").
The Adviser provides the Fund with overall investment advisory and
administrative services, as well as general office facilities. Leslie J.
Nanberg, a Senior Vice President of the Adviser, has been the Fund's portfolio
manager since 1984. Mr. Nanberg has been employed by the Adviser since 1980.
Subject to such policies as the Trustees may determine, the Adviser makes
investment decisions for the Fund. For its services and facilities, the Adviser
receives a management fee computed and paid monthly at the annual rate of 0.90%
of the first $500 million of the Fund's average daily net assets and 0.70% of
the Fund's average daily net assets in excess of $500 million for the Fund's
then-current fiscal year. For the
13
<PAGE> 21
Fund's fiscal year ended November 30, 1994, the management fee was computed and
paid monthly at the annual rate of 0.90% of average daily net assets, and MFS
received fees under the Advisory Agreement of $4,278,028.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds"), to MFS(R)Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Institutional Trust, MFS Variable
Insurance Trust, MFS Union Standard Trust, MFS Special Value Trust, MFS/Sun Life
Series Trust, Sun Growth Variable Annuity Fund, Inc. and seven variable
accounts, each of which is a registered investment company established by Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)") in
connection with the sale of Compass-2 and Compass-3 combination fixed/variable
annuity contracts. MFS and its wholly owned subsidiary, MFS Asset Management,
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 $34.5 billion on behalf of approximately 1.6 million investor
accounts as of February 28, 1995. As of such date, the MFS organization managed
approximately $19.5 billion of assets invested in fixed income securities. MFS
is a subsidiary of Sun Life of Canada (U.S.), which in turn is a subsidiary of
Sun Life Assurance Company of Canada ("Sun Life"). The Directors of MFS are A.
Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott, John D. McNeil and John R.
Gardner. Mr. Brodkin is the Chairman, Mr. Shames is the President and Mr. Scott
is the Secretary and a Senior Executive Vice President of MFS. Messrs. McNeil
and Gardner are the Chairman and President, respectively, of Sun Life. Sun Life,
a mutual life insurance company, is one of the largest international life
insurance companies and has been operating in the United States since 1895,
establishing a headquarters office here in 1973. The executive officers of MFS
report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman, President
and a Trustee of the Trust. Leslie J. Nanberg, Stephen C. Bryant, W. Thomas
London, Stephen E. Cavan, James R. Bordewick, Jr. and James O. Yost, all of whom
are officers of MFS, are also officers of the Trust.
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. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and other services for the Fund.
6. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
securities dealer, certain banks and other financial institutions having selling
agreements with MFD. Non-securities dealer financial institutions will receive
transaction fees that are the same as commission fees to dealers. Securities
dealers and other financial institutions may also charge their customers fees
relating to investments in the Fund.
14
<PAGE> 22
The Fund offers three classes of shares which bear sales charges and
distribution fees in different forms and amounts:
CLASS A SHARES: Class A shares are offered at net asset value per share plus an
initial sales charge (or CDSC in the case of certain purchases of $1 million or
more) as follows:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SALES CHARGE* AS
PERCENTAGE OF:
-------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
<S> <C> <C> <C>
Less than $100,000................................ 4.75% 4.99% 4.00%
$100,000 but less than $250,000................... 4.00 4.17 3.20
$250,000 but less than $500,000................... 2.95 3.04 2.25
$500,000 but less than $1,000,000................. 2.20 2.25 1.70
$1,000,000 or more................................ None** None** See Below**
<FN>
---------------
*Because of rounding in the calculation of offering price, actual sales charges
may be more or less than those calculated using the percentages above.
**A CDSC may apply in certain instances. MFD will pay a commission on purchases
of $1 million or more (see below).
</TABLE>
No sales charge is payable at the time of purchase of Class A shares on
investments of $1 million or more. However, a CDSC shall be imposed on such
investments in the event of a share redemption within 12 months following the
share purchase, at the rate of 1% of the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares.
In determining whether a CDSC on such Class A shares is payable, and, if so, the
amount of the charge, it is assumed that shares not subject to the CDSC are the
first redeemed followed by other shares held for the longest period of time. All
investments made during a calendar month, regardless of when during the month
the investment occurred, will age one month on the last day of the month and
each subsequent month. Except as noted below, the CDSC on Class A shares will be
waived in the case of: (i) exchanges (except that if the shares acquired by
exchange were then redeemed within 12 months of the initial purchase (other than
in connection with subsequent exchanges to other MFS Funds), the charge would
not be waived); (ii) distributions to participants from a retirement plan
qualified under section 401(a) of the Code (a "Retirement Plan") due to: (a) a
loan from the plan (repayments of loans, however, will constitute new sales for
purposes of assessing the CDSC); or (b) "financial hardship" of the participant
in the plan, as that term is defined in Treasury Regulations Section
1.401(k)-1(d)(2), as amended from time to time; or (c) the death of a
participant in such plans; (iii) distributions from a 403(b) plan or an
Individual Retirement Account ("IRA") due to death, disability, or attainment of
age 59 1/2; (iv) tax-free returns of excess contributions to an IRA; (v)
distributions by other employee benefit plans to pay benefits and (vi) certain
involuntary redemptions and redemptions in connection with certain automatic
withdrawals from a qualified retirement plan. The CDSC on Class A Shares will
not be waived, however, if the Retirement Plan withdraws from the Fund, except
that if the Retirement Plan has invested its assets in Class A shares of one or
more of MFS Funds for more than 10 years from the later to occur of (i) January
1, 1993 or (ii) the date such Retirement Plan first invests its assets in Class
A shares of one or more of the MFS Funds, the CDSC on Class A shares will be
waived in the case of a redemption of all of the Retirement Plan's shares
(including shares of any other class) in all MFS Funds (i.e., all the assets of
the Retirement Plan invested in the MFS Funds are withdrawn), unless,
immediately prior to the redemption, the aggregate amount invested by the
Retirement Plan in Class A shares of the MFS Funds (excluding the reinvestment
of distributions) during the prior four-year period equals 50% or more of the
total value of the Retirement Plan's assets in the MFS Funds, in which case the
CDSC will not be waived. The CDSC on Class A shares will be waived upon
redemption by a Retirement Plan where the redemption proceeds are used to pay
expenses of the Retirement Plan or certain expenses of participants under the
Retirement Plan (e.g., participant account fees), provided that the Retirement
Plan's sponsor subscribes to the MFS Fundamental 401(k) Plan(sm) or another
similar recordkeeping system made available by The Shareholder Servicing Agent.
The CDSC on Class A shares will be waived upon the transfer of registration from
shares held by a Retirement Plan through a single account maintained by the
Shareholder Servicing Agent to multiple Class A share accounts maintained by the
Shareholder Servicing Agent on behalf of individual participants in the
Retirement Plan, provided that the
15
<PAGE> 23
Retirement Plan's sponsor subscribes to the MFS Fundamental 401(k) Plan(sm) or
another similar recordkeeping system made available by the Shareholder Servicing
Agent. Any applicable CDSC will be deferred upon an exchange of Class A shares
of the Fund for units of participation of the MFS Fixed Fund (a bank collective
investment fund) (the "Units"), and the CDSC will be deducted from the
redemption proceeds when such Units are subsequently redeemed (assuming the CDSC
is then payable). No CDSC will be assessed upon an exchange of Units for Class A
shares of the Fund. For purposes of calculating the CDSC payable upon redemption
of Class A shares of the Fund or Units acquired pursuant to one or more
exchanges, the period during which the Units are held will be aggregated with
the period during which the Class A shares are held. MFD shall receive all CDSCs
which it intends to apply for the benefit of the Fund.
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 MFS Funds and other funds
owned or being purchased, the existence of an agreement to purchase additional
shares during a 13-month period (or a 36-month period for purchases of $1
million or more) or other special purchase programs. A description of the Right
of Accumulation, Letter of Intent and Group Purchases privileges by which the
sales charge may be reduced is set forth in the Statement of Additional
Information. In addition, MFD will pay a commission to dealers who initiate and
are responsible for purchases of $1 million or more as follows: 1.00% on sales
up to $5 million, plus 0.25% on the amount in excess of $5 million. Purchases of
$1 million or more for each shareholder account will be aggregated over a
12-month period (commencing from the date of the first such purchase) for
purposes of determining the level of commissions to be paid during that period
with respect to such account.
Class A shares of the Fund may be sold at their net asset value to the officers
of the Trust, to any of the subsidiary companies of Sun Life, to eligible
Directors, officers, employees (including retired employees) and agents of MFS,
Sun Life or any of their subsidiary companies, to any trust, pension,
profit-sharing or any other benefit plan for such persons, to any trustees and
retired trustees of any investment company for which MFD serves as distributor
or principal underwriter, and to certain family members of such individuals and
their spouses, provided such shares will not be resold except to the Fund. Class
A shares of the Fund may be sold at net asset value to any employee, partner,
officer or trustee of any sub-adviser to any MFS Fund and to certain family
members of such individuals and their spouses, or to any trust, pension,
profit-sharing or other retirement plan for the sole benefit of such employee or
representative, provided such shares will not be resold except to the Fund.
Class A shares of the Fund may also be sold at their net asset value to any
employee or registered representative of any dealer or other financial
institution which has a sales agreement with MFD or its affiliates, to certain
family members of such employees or representatives and their spouses, or to any
trust, pension, profit-sharing or other retirement plan for the sole benefit of
such employee or representative, as well as to clients of the MFS Asset
Management, Inc. Class A shares may be sold at net asset value, subject to
appropriate documentation, through a dealer where the amount invested represents
redemption proceeds from a registered open-end management investment company not
distributed or managed by MFD or its affiliates if: (i) the redeemed shares were
subject to an initial sales charge or a deferred sales charge (whether or not
actually imposed); (ii) such redemption has occurred no more than 90 days prior
to the purchase of Class A shares of the Fund; and (iii) the Fund, MFD or its
affiliates have not agreed with such company or its affiliates, formally or
informally, to sell Class A shares at net asset value or provide any other
incentive with respect to such redemption and sale. Class A shares of the Fund
may also be sold at net asset value where the amount invested represents
redemption proceeds from MFS Fixed Fund. In addition, Class A shares of the Fund
may be sold at net asset value in connection with the acquisition or liquidation
of the assets of other investment companies or personal holding companies.
Insurance company separate accounts may purchase Class A shares of the Fund at
their net asset value. Class A shares of the Fund may be purchased at net asset
value by retirement plans whose third party administrators have entered into an
administrative services agreement with MFD or one or more of its affiliates to
perform certain administrative services, subject to certain operational
requirements specified from time to time by MFD or one or more of its
affiliates. Class A shares of the Fund may be purchased at net asset value
through certain broker-dealers and other financial institutions which have
entered into an
16
<PAGE> 24
agreement with MFD, which includes a requirement that such shares be sold for
the benefit of clients participating in a "wrap account" or a similar program
under which such clients pay a fee to such broker-dealer or other financial
institution.
Class A shares of the Fund may be purchased at net asset value by certain
retirement plans subject to the Employee Retirement Income Security Act of 1974,
as amended, subject to the following:
(i) The sponsoring organization must demonstrate to the satisfaction of MFD
that either (a) the employer has at least 25 employees or (b) the aggregate
purchases by the retirement plan of Class A shares of the MFS Funds will be
in an amount of at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion; and
(ii) a CDSC of 1% will be imposed on such purchases in the event of certain
redemption transactions within 12 months following such purchases.
Dealers who initiate and are responsible for purchases of Class A shares of the
Fund in this manner will be paid a commission by MFD, as follows: 1.00% on sales
up to $5 million, plus 0.25% on the amount in excess of $5 million; provided,
however, that MFD may pay a commission, on sales in excess of $5 million to
certain retirement plans, of 1.00% to certain dealers which, at MFD's
invitation, enter into an agreement with MFD in which the dealer agrees to
return any commission paid to it on the sale (or on a pro rata portion thereof)
if the shareholder redeems his or her shares within a period of time after
purchase as specified by MFD. Purchases of $1 million or more for each
shareholder account will be aggregated over a 12-month period (commencing from
the date of the first such purchase) for purposes of determining the level of
commissions to be paid during that period with respect to such account. Class A
shares of the Fund may be sold at net asset value through the automatic
reinvestment of Class A and Class B distributions which constitute required
withdrawals from qualified retirement plans.
Class A shares of the Fund may be purchased at net asset value by retirement
plans qualified under section 401(k) of the Code through certain broker-dealers
and other financial institutions which have entered into an agreement with MFD
which includes certain minimum size qualifications for such retirement plans and
provides that the broker-dealer or other financial institution will perform
certain administrative services with respect to the plan's account. Furthermore,
Class A shares of the Fund may be sold at net asset value through the automatic
reinvestment of distributions of dividends and capital gains of Class A shares
of other MFS Funds pursuant to the Distribution Investment Program (see
"Shareholder Services" in the Statement of Additional Information).
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC as follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
<S> <C>
First................................................................... 4%
Second.................................................................. 4%
Third................................................................... 3%
Fourth.................................................................. 3%
Fifth................................................................... 2%
Sixth................................................................... 1%
Seventh and following................................................... 0%
</TABLE>
17
<PAGE> 25
For Class B shares purchased prior to January 1, 1993, the Fund imposes a CDSC
as a percentage of original purchase price or redemption proceeds, as
applicable:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
<S> <C>
First................................................................... 6%
Second.................................................................. 5%
Third................................................................... 4%
Fourth.................................................................. 3%
Fifth................................................................... 2%
Sixth................................................................... 1%
Seventh and following................................................... 0%
</TABLE>
No CDSC is paid upon an exchange of shares. For purposes of calculating the CDSC
upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares. See "Redemptions and
Repurchases -- Contingent Deferred Sales Charge" for further discussion of the
CDSC.
The CDSC on Class B shares will be waived upon the death or disability (as
defined in section 72(m)(7) of the Code) of any investor, provided the account
is registered (i) in the case of a deceased individual, solely in the deceased
individual's name, (ii) in the case of a disabled individual, solely or jointly
in the disabled individual's name or (iii) in the name of a living trust for the
benefit of the deceased or disabled individual. The CDSC on Class B shares will
also be waived in the case of redemptions of shares of the Fund pursuant to a
systematic withdrawal plan. In addition, the CDSC on Class B shares will be
waived in the case of distributions from an IRA, SAR-SEP or any other retirement
plan qualified under Section 401(a) or 403(b) of the Code, due to death or
disability, or in the case of required minimum distributions from any such
retirement plan due to attainment of age 70 1/2. The CDSC on Class B shares will
be waived in the case of distributions from a retirement plan qualified under
Section 401(a) of the Code due to (i) returns of excess contribution to the
plan, (ii) retirement of a participant in the plan, (iii) a loan from the plan
(repayments of loans, however, will constitute new sales for purposes of
assessing the CDSC), (iv) "financial hardship" of the participant in the plan,
as that term is defined in Treasury Regulation 1.401(k)-1(d)(2), as amended from
time to time, and (v) termination of employment of the participant in the plan
(excluding, however, a partial or other termination of the plan). The CDSC on
Class B shares will be waived in the case of distributions from a SAR-SEP due to
(i) returns of excess contribution to the plan, (ii) retirement of a participant
in the plan and (iii) termination of employment of the participant in the plan
(excluding, however, a partial or other termination of the plan). The CDSC on
Class B shares of the Fund will also be waived upon redemption by (i) officers
of the Fund, (ii) any of the subsidiary companies of Sun Life, (iii) eligible
Directors, officers, employees (including retired employees) and agents of MFS,
Sun Life or any of their subsidiary companies, (iv) any trust, pension,
profit-sharing or any other benefit plan for such persons, (v) any trustees and
retired trustees of any investment company for which MFD serves as distributor
or principal underwriter, and (vi) certain family members of such individuals
and their spouses, provided in each case that the shares will not be resold
except to the Fund. The CDSC on Class B shares will also be waived in the case
of redemptions by any employee or registered representative of any dealer or
other financial institution which has a sales agreement with MFD, by certain
family members of such employee or representative and their spouse, by any
trust, pension, profit-sharing or other retirement plan for the sole benefit of
such employee or representative and by clients of the MFS Asset Management, Inc.
A retirement plan qualified under Section 401(a) of the Code, (a "Retirement
Plan") that has invested its assets in Class B shares of one or more of the MFS
Funds for more than 10 years from the later to occur of (i) January 1, 1993 or
(ii) the date the Retirement Plan first invests its assets in Class B shares of
one or more of the funds in the MFS Funds will have the CDSC on Class B shares
waived in the case of a redemption of all the Retirement Plan's shares
(including shares of any other class) in all MFS Funds (i.e., all the assets of
the Retirement Plan invested in the MFS Funds are withdrawn), except that if,
immediately prior to the redemption, the aggregate amount invested by the
Retirement Plan in Class B shares of the MFS Funds (excluding the reinvestment
of distributions) during the prior four year period equals 50% or more of the
total value of the Retirement Plan's
18
<PAGE> 26
assets in the MFS Funds, then the CDSC will not be waived. The CDSC on Class B
shares will be waived upon redemption by a Retirement Plan where the redemption
proceeds are used to pay expenses of the Retirement Plan or certain expenses of
participants under the Retirement Plan (e.g., participant account fees),
provided that the Retirement Plan's sponsor subscribes to the MFS Fundamental
401(k) Plan(sm) or another similar recordkeeping system made available by the
Shareholder Servicing Agent. The CDSC on Class B shares will be waived upon the
transfer of registration from shares held by a Retirement Plan through a single
account maintained by the Shareholder Servicing Agent to multiple Class A share
accounts maintained by the Shareholder Servicing Agent on behalf of individual
participants in the Retirement Plan, provided that the Retirement Plan's sponsor
subscribes to the MFS Fundamental 401(k) Plan(sm) or another similar
recordkeeping system made available by the Shareholder Servicing Agent. The CDSC
on Class B shares may also be waived in connection with the acquisition or
liquidation of the assets of other investment companies or personal holding
companies.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund will convert to Class A
shares of the Fund approximately eight years after the purchase date. Shares
purchased through the reinvestment of distributions paid in respect of Class B
shares will be treated as Class B shares for purposes of the payment of the
distribution and service fees under the Distribution Plan applicable to Class B
shares. However, for purposes of conversion to Class A shares, all shares in a
shareholder's account that were purchased through the reinvestment of dividends
and distributions paid in respect of Class B shares (and which have not
converted to Class A shares as provided in the following sentence) will be held
in a separate sub-account. Each time any Class B shares in the shareholder's
account (other than those in the sub-account) convert to Class A shares, a
portion of the Class B shares then in the sub-account will also convert to Class
A shares. The portion will be determined by the ratio that the shareholder's
Class B shares not acquired through reinvestment of dividends and distributions
that are converting to Class A shares bear to the shareholder's total Class B
shares not acquired through reinvestment. The conversion of Class B shares to
Class A shares is subject to the continuing availability of a ruling from the
Internal Revenue Service or an opinion of counsel that such conversion will not
constitute a taxable event for federal tax purposes. There can be no assurance
that such ruling or opinion will be available, and the conversion of Class B
shares to Class A shares will not occur if such ruling or opinion is not
available. In such event, Class B shares would continue to be subject to higher
expenses than Class A shares for an indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge or a CDSC. Class C shares do not convert to any other class of
shares of the Fund. The maximum investment in Class C shares that may be made is
$5,000,000 per transaction.
Class C shares are not currently available for purchase by any retirement plan
qualified under 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.
GENERAL: Except as described below, the minimum initial investment is $1,000 per
account and the minimum additional investment is $50 per account. Accounts being
established for monthly automatic investments and under payroll savings programs
and tax-deferred retirement programs (other than IRAs) involving the submission
of investments by means of group remittal statements are subject to a $50
minimum on initial and additional investments per account. The minimum initial
investment for IRAs is $250 per account and the minimum additional investment is
$50 per account. Accounts being established for participation in the Automatic
Exchange Plan are subject to a $50 minimum on initial and additional investments
per account. There are also other limited exceptions to these minimums for
certain tax-deferred retirement programs. Any minimums may be changed at any
time at the discretion of MFD. The Fund reserves the right to cease offering its
shares at any time.
For shareholders who elect to participate in certain investment programs (e.g.,
the Automatic Investment Plan) or avail themselves of certain 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.
A shareholder whose shares are held in the name of, or controlled by, an
investment dealer might not receive many of the privileges and services from the
Fund (such as Right of Accumulation, Letter of Intent and certain recordkeeping
services) that the Fund ordinarily provides.
19
<PAGE> 27
Purchases and exchanges should be made for investment purposes only. The Fund
and MFD each reserve the right to reject any specific purchase order or to
restrict purchases by a particular purchaser (or group of related purchasers).
The Fund or MFD may reject or restrict any purchases by a particular purchaser
or group, for example, when such purchase is contrary to the best interests of
the Fund's other shareholders or otherwise would disrupt the management of the
Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of certain MFS Funds (as determined by MFD) which follow a
timing pattern, and with individuals or entities acting on such shareholders'
behalf (collectively, "market timers"), setting forth the terms, procedures and
restrictions with respect to such exchanges. In the absence of such an
agreement, it is the policy of the Fund and MFD to reject or restrict purchases
by market timers if (i) more than two exchange purchases are effected in a timed
account in the same calendar quarter or (ii) a purchase would result in shares
being held in timed accounts by market timers representing more than (x) one
percent of the Fund's net assets or (y) specified dollar amounts in the case of
certain MFS Funds which may include the Fund and which may change from time to
time. The Fund and MFD each reserve the right to request market timers to redeem
their shares at net asset value, less any applicable CDSC, if either of these
restrictions is violated.
Securities dealers and other financial institutions may receive different
compensation with respect to sales of Class A, Class B and Class C shares. In
some instances, promotional incentives to dealers may be offered only to certain
dealers who have sold or may sell significant amounts of Fund shares. From time
to time, MFD may pay dealers 100% of the applicable sales charge on sales of
Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset value
of all of the Class B shares of certain specified MFS Funds sold by such dealer
during a specified sales period. In addition, from time to time MFD, at its
expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of the Fund. The staff
of the SEC has indicated that dealers who receive more than 90% of the sales
charge may be considered underwriters. Such concessions provided by MFD may
include financial assistance to dealers in connection with preapproved
conferences or seminars, sales or training programs for invited registered
representatives, payment for travel expenses, including lodging, incurred by
registered representatives and members of their families or other invited guests
to various locations 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. In some instances, these concessions may be
offered to dealers or only to certain dealers who have sold or may sell, during
specified periods, certain minimum amounts of shares of the Fund. From time to
time, MFD may make expense reimbursements for special training of a dealer's
registered representatives in group meetings or to help pay the expenses of
sales contests. Other concessions will not be offered to the extent prohibited
by the laws of any state or any self-regulatory agency, such as the NASD.
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 (as described
above). If, however, a bank were prohibited from so acting, the Trustees would
consider what actions, if any, would be necessary to continue to provide
efficient and effective shareholder services. It is not expected that
shareholders would suffer any adverse financial consequence as a result of these
occurrences. In addition, state securities laws on this issue may differ from
the interpretation of federal law expressed herein and banks and financial
institutions may be required to register as broker-dealers pursuant to state
law.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds (if available for sale) at net asset value. In addition, Class C
shares may be exchanged for shares of MFS Money Market Fund at net asset value.
Shares of one class may not be exchanged for shares of any other class.
Exchanges will be made only after instructions in writing or by telephone (an
"Exchange Request") are received for an established account by the Shareholder
Servicing Agent in proper form (i.e., if in writing -- signed by the record
owner(s) exactly as the shares are registered; if by telephone -- proper account
identification is given by the dealer or shareholder of record) and each
exchange must involve either
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<PAGE> 28
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 the Exchange Request is received by the Shareholder Servicing Agent on any
business day 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. No more than five exchanges may be made in any one
Exchange Request by telephone. Additional information concerning this exchange
privilege and prospectuses for any of the other MFS Funds may be obtained from
investment dealers or the Shareholder Servicing Agent. A shareholder should read
the prospectus of the other MFS Fund and consider the differences in objectives
and policies before making any exchange. For federal and (generally) state
income tax purposes, an exchange is treated as a sale of the shares exchanged
and, therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone see "Redemptions By Telephone." The
exchange privilege (or any aspect of it) may be changed or discontinued and is
subject to certain limitations, including certain restrictions on purchases by
market timers. Special procedures, privileges and restrictions with respect to
exchanges may apply to market timers who enter into an agreement with MFD, as
set forth in such agreement (see "Purchases").
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the amount in his account on
any date on which the Fund is open for business by redeeming shares at their net
asset value or by selling such shares to the Fund through a dealer (a
repurchase). Since the net asset value of shares of the account fluctuate,
redemptions or repurchases, which are taxable transactions, are likely to result
in gains or losses to the shareholder. When a shareholder withdraws an amount
from his account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except for shares purchased, or received in
exchange for shares purchased, by check (including certified checks or cashier's
checks); payment of redemption proceeds may be delayed for 15 days from the
purchase date in an effort to assure that such check has cleared. Payment of
redemption proceeds may be delayed for up to seven days from the redemption date
if the Fund determines that such a delay would be in the best interest of all
its shareholders.
A. REDEMPTION BY MAIL -- Each shareholder has the right to redeem all or any
portion of the shares in his account by mailing or delivering to the Shareholder
Servicing Agent (see back cover for address) a stock power with a written
request for redemption or letter of instruction, together with his share
certificates (if any were issued), all in "good order" for transfer. "Good
order" generally means that the stock power, written request for redemption,
letter of instruction or share certificate must be endorsed by the record
owner(s) exactly as the shares are registered and the signature(s) must be
guaranteed in the manner set forth below under the caption "Signature
Guarantee." In addition, in some cases, "good order" may require the furnishing
of additional documents. The Shareholder Servicing Agent may make certain de
minimis exceptions to the above requirements for redemption. Within seven days
after receipt of a redemption request by the Shareholder Servicing Agent in
"good order," the Fund will make payment in cash of the net asset value of the
shares next determined after such redemption request was received, reduced by
the amount of any applicable CDSC 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 the Exchange is restricted or to the extent otherwise
permitted by the 1940 Act if an emergency exists.
B. REDEMPTION BY TELEPHONE -- Each shareholder may redeem an amount from his
account by telephoning toll-free at (800) 225-2606. Shareholders wishing to
avail themselves of this telephone redemption privilege must so elect on their
Account Application, designate thereon a commercial bank and account number to
receive the proceeds of such redemption, and sign the Account Application Form
with the signature(s) guaranteed in the manner set forth below under the caption
"Signature Guarantee." The proceeds of such a redemption, reduced by the amount
of any applicable CDSC described above and the amount of any income tax required
to be withheld, are mailed by check to the designated account, without charge.
As a special service, investors may arrange to have proceeds in excess of $1,000
wired in federal funds to the designated account. If a telephone
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<PAGE> 29
redemption request is received by the Shareholder Servicing Agent by the close
of regular trading on the Exchange on any business day, shares will be redeemed
at the closing net asset value of the Fund on that day. Subject to the
conditions described in this section, proceeds of a redemption are normally
mailed or wired on the next business day following the date of receipt of the
order for redemption. The Shareholder Servicing Agent will not be responsible
for any losses resulting from unauthorized telephone transactions if it follows
reasonable procedures designed to verify the identity of the caller. The
Shareholder Servicing Agent will request personal or other information from the
caller, and will normally also record calls. Shareholders should verify the
accuracy of confirmation statements immediately after their receipt.
C. REPURCHASE THROUGH A DEALER -- If a shareholder desires to sell his shares at
their net asset value through his securities dealer (a repurchase), the
shareholder can place a repurchase order with his dealer, who may charge the
shareholder a fee. Net asset value is calculated on the day the dealer places
the order with MFD, as the Fund's agent. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO MFD ON THE SAME DAY BEFORE MFD CLOSES FOR BUSINESS, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
GENERAL: Shareholders of the Fund who have redeemed their shares have a one-time
right to reinvest the redemption proceeds in the same class of shares of any of
the MFS Funds (if shares of such Fund are available for sale) at net asset value
(with a credit for any CDSC paid) within 90 days of the redemption pursuant to
the Reinstatement Privilege. If the shares credited for any CDSC paid are then
redeemed within six years of the initial purchase in the case of Class B shares,
or within 12 months of the initial purchase for certain Class A share purchases,
a CDSC will be imposed upon redemption. Such purchases under the Reinstatement
Privilege are subject to all limitations in the Statement of Additional
Information regarding this privilege.
Subject to the Fund's compliance with applicable regulations, the Fund has
reserved the right to pay the redemption or repurchase price of shares of the
Fund, either totally or partially, by a distribution in kind of securities
(instead of cash) from the Fund's portfolio. The securities distributed in such
a distribution would be valued at the same amount as that assigned to them in
calculating the net asset value for the shares being sold. If a shareholder
receives a distribution in kind, the shareholder could incur brokerage or
transaction charges in converting the securities to cash.
Due to the relatively high cost of maintaining small accounts, the Fund reserves
the right to redeem shares in any account for their then-current value (which
will be promptly paid to the shareholder) if at any time the total investment in
such account drops below $500 because of redemptions, except in the case of
accounts established for monthly automatic investments and certain payroll
savings programs, Automatic Exchange Plan accounts and tax-deferred retirement
plans, for which there is a lower minimum investment requirement (see
"Purchases"). Shareholders will be notified that the value of their account is
less than the minimum investment requirement and allowed 60 days to make an
additional investment before the redemption is processed. No CDSC will be
imposed with respect to such involuntary redemptions.
SIGNATURE GUARANTEE: In order to protect shareholders against fraud to the
greatest extent possible, the Fund requires in certain instances as indicated
above that the shareholder's signature be guaranteed. In these cases the
shareholder's signature must be guaranteed by an eligible bank, broker, dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association. Signature guarantees shall be accepted
in accordance with policies established by the Shareholder Servicing Agent.
CONTINGENT DEFERRED SALES CHARGE. Investments ("Direct Purchases") in Class A
and B shares will be subject to a CDSC for a period of 12 months (in the case of
purchases of $1 million or more of Class A shares) or six years (in the case of
purchases of Class B shares). Class C shares are not subject to a CDSC.
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
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<PAGE> 30
December 31 of that year and each subsequent year. At the time of a redemption,
the amount by which the value of a shareholder's account for a particular class
represented by Direct Purchases exceeds the sum of the six calendar year
aggregations (12 months in the case of purchases of $1 million or more of Class
A shares) of Direct Purchases may be redeemed without charge ("Free Amount").
Moreover, no CDSC is ever assessed on additional shares acquired through the
automatic reinvestment of dividends or capital gain distributions ("Reinvested
Shares").
Therefore, at the time of redemption of shares of a particular class, (i) any
Free Amount is not subject to the CDSC, and (ii) the amount of the redemption
equal to the then-current value of Reinvested Shares is not subject to the CDSC,
but (iii) any amount of 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 will be calculated as set forth in
"Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except that, with respect to transfers of registration to an IRA
rollover account, the CDSC will be waived if the shares being reregistered would
have been eligible for a CDSC waiver had they been redeemed.
DISTRIBUTION PLANS
The Trustees have adopted separate distribution plans for Class A, Class B and
Class C shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Rule"), after having concluded that there is a reasonable
likelihood that the plans would benefit the Fund and its shareholders.
CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan provides that the Fund
will pay MFD a distribution/service fee aggregating up to (but not necessarily
all of) 0.35% of the average daily net assets attributable to Class A shares
annually in order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of Class A shares. The expenses to be paid by MFD on
behalf of the Fund include a service fee to securities dealers which enter into
a sales agreement with MFD of up to 0.25% per annum of the Fund's average daily
net assets attributable to Class A shares that are owned by investors for whom
such securities dealer is the holder or dealer of record. This fee is intended
to be partial consideration for all personal services and/or account maintenance
services rendered by the dealer with respect to Class A shares. MFD may from
time to time reduce the amount of the service fee paid for shares sold prior to
a certain date. MFD may also retain a distribution fee of 0.10% per annum of the
Fund's average daily net assets attributable to Class A shares as partial
consideration for services performed and expenses incurred in the performance of
MFD's obligations under its distribution agreement with the Fund. MFD, however,
currently is waiving this 0.10% per annum distribution fee and will not in the
future accept payment of this fee unless it first obtains the approval of the
Trust's Board of Trustees. In addition, to the extent that the aggregate of the
foregoing fees does not exceed 0.35% per annum of the average daily net assets
of the Fund attributable to Class A shares, the Fund is permitted to pay other
distribution-related expenses, including commissions to dealers and payments to
wholesalers employed by MFD for sales at or above a certain dollar level. Fees
payable under the Class A Distribution Plan are charged to, and therefore
reduce, income allocated to Class A shares. Service fees may be reduced for a
securities dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having a net asset value at or above a certain dollar
level. Dealers may from time to time be required to meet certain criteria in
order to receive service fees. MFD or its affiliates are entitled to retain all
service fees payable under the Class A Distribution Plan for which there is no
dealer of record or for which qualification standards have not been met as
partial consideration for personal services and/or account maintenance services
performed by MFD or its affiliates for shareholder accounts. Certain banks and
other financial institutions that have agency agreements with MFD will receive
service fees that are the same as service fees to dealers.
CLASS B DISTRIBUTION PLAN. The Class B Distribution Plan provides that the Fund
will pay MFD a daily distribution fee equal on an annual basis to 0.75% of the
Fund's average daily net assets attributable to Class B shares and will pay MFD
a service fee of up to 0.25% per annum of the Fund's average daily net assets
attributable to Class B shares (which MFD will in turn pay to securities dealers
which enter into a sales agreement with MFD at a rate of up to 0.25% per annum
of the Fund's average daily net assets attributable to Class B shares owned by
investors for whom that securities dealer is the holder or dealer of record).
This service fee is intended to be additional consideration for all personal
services and/or account maintenance services rendered by
23
<PAGE> 31
the dealer with respect to the Class B shares. Fees payable under the Class B
Distribution Plan are charged to, and therefore reduce, income allocated to
Class B shares. The Class B Distribution Plan also provides that MFD will
receive all CDSCs attributable to Class B shares (see "Redemptions and
Repurchases" above) which do not reduce the distribution fee. 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 at a rate equal to 0.25% of the purchase price of such shares and,
as compensation therefor, MFD may retain the service fee paid by the Fund with
respect to such shares for the first year after purchase. Therefore, the total
amount paid to a dealer upon the sale of shares is 4.00% of the purchase price
of the shares (commission rate of 3.75% plus service fee equal to 0.25% of the
purchase price). Dealers will become eligible for additional service fees with
respect to such shares commencing in the thirteenth month following the
purchase. 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 Class B Distribution Plan for which there is no
dealer of record or for which qualification standards have not been met as
partial consideration for personal services and/or account maintenance services
performed by MFD or its affiliates for shareholder accounts. The purpose of the
distribution payments to MFD under the Class B Distribution Plan is to
compensate MFD for its distribution services to the Fund. Since MFD's
compensation is not directly tied to its expenses, the amount of compensation
received by MFD during any year may be more or less than its actual expenses.
For this reason, this type of distribution fee arrangement is characterized by
the staff of the SEC as being of the "compensation" variety. However, the Fund
is not liable for any expenses incurred by MFD in excess of the amount of
compensation it receives. The expenses incurred by MFD, including commissions to
dealers, are likely to be greater than the distribution fees for the next
several years, but thereafter such expenses may be less than the amount of the
distribution fees. Certain banks and other financial institutions that have
agency agreements with MFD will receive agency transaction and service fees that
are the same as commissions and service fees to dealers.
CLASS C DISTRIBUTION PLAN. The Class C Distribution Plan provides that the Fund
will pay MFD a distribution fee of up to 0.75% per annum of the Fund's average
daily net assets attributable to Class C shares and will pay MFD a service fee
of up to 0.25% per annum of the Fund's average daily net assets attributable to
Class C shares (which MFD in turn pays to securities dealers which enter into a
sales agreement with MFD at a rate of up to 0.25% per annum of the Fund's daily
net assets attributable to Class C shares owned by investors for whom that
securities dealer is the holder or dealer of record). The distribution/service
fees attributable to Class C shares are designed to permit an investor to
purchase such shares through a broker-dealer without the assessment of an
initial sales charge or a CDSC while allowing MFD to compensate broker-dealers
in connection with the sale of such shares. The service fee is intended to be
additional consideration for all personal services and/or account maintenance
services rendered with respect to Class C shares. MFD or its affiliates are
entitled to retain all service fees payable under the Class C Distribution Plan
with respect to accounts for which there is no dealer of record as partial
consideration for personal services and/or account maintenance services
performed by MFD or its affiliates for shareholder accounts. The purpose of the
distribution payments to MFD under the Class C Distribution Plan is to
compensate MFD for its distribution services to the Fund. Distribution fee
payments under the Plan will be used by MFD to pay securities dealers a
distribution fee in an amount equal on an annual basis to 0.75% of the Fund's
average daily net assets attributable to Class C shares owned by investors for
whom that securities dealer is the holder or dealer of record. (Therefore, the
total amount of distribution/service fees paid to a dealer on an annual basis is
1.00% of the Fund's average daily net assets attributable to Class C shares
owned by investors for whom the securities dealer is the holder or dealer of
record.) MFD also pays expenses of printing prospectuses and reports used for
sales purposes, expenses with respect to the preparation and printing of sales
literature and other distribution related expenses, including, without
limitation, the compensation of personnel and all costs of travel, office
expense and equipment. Since MFD's compensation is not directly tied to its
expenses, the amount of compensation received by MFD during any year may be more
or less than its actual expenses. For this reason, this type of distribution fee
arrangement is characterized by the staff of the SEC as being of the
"compensation" variety. However, the Fund is not liable for any expenses
incurred by MFD in excess of the amount of compensation it receives. Certain
banks and other financial institutions that have agency agreements with MFD will
receive agency transaction and service fees that are the same as distribution
and service fees to dealers. Fees payable under the Class C Distribution Plan
are charged to, and therefore reduce, income allocated to Class C shares.
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<PAGE> 32
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income to its
shareholders as dividends on an annual 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. The Fund may make one or more distributions
during the calendar year to its shareholders from any long-term capital gains
and may also make one or more distributions during the calendar year to its
shareholders from short-term capital gains. Shareholders may elect to receive
dividends and capital gain distributions in either cash or additional shares of
the same class with respect to which a distribution is made. See "Tax Status"
and "Shareholder Services -- Distribution Options" below. Distributions paid by
the Fund with respect to Class A shares will generally be greater than those
paid with respect to Class B and Class C shares because expenses attributable to
Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
Federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, and to make
distributions to its shareholders in accordance with the timing requirements
imposed by the Code. It is expected that the Fund will not be required to pay
entity level federal income or excise taxes, although foreign-source income
received by the Fund may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund, whether paid in cash or additional shares. A portion of
the dividends received from the Fund (but none of the Fund's capital gain
distributions) may qualify for the dividends received deduction for
corporations. Shareholders may not have to pay state or local taxes on dividends
derived from interest on U.S. Government obligations. Investors should consult
with their tax advisors in this regard.
A statement setting forth the Federal income tax status of all Fund dividends
and distributions for each calendar year, including the portion taxable as
ordinary income, the portion taxable as long-term capital gain, the portion, if
any, representing a return of capital (which is free of current taxes but
results in a basis reduction) and the amount, if any, of federal income tax
withheld will be sent to each shareholder promptly after the end of such year.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares just before the Fund makes 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 a rate of 30% on
dividends and certain other payments that are subject to such withholding and
that are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable treaty.
The Fund is also required in certain circumstances to apply backup withholding
at a rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a resident of
the U.S.) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. However,
backup withholding will not be applied to payments which have been subject to
30% withholding. Prospective Shareholders should read the Account Application
for information regarding backup withholding of federal income tax and should
consult their own tax advisor as to the tax consequences 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 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. Assets in the Fund's portfolio are
valued on the basis of their market values or otherwise at their fair values, as
described in the Statement of Additional Information. All investments and assets
are expressed in U.S. dollars based upon current currency exchange rates. The
net asset value per share of each class of shares is effective for orders
received by the dealer prior to its calculation and received by MFD prior to the
close of that business day.
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<PAGE> 33
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of two series of the Trust, has three classes of shares, entitled
Class A, Class B and Class C Shares of Beneficial Interest (without par value).
The Trust presently has two series of shares and 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 or selection of accountants. Additionally, each class of
shares of a series will vote separately on any material increases in the fees
under its Distribution Plan or on any other matter that affects solely that
class of shares, but will otherwise vote together with all other classes of
shares of the series on all other matters.
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
nonassessable. Should the Fund be liquidated, shareholders of each class are
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 does not intend to hold annual shareholder meetings.
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 omissions 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 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 Lipper
Analytical Services, Inc., Morningstar, Inc. and Wiesenberger Investment
Companies Service. Yield quotations are based on the annualized net investment
income per class share over a 30-day period stated as a percent of the maximum
public offering price on the last day of that period. Yield calculations for
Class B shares assume no CDSC is paid. The current distribution rate for each
class is generally based upon the total amount of dividends per share paid by
the Fund to shareholders of that class during the past twelve months and is
computed by dividing the amount of such dividends by the maximum public offering
price of that class at the end of such period. Current distribution rate
calculations for Class B shares assume no CDSC is paid. The current distribution
rate differs from the yield calculation because it may include distributions to
shareholders from sources other than dividends and interest, such as premium
income from option writing, short-term capital gains, and return of invested
capital, and is calculated over a different period of time. Total rate of return
quotations will reflect the average annual percentage change over stated periods
in the value of an investment in each class of shares of the Fund made at the
maximum public offering price of shares of that class and with all distributions
reinvested and which, if quoted for periods of six years or less, will give
effect to the imposition of the CDSC assessed upon redemptions of the Fund's
Class B shares. Such total rate of return quotations may be accompanied by
quotations which do not reflect the reduction in value of the initial investment
due to the sales charge or the deduction of a CDSC, and which will thus be
higher. All performance quotations are based on historical performance and are
not intended to indicate future performance. Yield reflects only net portfolio
income as of a stated period of 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 and total rate of return, see the Statement of Additional
Information. For further information about the Fund's performance for the fiscal
year ended November 30, 1994, 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
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<PAGE> 34
addition to information provided in shareholder reports, the Fund may, in its
discretion, from time to time, make a list of all or a portion of its holdings
available to investors upon request.
7. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund, should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his or her account.
At the end of each calendar year, each shareholder will receive income tax
information regarding reportable dividends and distributions for that year,
including whether any portion represents a return of capital (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 reinvested in additional
shares;
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Dividends and capital gain
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, 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 Statement of Additional Information) anticipates purchasing
$100,000 or more of Class A shares of the Fund alone or in combination with
shares of Class B or Class C of the Fund or any of the classes of other MFS
Funds or the MFS Fixed Fund (a bank collective investment fund) within a
13-month period (or a 36-month period for purchases of $1 million or more), the
shareholder may obtain such shares at the same reduced sales charge as though
the total quantity were invested in one lump sum, subject to escrow agreements
and the appointment of an attorney for redemptions from the escrow amount if the
intended purchases are not completed, by completing the Letter of Intent section
of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of all classes of shares of
that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches 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 another 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 her (or anyone he or she designates) regular
periodic payments, as designated on the Account Application and based upon the
value of his or her account. Each payment under a Systematic Withdrawal Plan (a
"SWP") must be at least $100, except in certain limited
27
<PAGE> 35
circumstances. The aggregate withdrawals of Class B shares in any year pursuant
to a SWP will not be subject to a CDSC and are generally limited to 10% of the
value of the account at the time of the establishment of the SWP. The CDSC will
not be waived in the case of SWP redemptions of Class A shares which are subject
to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or investment
dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
other MFS Funds (and in the case of Class C shares, for shares of MFS Money
Market Fund) under the Automatic Exchange Plan, a dollar cost averaging program.
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.
Under the Automatic Exchange Plan, exchanges of at least $50 each may be made to
up to four different funds. A shareholder should consider the objectives and
policies of a fund and review its prospectus before electing to 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 Statement of Additional Information for further information
concerning the Automatic Exchange Plan. Investors should consult their tax
advisers for information regarding the potential capital gain and loss
consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share 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 adviser before establishing any of the tax-deferred retirement plans
described above.
------------------------
The Fund's Statement of Additional Information, dated April 1, 1995 contains
more detailed information about the Trust and the Fund, including information
related to: (i) the Fund's investment policies and restrictions, including the
purchase and sale of Options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and Options on Foreign Currencies; (ii) the Trustees, officers
and investment adviser; (iii) portfolio trading; (iv) the Fund's shares,
including rights and liabilities of shareholders; (v) tax status of dividends
and distributions; (vi) the Distribution Plans; and (vii) various services and
privileges provided by the Fund for the benefit of its shareholders, including
additional information with respect to the exchange privilege.
28
<PAGE> 36
[MFS LOGO]
THE FIRST NAME IN MUTUAL FUNDS
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000 MFS[trademark] WORLD GOVERNMENTS FUND
Distributor Prospectus
MFS Fund Distributors, Inc. April 1, 1995
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank & 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
Ernts & Young LLP
200 Clarendon Street
Boston, MA 02116
[MFS LOGO]
THE FIRST NAME IN MUTUAL FUNDS
MFS[trademark] WORLD GOVERNMENTS FUND
500 Boylston Street
Boston, MA 02116
<PAGE> 37
[LOGO]
<TABLE>
<S> <C>
MFS(R) WORLD STATEMENT OF
GOVERNMENTS FUND ADDITIONAL INFORMATION
(A member of the MFS Family of
Funds[REGISTERED TRADEMARK]) April 1, 1995
--------------------------------------------------------------------------------------------------
<CAPTION>
Page
----
<C> <S> <C>
1. Definitions........................................................................... 2
2. Investment Objective, Policies and Restrictions....................................... 2
3. Management of the Fund................................................................ 12
Trustees.............................................................................. 12
Officers.............................................................................. 12
Investment Adviser.................................................................... 13
Custodian............................................................................. 14
Shareholder Servicing Agent........................................................... 14
Distributor........................................................................... 14
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. Determination of Net Asset Value and Performance...................................... 21
8. Distribution Plans.................................................................... 24
9. Description of Shares, Voting Rights and Liabilities.................................. 26
10. Independent Auditors and Financial Statements......................................... 27
</TABLE>
MFS WORLD GOVERNMENTS FUND
A Series of MFS Series Trust VII
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information sets forth information which may be of
interest to investors but which is not necessarily included in the Fund's
Prospectus, dated April 1, 1995. This Statement of Additional Information should
be read in conjunction with the Prospectus, a copy of which may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number).
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A
CURRENT PROSPECTUS.
<PAGE> 38
1. DEFINITIONS
<TABLE>
<S> <C> <C>
"Fund" -- MFS World Governments Fund,
America's first global bond
fund, is a series of MFS
Series Trust VII (the
"Trust"), a Massachusetts
business trust. The Fund was
known as: "Massachusetts
Financial International
Trust -- Bond Portfolio"
until its name was changed
effective November 1, 1990;
as MFS Worldwide Gov-
ernments Trust until its
name was changed on August
3, 1992; and as MFS
Worldwide Governments Fund
until its name was changed
on August 17, 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 April 1, 1995.
</TABLE>
2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE. The Fund's investment objective is to seek not only
preservation, but also growth of capital, together with moderate current income.
There can be no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES. The Fund seeks to achieve its investment objective through
a professionally managed, internationally diversified portfolio consisting
primarily of debt securities and to a lesser extent equity securities and gold.
The Prospectus contains a discussion of the various types of securities in which
the Fund may invest and certain risks involved in such investments.
Under normal economic or market conditions at least 80% of the Fund's portfolio
is invested in debt securities. Up to 20% of the Fund's assets may be invested
in equity securities. The Fund may invest up to 10% of its total assets in gold.
Although the Fund has the power to buy gold, the Fund has undertaken with
certain state securities commissions not to purchase gold. Therefore, the Fund
will not purchase gold until the state regulatory authorities amend their
position with respect to its purchase or until the Fund withdraws from these
states.
The Fund may invest up to 100% (and expects generally to invest between 10% and
80%) of its total assets in foreign securities (not including American
Depositary Receipts). The percentage of the Fund's assets invested in securities
issued abroad and denominated in foreign currencies ("non-dollar securities")
will vary depending on the state of the economies of the principal countries of
the world, their financial markets and the relationship of their currencies to
the U.S. dollar. The Prospectus contains a discussion of the various risks
associated with investments in non-dollar securities. The Adviser will determine
the amount of the Fund's assets to be invested in the United States and the
amount to be invested abroad. The U.S. assets will be invested in high quality
debt securities and the remainder of the assets will be diversified among
countries where opportunities for total return are expected to be most
attractive. It is currently expected that investments within foreign countries
will be primarily in government securities to minimize credit risks. The Fund
has registered as a "non-diversified" investment company so that, subject to
certain tax requirements, it will be able to invest more than 5% of its assets
in the obligations of each of one or more foreign government issuers. (A
"diversified" investment company would be required under the Investment Company
Act of 1940, as amended (the "1940 Act"), to maintain at least 75% of its assets
in cash (including foreign currency), cash items, U.S. Government securities and
other securities, limited per issuer to blocks of less than 5% of the investment
company's total assets.) The Fund does not believe that the credit risk inherent
in the obligations of stable foreign governments is significantly greater than
that of U.S. Government obligations. The portfolio will be managed actively and
the asset allocations modified as the Adviser deems necessary.
The Fund may invest in equity securities issued by foreign companies. 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.
The Fund will purchase non-dollar securities denominated in the currency of
countries where the interest rate environment as well as the general economic
climate provide an opportunity for declining interest rates and currency
appreciation. If interest rates decline, such non-dollar securities will
appreciate in value. If the currency also appreciates against the dollar, the
total investment in such non-dollar securities would be enhanced further. (For
example, if United Kingdom bonds yield 14% during a year when interest rates
decline causing the bonds to appreciate by 5% and the pound rises 3% versus the
dollar, then the annual total return of such bonds would be 22%. This example is
illustrative only.) Conversely, a rise in interest rates or decline in currency
exchange rates would adversely affect the Fund's return.
Investments in non-dollar securities are evaluated primarily on the strength of
a particular currency against the dollar and on the interest rate climate of
that country. Currency is judged on the basis of fundamental economic criteria
(e.g., relative inflation levels and trends, growth rate forecasts, balance of
payments status, and economic policies) as well as technical and political data.
In addition to the foregoing, interest rates are evaluated on the basis of
differentials or anomalies that may exist between different countries.
Although the Fund does not intend to seek short-term profits, securities in its
portfolio will be sold whenever the Adviser
2
<PAGE> 39
believes it is appropriate to do so without regard to the length of time the
particular asset may have been held. A high turnover rate involves greater
expenses to the Fund. The Fund engages in portfolio trading if it believes a
transaction net of costs (including custodian charges) will help in achieving
its investment objective. See "Portfolio Transactions and Brokerage Commissions"
below.
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. The Fund may invest in either type of ADR. Although
the U.S. investor holds a substitute receipt of ownership rather than direct
stock certificates, the use of the depository receipts in the United States can
reduce costs and delays as well as potential currency exchange and other
difficulties. The Fund may purchase securities in local markets and direct
delivery of these ordinary shares to the local depository of an ADR agent bank
in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Fund's custodian in five days. The Fund may also execute
trades on the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting requirements in
the United States as a domestic issuer. Accordingly the information available to
a U.S. investor will be limited to the information the foreign issuer is
required to disclose in its own country and the market value of an ADR may not
reflect undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are denominated in foreign currency.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage pass-through
securities as described in the Prospectus. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. Some mortgage pass-through securities (such as securities
issued by the Government National Mortgage Association ("GNMA")) are described
as "modified pass-through." These securities entitle the holder to receive all
interests and principal payments owed on the mortgages in the mortgage pool, net
of certain fees, at the scheduled payment dates regardless of whether the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities is the
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of Federal Housing Authority-insured or Veterans Administration-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.
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 the 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
3
<PAGE> 40
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. The Fund may only invest in SMBS issued or guaranteed by
agencies, authorities or instrumentalities of the U.S. Government.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of mortgage assets. The
Fund will only invest in SMBS whose mortgage assets are issued or guaranteed by
the U.S. Government, its agencies, authorities or instrumentalities. 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.
REPURCHASE AGREEMENTS: As described in the Prospectus, the Fund may enter into
repurchase agreements with sellers who are member firms (or subsidiaries
thereof), of the New York Stock Exchange (the "Exchange") or members of the
Federal Reserve System, recognized primary U.S. Government securities dealers or
institutions which the Adviser has determined to be of comparable
creditworthiness. The securities that the Fund purchases and holds through its
agent are U.S. Government securities, the values of which are equal to or
greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Fund together with the repurchase price
on repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities to entities deemed creditworthy by the Adviser.
Such loans would be required to be secured continuously by collateral in cash,
cash equivalents or U.S. Treasury securities maintained on a current basis at an
amount at least equal to the market value of the securities
4
<PAGE> 41
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 usually
not exceed five days). During the existence of a loan, the Fund would continue
to receive the equivalent of the interest or dividends paid by the issuer on the
securities loaned and would also receive compensation based on investment of the
collateral. The Fund would not, however, have the right to vote any securities
having voting rights during the existence of the loan, but 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 could be earned currently from securities loans
of this type justifies the attendant risk. If the Adviser determines to make
securities loans, it is not intended that the value of the securities loaned
would exceed 25% of the value of the Fund's net assets.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: As described in the Prospectus, the Fund
may enter into mortgage "dollar roll" transactions pursuant to which it sells
mortgage-backed securities for delivery in the future and simultaneously
contracts to repurchase substantially similar securities on a specified future
date. 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.
OPTIONS ON SECURITIES: The Fund may write (sell) covered call and put options on
securities ("Options") and purchase call and put Options. The Fund may write
Options for the purpose of increasing its return and for hedging purposes. In
particular, if the Fund writes an Option which expires unexercised or is closed
out by the Fund at a profit, the Fund retains the premium paid for the Option
less related transaction costs, which increases its gross income and offsets in
part the reduced value of the portfolio security in connection with which the
Option is written, or the increased cost of portfolio securities to be acquired.
In contrast, however, if the price of the security underlying the Option moves
adversely to the Fund's position, the Option may be exercised and the Fund will
then be required to purchase or sell the security at a disadvantageous price,
which might only partially be offset by the amount of the premium.
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 Option the Fund determines to write
depends 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.
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 in which call Options are used in
equivalent buy-and-write transactions.
The Fund may also write combinations of Options on the same security, a practice
known as a "straddle." By writing a straddle, the Fund undertakes a simultaneous
obligation to sell or 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.
By writing a call Option on a portfolio security, 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 above its then current market value, resulting in
a loss unless the security subsequently appreciates in value. The writing of
Options will not be undertaken by the Fund solely for hedging purposes, and may
involve certain risks which are not present in the case of hedging transactions.
Moreover, even where Options are written for hedging purposes, such transactions
will constitute only a partial hedge against declines in the value of portfolio
securities or against increases in the value of securities to be acquired, up to
the amount of the premium.
The Fund may also purchase put and call Options. Put Options are purchased to
hedge against a decline in the value of securities held in the Fund's portfolio.
If such a decline occurs, the put Options will permit the Fund to sell the
securities underlying such Options at the exercise price, or to close out the
Options at a profit. The Fund will purchase call Options to hedge against an
increase in the price of securities that the Fund anticipates purchasing in the
future. If such an increase occurs, the call Option will permit the Fund to
purchase the securities underlying such Option at the exercise price or to close
out the Option at a profit. The premium paid for a call or put 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
or declines sufficiently, the Option may expire worthless to the Fund. In
addition, in the event that the price of the security in connection with which
an Option was
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<PAGE> 42
purchased moves in a direction favorable to the Fund, the benefits realized by
the Fund as a result of such favorable movement will be reduced by the amount of
the premium paid for the Option and related transaction costs.
YIELD CURVE OPTIONS: The Fund may also enter into options on the yield "spread,"
or yield differential between two securities, transactions referred to as a
"yield curve" options. In contrast to other types of options, a yield curve
option is based on the difference between the yields of designated securities,
rather than the prices of the individual securities, and is 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, a 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 (i.e., in an effort to
increase its current income) 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 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 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 is covered if the Fund holds another
call (or put) option on the spread between the same two securities and maintains
in a segregated account with its custodian cash or cash equivalents 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.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities or foreign currencies or
contracts based on indexes of securities or currencies (including any index of
U.S. or foreign securities) as such instruments become available for trading
("Futures Contracts"). This investment technique may be used to hedge (i.e., to
protect) against anticipated future changes in interest or exchange rates or
declines in the securities market which otherwise might adversely affect the
value of the Fund's portfolio securities or adversely affect the prices of
long-term bonds or other securities which the Fund intends to purchase at a
later date. The Fund may also enter into Futures Contracts for non-hedging
purposes, to the extent permitted by applicable law.
A "sale" of a Futures Contract means a contractual obligation to deliver the
securities or foreign currency called for by the contract at a fixed price at a
specified time in the future. A "purchase" of a Futures Contract means a
contractual obligation to acquire the securities or foreign currency at a fixed
price at a specified time in the future.
While Futures Contracts provide for the delivery of securities or currencies,
such deliveries are very seldom made. Generally, a Futures Contract is
terminated by entering into an offsetting transaction. The Fund will incur
brokerage fees when it purchases and sells Futures Contracts. At the time such a
purchase or sale is made, the Fund must allocate cash or securities as a margin
deposit ("initial deposit"). It is expected that the initial deposit will vary
but may be as low as 5% or less of the value of the contract. The Futures
Contract is valued daily thereafter and the payment of "variation margin" may be
required to be paid or received, so that each day the Fund may provide or
receive cash that reflects the decline or increase in the value of the contract.
The purpose of the purchase or sale of a Futures Contract, in the case of a
portfolio holding long-term debt securities, is to attempt to protect the Fund
from fluctuations in interest rates without actually buying or selling longterm
debt securities. For example, if the Fund owned long-term bonds and interest
rates were expected to increase, the Fund might enter into Futures Contracts for
the sale of debt securities. If interest rates did increase, the value of the
debt securities in the portfolio would decline, but the value of the Fund's
Futures Contracts should 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 or by buying bonds with long maturities and selling bonds
with short maturities when interest rates are expected to decline. 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 defensive
position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased 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 buy long-term bonds on the cash market.
Purchases of Futures Contracts would be particularly appropriate when the cash
flow from the sale of new shares of the Fund could have the effect of diluting
dividend earnings. To the extent the Fund enters into Futures Contracts for this
purpose, the assets in the segregated
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<PAGE> 43
asset account maintained to cover the Fund's obligations with respect to such
Futures Contracts will consist of cash, cash equivalents or short-term money
market instruments from the portfolio of the Fund 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, thereby assuring that the
transactions are unleveraged.
Futures Contracts on foreign currencies may be used in a similar manner, in
order to protect against declines in the dollar value of portfolio securities
denominated in foreign currencies, or increases in the dollar value of
securities to be acquired.
A Futures Contract on an index of securities provides for the making and
acceptance of a cash settlement based on changes in value of the underlying
index. The Fund may enter into stock index futures contracts in order to protect
the Fund's current or intended stock investments from broad fluctuations in
stock prices and for non-hedging purposes to the extent permitted by applicable
law. For example, the Fund may sell stock index futures contacts in anticipation
of or during a market decline to attempt to offset the decrease in market value
of the Fund's securities portfolio that might otherwise result. If such decline
occurs, the loss in value of portfolio securities may be offset, in whole or in
part, by gains on the futures position. When the Fund is not fully invested in
the securities market and anticipates a significant market advance, it may
purchase stock index futures contracts in order to gain rapid market exposure
that may, in part or in whole, offset increases in the cost of securities that
the Fund intends to purchase. As such acquisitions are made, the corresponding
positions in stock index futures contracts will be closed out. In a substantial
majority of these transactions, the Fund will purchase such securities upon the
termination of the futures position, but under unusual market conditions, a long
futures position may be terminated without a related purchase of securities.
Futures Contracts on other securities indexes may be used in a similar manner in
order to protect the portfolio from broad fluctuations in securities prices and
for non-hedging purposes, to the extent permitted by applicable law.
OPTIONS ON FUTURES CONTRACTS: The Fund may write and purchase options to buy or
sell Futures Contracts ("Options on Futures Contracts"). The writing of a call
Option on a Futures Contract may constitute a partial hedge against declining
prices of the security or currency underlying 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 may constitute a partial hedge against increasing prices of the
security or currency underlying 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. 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 Fund may purchase Options on Futures Contracts for hedging purposes as an
alternative to purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected market-wide decline, a rise in interest rates or a
decline in the dollar value of foreign currencies in which portfolio securities
are denominated, the Fund may, in lieu of selling Futures Contracts, purchase
put options thereon. In the event that such decrease in portfolio value occurs,
it may be offset, in whole or part, by a profit on the option. Conversely, where
it is projected that the value of securities to be acquired by the Fund will
increase prior to acquisition, due to a market advance, or a decline in interest
rates or a rise in the dollar value of foreign currencies in which securities to
be acquired are denominated, the Fund may purchase call Options on Futures
Contracts, rather than purchasing the underlying Futures Contracts. As in the
case of Options, the writing of Options on Futures Contracts may require the
Fund to forgo all or a portion of the benefits of favorable movements in the
price of portfolio securities, and the purchase of Options on Futures Contracts
may require the Fund to forego all or a portion of such benefits up to the
amount of the premium paid and related transaction costs. The Fund may also
enter into Options on Futures Contracts for non-hedging purposes, to the extent
permitted by applicable law.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a specific currency at a future date at a
price set at the time of the contract (a "Forward Contract"). The Fund may enter
into Forward Contracts for hedging purposes as well as for non-hedging purposes.
The Fund may also enter into Forward Contracts for "cross hedging" as noted in
the Prospectus. Transactions in Forward Contracts entered into for hedging
purposes will include forward purchases or sales of foreign currencies for the
purpose of protecting the dollar value of securities denominated in a foreign
currency or protecting the dollar equivalent of interest or dividends to be paid
on such securities. By entering into such transactions, however, the Fund may be
required to forgo the benefits of advantageous changes in exchange rates. The
Fund may also enter into transactions in Forward Contracts for other than
hedging purposes which presents greater profit potential but also involves
increased risk. For example, if the Adviser believes that the value of a
particular foreign currency will increase or decrease relative to the value of
the U.S. dollar, the Fund may purchase or sell such currency, respectively,
through a Forward Contract. If the expected changes in the value of the currency
occur, the Fund will realize profits which will increase its gross income. Where
exchange
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<PAGE> 44
rates do not move in the direction or to the extent anticipated, however, the
Fund may sustain losses which will reduce its gross income. Such transactions,
therefore, should be considered speculative.
The Fund has established procedures consistent with statements by the SEC and
its staff regarding the use of Forward Contracts by registered investment
companies, which require the use of segregated assets or "cover" in connection
with the purchase and sale of such contracts. In those instances in which the
Fund satisfies this requirement through segregation of assets, it will maintain,
in a segregated account, cash, cash equivalents or high grade debt securities,
which will be marked to market on a daily basis in an amount equal to the value
of its commitments under Forward Contracts.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
options on foreign currencies ("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. 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 did decline, the Fund would have the right to sell such currency for a
fixed amount in dollars and would 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 would 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 forgo 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 may, instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurred, the option would most likely not be
exercised, and the diminution in value of portfolio securities would be offset
by the amount of the premium received less related transaction costs. As in the
case of other types of options, therefore, the writing of Options on Foreign
Currencies will constitute only a partial hedge.
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
may include securities that have embedded swap agreements (see "Swaps and
Related Transactions) and typically, but not always, are debt securities or
deposits whose value at maturity 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 agreements may increase or decrease the
Fund's exposure to long or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as securities prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. The Fund is not
limited to any particular form or variety of swap agreement if MFS determines it
is consistent with the Fund's investment objective and policies.
The Fund will maintain cash or appropriate liquid assets with its custodian to
cover its current obligations under swap transactions. If the Fund enters into a
swap agreement on a net basis (i.e., the two payment streams are netted out,
with the Fund receiving or paying, as the case may be, only the net amount of
the two payments), the Fund will maintain cash or liquid assets with its
Custodian with a daily value at least equal to the excess,
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<PAGE> 45
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 cash or
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 counter-
party'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.
RISK FACTORS: IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO -- The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in options, Futures Contracts, and Forward
Contracts will depend on the degree to which price movements in the underlying
instruments correlate with price movements in the relevant portion of the Fund's
portfolio. If the values of portfolio securities being hedged do not move in the
same amount or direction as the instruments underlying options, Futures
Contracts or Forward Contracts traded, the Fund's hedging strategy may not be
successful and the Fund could sustain losses on its hedging strategy which would
not be offset by gains on its portfolio. It is also possible that there may be a
negative correlation between the instrument underlying an option, Future
Contract or Forward Contract traded and the portfolio securities being hedged,
which could result in losses both on the hedging transaction and the portfolio
securities. In such instances, the Fund's overall return could be less than if
the hedging transaction had not been undertaken. In the case of futures and
options based on an index of securities or individual fixed income securities,
the portfolio will not duplicate the components of the index, and in the case of
futures and options on fixed income securities, the portfolio securities which
are being hedged may not be the same type of obligation underlying such
contract. As a result, the correlation probably will not be exact. Consequently,
the Fund bears the risk that the price of the portfolio securities being hedged
will not move in the same amount or direction as the underlying index or
obligation.
The correlation between prices of securities and prices of Options, Futures
Contracts or Forward Contracts may be distorted due to differences in the nature
of the markets, such as differences in margin requirements, the liquidity of
such markets and the participation of speculators in the option, Futures
Contract and Forward Contract markets. 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. The trading of Options on Futures Contracts
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. The risk of
imperfect correlation, however, generally tends to diminish as the maturity or
termination date of the Option, Futures Contract or Forward Contract approaches.
The trading of options, Futures Contracts and Forward Contracts also entails the
risk that, if the Adviser's judgment as to the general direction of interest or
exchange rates is incorrect, the Fund's overall performance may 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, and rates
instead decline, the Fund will lose part or all of the benefit of the increased
value of the securities being hedged, and may be required to meet ongoing daily
variation margin payments.
It should be noted that the Fund may purchase and sell Options, Futures
Contracts, Options on Futures Contracts and Forward Contracts not only for
hedging purposes, but also for non-hedging purposes, to the extent permitted by
applicable law, including for the purpose of increasing its return. As a result,
the Fund will incur the risk that losses on such transactions will not be offset
by corresponding increases in the value of portfolio securities or decreases in
the cost of securities to be acquired.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET -- Prior to exercise or expiration,
a position in an exchange-traded Option, Futures Contract, Option on a Futures
Contract or Option on a Foreign Currency can only be terminated by entering into
a closing purchase or sale transaction, which requires a secondary market for
such instruments on the exchange on which the initial transaction was entered.
If no such market exists, it may not be possible to close out a position, and
the Fund could be required to purchase or sell the underlying instrument or meet
ongoing variation margin requirements. The inability to close out option or
futures positions also could have an adverse effect on the Fund's ability
effectively to hedge its portfolio.
The liquidity of a secondary market in an Option or Futures Contract may be
adversely affected by "daily price fluctuation limits," established by the
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. Such limits could prevent the Fund from liquidating open
positions, which could render its hedging strategy unsuccessful and result in
trading losses. The exchanges on which Options and Futures Contracts are traded
have also established a number of limitations governing the maximum number of
positions which may be traded by a trader, whether acting alone or in concert
with others. Further, the purchase and sale of exchange-traded options and
Futures Contracts is subject to the risk of trading halts, suspensions, exchange
or clearing corporation equipment failures, government intervention, insolvency
of
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<PAGE> 46
a brokerage firm, intervening broker or clearing corporation or other
disruptions of normal trading activity, which could make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
RISKS OF OPTIONS ON FUTURES CONTRACTS -- In order to profit from the purchase of
an Option on a Futures Contract, it may be necessary to exercise the option and
liquidate the underlying Futures Contract, subject to all of the risks of
futures trading. The writer of an Option on a Futures Contract is subject to the
risks of futures trading, including the requirement of initial and variation
margin deposits.
ADDITIONAL RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS
NOT CONDUCTED ON UNITED STATES EXCHANGES -- The available information on which
the Fund will make trading decisions concerning transactions related to foreign
currencies or foreign securities may not be as complete as the comparable data
on which the Fund makes investment and trading decisions in connection with
other transactions. Moreover, because the foreign currency market is a global,
twenty-four hour market, and the markets for foreign securities as well as
markets in foreign countries may be operating during non-business hours in the
United States, events could occur in such markets which would not be reflected
until the following day, thereby rendering it more difficult for the Fund to
respond in a timely manner.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Fund's position, unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. This
could make it difficult or impossible to enter into a desired transaction or
liquidate open positions, and could therefore result in trading losses. Further,
over-the-counter transactions are not subject to the performance guarantee of an
exchange clearing house and the Fund will therefore be subject to the risk of
default by, or the bankruptcy of, a financial institution or other counterparty.
Transactions on exchanges located in foreign countries may not be conducted in
the same manner as those entered into on United States exchanges, and may be
subject to different margin, exercise, settlement or expiration procedures.
As a result, many of the risks of over-the-counter trading may be present in
connection with such transactions. Moreover, the SEC or Commodity Futures
Trading Commission ("CFTC") has jurisdiction over the trading in the United
States of many types of over-the-counter and foreign instruments, and such
agencies could adopt regulations or interpretations which would make it
difficult or impossible for the Fund to enter into the trading strategies
identified herein or to liquidate existing positions.
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 the 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.
In addition, where the Fund enters into Forward Contracts as a "cross hedge"
(i.e., the purchase or sale of a Forward Contract on one currency to hedge
against risk of loss arising from changes in value of a second currency), the
Fund incurs the risk of imperfect correlation between changes in the values of
the two currencies, which could result in losses.
RESTRICTIONS ON THE USE OF OPTIONS AND FUTURES: In order to assure that the Fund
will not be deemed to be a "commodity pool" for purposes of the Commodity
Exchange Act, regulations of the CFTC require that the Fund enter into
transactions in Futures Contracts and Options on Futures Contracts only (i) for
bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Fund's assets. In addition, the Fund must comply with the requirements of
various state securities laws in connection with such transactions.
The Fund has adopted the additional policy that it will not enter into a Futures
Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
options if, as a result, more than 5% of its total assets would be invested in
such options.
When the Fund purchases a Futures Contract, an amount of cash and cash
equivalents will be deposited in a segregated account with the Fund's custodian
so that the amount so segregated will at all times equal the value of the
Futures Contract, thereby insuring that the use of such Futures is unleveraged.
The policies stated above are not fundamental and may be changed without
shareholder approval, as may the Fund's objective.
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 Statement of Additional Information, means the
lesser of
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<PAGE> 47
(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 at which holders of more
than 50% of the outstanding shares of the Trust or a series or class, as
applicable, are represented in person or by proxy):
The Fund may not:
(1) Borrow 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
33 1/3% 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, 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;
(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 (except gold, and then
subject to a limit of 10% of its gross assets) or commodity contracts (except
gold futures/forward contracts, Forward Contracts, Futures Contracts, Options,
Options on Futures Contracts and Options on Foreign Currencies) in the
ordinary course of its business. 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 a
portion of an 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 its total assets (taken at market value)
to be invested in the securities of such issuer, other than securities issued
or guaranteed by the U.S. Government, any foreign government or any of their
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 closed-end 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 such securities if such purchase at the time thereof would
cause more than 10% of its total assets (taken at market value) to be invested
in the securities of such issuers, or more than 3% of the total outstanding
voting securities of any closed-end investment company to be held by the Fund.
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
Adviser or the Sub-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, 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;
(12) Purchase any securities, gold or evidences of interest therein on
margin, except that the Fund may obtain such short-term credit as may be
necessary for the clearance of any transactions and except that the Fund may
make margin deposits in connection with Futures Contracts, Options on Futures
Contracts, Options and Options on Foreign Currencies;
(13) Sell any security which the Fund 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; or
(14) Purchase or sell any put or call option or any combination thereof,
provided, that this shall not prevent the purchase, ownership, holding or sale
of contracts for the future delivery of securities, currencies or warrants
where the grantor of the warrants is the issuer of the underlying securities
or the writing and purchasing of puts, calls or
11
<PAGE> 48
combinations thereof with respect to securities, Futures Contracts and foreign
currencies.
As a matter of non-fundamental policy (which may be changed without shareholder
approval), the Fund may not knowingly invest in securities (other than
repurchase agreements maturing in seven days or less) which are subject to legal
or contractual restrictions on resale or for which there is no readily available
market (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 invested in such
securities.
As a matter of non-fundamental policy (which may be changed without shareholder
approval), the Fund may not create, assume or suffer to exist any lien, security
interest or other encumbrance securing borrowed money or obligations of the Fund
under a securities lending arrangement in an amount exceeding 25% of the Fund's
net assets.
Except with respect to Investment Restriction (1), these investment restrictions
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
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 of the Fund's assets,
and the officers of the Trust are responsible for the Fund's operations. The
Trustees and officers are listed below, together with their principal
occupations during the past five years. (Their titles may have varied during
that period.)
TRUSTEES
A. KEITH BRODKIN* Chairman and President
Massachusetts Financial Services Company, Chairman and Director
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, former Chairman and
Director (until September 30, 1991)
PETER G. HARWOOD
Loomis, Sayles & Co. (investment counsel firm), Financial Vice President,
Treasurer and Director (retired October 1988)
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES
Eastern Enterprises (diversified holding company), Chairman and Chief Executive
Officer (since December 1991); General Cinema Corporation, Vice Chairman and
Chief Financial Officer (until December 1991); The Neiman Marcus Group, Inc.,
Vice Chairman and Chief Financial Officer (from August 1987 to December 1991);
United States Fitch Corporation, Director
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU
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 (from June 1990 until
November 1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge, Massachusetts
CHARLES W. SCHMIDT
Private Investor, Raytheon Company (Diversified Electronics Manufacturer),
Senior Vice President (until December 1990); OHM Corporation, Director; The
Boston Company, Director, Boston Safe Deposit and Trust Company, Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President
ELAINE R. SMITH
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (from August 1990 to September 1992); Ernst &
Young (accountants), Consultant (from February to July 1990)
Address: Weston, Massachusetts
DAVID B. STONE
North American Management Corp. (investment adviser) Chairman
Address: Ten Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
LESLIE J. NANBERG,* Vice President
Massachusetts Financial Services Company, Senior Vice President
STEPHEN C. BRYANT,* Vice President
Massachusetts Financial Services Company, Senior Vice President
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President and Assistant
Treasurer
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President and General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel (since September, 1990); associated with a major law firm (prior to
August, 1990)
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President
---------------
* "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 subsidiary of MFS is the
investment adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs.
Shames and Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold
similar positions with certain other MFS affiliates. Mr. Bailey is a
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<PAGE> 49
Director of Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada
(U.S.)"), the corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $1,500 per year plus $2,910 per meeting and committee
meeting attended, together with such Trustee's 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 the interested Trustees except Mr.
Bailey. 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 in Appendix A hereto is certain information concerning the cash
compensation paid to non-interested Trustees and Mr. Bailey and benefits
accrued, and estimated benefits payable, under the retirement plan.
As of February 28, 1995, all Trustees and officers as a group owned less than 1%
of the Fund's shares outstanding on that date.
As of February 28, 1995, Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box
45286, Jacksonville, Florida was the record owners of approximately 9.78% of the
outstanding Class A shares of the Fund. As of January 9, 1995, Merrill Lynch
Pierce Fenner & Smith, Inc., P.O. Box 45286, Jacksonville, Florida was the
record owner of approximately 6.98% of the outstanding Class B shares of the
Fund. As of January 9, 1995, PaineWebber for the benefit of Milliken & Michaels,
Inc., Metairie, 70002-1752; R Duffield & C. R. Player Jr. Cotr Char Unit Trust
for lives of donor Ruth McCormick Tankersley & Mark Miller, Kristie Miller and
Tiffany Wolfe, Barnesville, Maryland 20838-0401; Merrill Lynch Pierce Fenner &
Smith, P.O. Box 45286, Jacksonville, Florida 32232-5286, were the record owners
of approximately 8.94%, 5.77%, 5.77%, 5.77% and 17.61%, respectively, of the
outstanding Class C 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 liability to the Trust or its shareholders, it is determined 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 interests of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined pursuant to the Trust's Declaration of Trust that they have not
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.), which is a
subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Adviser manages the Fund pursuant to an Investment Advisory Agreement, dated
May 20, 1982, as amended (the "Advisory Agreement"). The Adviser provides the
Fund with overall investment advisory and administrative services, as well as
general office facilities. Subject to such policies as the Trustees may
determine, the Adviser makes investment decisions for the Fund. For these
services and facilities, the Adviser receives a management fee computed and paid
monthly at the annual rate of 0.90% of the first $500 million of the Fund's
average daily net assets and 0.70% of the Fund's average daily net assets in
excess of $500 million for the Fund's then-current fiscal year.
For the Fund's fiscal year ended December 31, 1992, for the fiscal period ended
November 30, 1993 and for the fiscal year ended November 30, 1994, the
management fee was computed and paid monthly at the annual rate of 0.90% of
average daily net assets. For these years, MFS received fees under the Advisory
Agreement of $2,899,509, $3,167,619 and $4,278,028, respectively.
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 expenses, 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. Any such adjustment would not
become effective until the beginning of the Fund's next fiscal year following
the date of such amendments or the date on which such requirements become no
longer applicable. For the fiscal year ended December 31, 1992, for the fiscal
period ended November 30, 1993 and for the fiscal year ended November 30, 1994
no reimbursement was made by the Advisor to the Fund for such expenses.
The Fund pays all of its expenses (other than those assumed by MFS or MFD),
including Trustees 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 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
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<PAGE> 50
Fund's Custodian ("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 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, during the fiscal period ended November 30, 1994, see "Statement of
Operations" in the Annual Report to shareholders incorporated by reference into
this Statement of Additional Information. Payment by the Fund of brokerage
commissions for brokerage and research services of value to the Adviser in
servicing its clients is discussed under the caption "Portfolio Transactions and
Brokerage Commissions."
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. MFS 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 Fund's investments, effecting its portfolio
transactions, and, in general, administering its affairs.
The Advisory Agreement will remain in effect until August 1, 1995, 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 shares (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 it is assigned and may be terminated without penalty by vote of
a majority of the Fund's shares (as defined in "Investment Restrictions"), or by
either party on not more than 60 days' nor less than 30 days' written notice.
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.
CUSTODIAN
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 Trustees have reviewed and approved
subcustodial arrangements with the Chase Manhattan Bank, N.A. for securities of
the Fund held outside the United States. The Custodian also acts as the dividend
disbursing agent of the Fund. The Custodian has contracted with the Adviser for
the Adviser to perform certain accounting functions related to options
transactions for which the Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agreement, effective August 1, 1985 (the "Agency
Agreement") with the Fund. The Shareholder Servicing Agent's responsibilities
under the Agency Agreement include administering and performing transfer agent
functions and the keeping 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 based on the net assets of each
class of shares of the Fund, computed and paid monthly. 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. For the
fiscal year ended November 30, 1994, the Fund paid the Shareholder Servicing
Agent $748,726 under the Agency Agreement. State Street Bank and Trust Company,
the dividend and distribution disbursing agent of the Fund, has contracted with
the Shareholder Servicing Agent to perform certain dividend and distribution
disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement as amended
and restated as of April 21, 1993, (the "Distribution Agreement") with the Fund.
Prior to January 1, 1995, MFS Financial Services, Inc. ("FSI"), another wholly
owned subsidiary of MFS, was the Fund's distributor. Where the 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
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<PAGE> 51
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 Statement of Additional
Information). A group might qualify to obtain quantity sales charge discounts
(see "Investment and Withdrawal Programs" in this Statement of Additional
Information).
Class A shares of the Fund may be sold at their net asset value to certain
persons or 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 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 commissions to
dealers who initiate and are responsible for purchases of $1 million or more as
described in the Prospectus.
CLASS B AND CLASS C SHARES: MFD acts as agent in selling Class B and Class C
shares of the Fund to dealers. The public offering price of Class B and Class C
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 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.
During the Fund's fiscal year ended November 30, 1994 MFD received sales charges
of $245,666 and dealers received sales charges of $1,234,872 (as concession on
gross sales charges of $1,480,538, for selling Class A shares of the Fund; the
Fund received $87,908,351 representing the aggregate net asset value.
During the Fund's fiscal year ended November 30, 1993, MFD received sales
charges of $472,759 and dealers received sales charges of $2,316,957 (as their
concession on gross sales charges of $2,789,716) for selling Class A shares of
the Fund; the Fund received $122,606,685 representing the aggregate net asset
value of such shares. During the Fund's fiscal ended November 30, 1992, MFD
received sales charges of $733,589 and dealers received sales charges of
$3,674,742 (as their concession on gross sales charges of $4,408,331) for
selling Class A shares of the Fund; the Fund received $130,639,760 representing
the aggregate net asset value of such shares.
During the Fund's fiscal year ended November 30, 1993 the CDSC imposed on
redemption of Class A shares was $9,547. During the Fund's fiscal year ended
November 30, 1994 the CDSC imposed on redemption of Class A shares was $10,087.
During the period from September 7, 1993 until November 30, 1993, the CDSC
imposed on redemption of the Fund's Class B shares was $2,434. During the Fund's
fiscal year ended November 30, 1994 the CDSC imposed on redemption of Class B
shares was $107,170.
The Distribution Agreement will remain in effect until August 1, 1995, 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 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
persons affiliated with the Adviser. Any such person may serve other clients of
the Adviser, or any subsidiary of the Adviser in a similar capacity. Changes in
the Fund's investments are reviewed by the Board of Trustees.
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 and broker-dealers through which it seeks this result. In the
United States and in some other countries 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. In other countries both debt and equity
securities are traded on exchanges at fixed commission rates. 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
15
<PAGE> 52
makers or on major exchanges unless, in its opinion, better prices are available
elsewhere. Subject to the requirement of seeking execution at the best available
price, securities transactions 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. At present no arrangements for the
recapture of commission payments are in effect.
Consistent with the foregoing primary consideration, the Rules of Fair Practice
of the National Association of Securities Dealers, Inc. (the 'NASD") and such
other policies as the Trustees may determine, the Adviser may consider sales of
shares of the Fund and of the other investment company clients of MFD as a
factor in the selection of broker-dealers to execute the Fund's portfolio
transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the Securities
Exchange Act of 1934, the Adviser may cause the Fund to pay a broker-dealer
which provides brokerage and research services to the Adviser an amount of
commission for effecting a securities transaction for the Fund in excess of the
amount other broker-dealers would have charged for the transaction if the
Adviser determines in good faith that the greater commission is reasonable in
relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of either a particular transaction or
their respective overall responsibilities to the Fund or to their other clients.
Not all of such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing, or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to the
availability of securities or of purchasers or sellers of securities and
services in effecting securities transactions and performing functions
incidental thereto, such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser for no consideration other
than brokerage or underwriting commissions. Securities may be bought or sold
through such broker-dealers, but at present, unless otherwise directed by the
Fund, a commission higher than one charged elsewhere will not be paid to such a
firm solely because it provided such Research. The Trust's Trustees (together
with the Trustees of the other MFS Funds) have directed the Adviser to allocate
a total of $20,000 of commission business from the MFS Funds to the Pershing
Division of Donaldson, Lufkin & Jenrette as consideration for the annual renewal
of the Lipper Directors' Analytical Data Service (which provides information
useful to the Trustees in reviewing the relationship between the Fund and the
Adviser).
For the fiscal years ended December 31, 1992, for the fiscal period ended
November 30, 1993 and for the fiscal year ended November 30, 1994 the Fund paid
no brokerage commissions.
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 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 the MFS Fixed Fund (a bank collective
investment fund) within a 13-month period (or 36-month period in the case 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
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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
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 his new investment, together with the
current offering price value of all holdings of all classes of shares of that
shareholder in the MFS Funds or the MFS Fixed Fund (a bank collective investment
fund) reaches a discount level. The current offering price value of an
investor's holdings of Class C shares will apply toward cumulative quantity
discounts of purchases of Class A shares. See "Purchases" in the Prospectus for
the sales charges on quantity discounts. 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.
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 the 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 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, as
designated on the Account Application and based upon the value of his account.
Each payment under a Systematic Withdrawal Plan (a "SWP") must be at least $100,
except in certain limited circumstances. The aggregate withdrawals of Class B
shares in any year pursuant to a SWP 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) any "Free Amount"; (ii) to the extent
necessary, 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 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 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 having an aggregate value of at
least $10,000 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 because of the assessment of the CDSC for certain share
redemptions. The shareholder by written instruction to the Shareholder Servicing
Agent 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.
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<PAGE> 54
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 or association (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 other
MFS Funds (if available for sale)(and, in the case of Class C shares, for shares
of MFS Money Market Fund) 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
four different funds effective on the seventh day of each month or 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 exchange. 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 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 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 shares of
such funds 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
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 in the case of Class B shares or within 12 months
of the initial purchase in the case 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
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<PAGE> 55
in the same fund may be considered a "wash sale" and may result in the inability
to recognize currently all or a portion of a 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 of the same class in an account with the Fund for which payment
has been received by the Fund (i.e., an established account) may be exchanged
for shares of the same class of any of the other MFS Funds (if available for
sale) at net asset value. 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") 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 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. 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 Funds. 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 accounts. 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 on any business day 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 Funds, 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 the Shareholder
Servicing Agent 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 fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except holders 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 (a bank collective investment fund) have the right to exchange their
units (except units acquired through direct purchases) for shares of the Fund,
subject to the conditions, if any, imposed upon such unitholders by the MFS
Fixed Fund.
Any state income tax advantages for investment in shares of each state specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timer accounts (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Except as noted below, shares of the Fund may
be purchased by all types of tax-deferred retirement plans. MFD makes available
through investment dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their nonemployed
spouses who desire to make limited contributions to a tax deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986 (the "Code"), as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain qualified corporate pension and profit-sharing plans.
The plan documents 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
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administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
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, and the composition and holding period
of the Fund's portfolio assets. Because the Fund intends to distribute all of
its net investment income and net realized capital gains to shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Fund will be required to pay any federal income or excise taxes,
although the Fund's foreign-source income may be subject to foreign withholding
taxes. If the Fund should fail to qualify as a "regulated investment company" in
any year, the Fund would incur a regular corporate federal income tax upon its
taxable income and Fund distributions would generally be taxable as ordinary
dividend income to 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 (whether paid in cash or reinvested in additional shares) are taxable to
shareholders as ordinary income for federal income tax purposes. A portion of
the Fund's ordinary income dividends (but none of its capital gains
distributions) is normally eligible for the dividends received deduction for
corporations if the recipient otherwise qualifies for that deduction with
respect to its holding of Fund shares. Availability of the deduction for
particular corporate shareholders is subject to certain limitations, and
deducted amounts may be subject to the alternative minimum tax or result in
certain basis adjustments. Distributions of net capital gains (i.e., the excess
of the net long-term capital gains over the short-term capital losses), whether
paid in cash or reinvested in additional shares, are taxable to the Fund's
shareholders as long-term capital gains for federal income tax purposes
regardless of how long they have owned shares in the Fund. Fund dividends
declared in October, November or December and paid the following January will be
taxable to shareholders as if received on December 31 of the year in which they
are declared.
Any dividend or distribution will have the effect of reducing the per share net
asset value of shares in the Fund by the amount of the dividend or distribution.
Shareholders purchasing shares shortly before the record date of any taxable
dividend or other 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 long-term capital gain or loss if the shares have been held for more
than 12 months and otherwise as a short-term capital gain or loss. However, any
loss realized upon a disposition of shares in the Fund held for six months or
less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a redemption of shares may also be disallowed under rules relating
to wash sales. Gain may be increased (or loss reduced) upon a redemption of
Class A shares of the Fund within 90 days after their purchase followed by any
purchase (including purchases by exchange or by reinvestment) without payment of
an additional sales charge of Class A shares of the Fund or of another MFS Fund
(or any other shares of an MFS Fund generally sold subject to a sales charge).
The Fund's transactions in Options, Futures Contracts and Forward Contracts will
be subject to special tax rules that may affect the amount, timing and character
of Fund income and distributions to shareholders. For example, certain positions
held by the Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on such day, and any gain or loss
associated with such 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, gold, and swaps and related transactions to the extent necessary to
meet the requirements of Subchapter M of the Code.
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 current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders and may, under certain
circumstances, make an economic return of capital taxable to shareholders. The
Fund's investment in zero coupon securities and certain securities purchased at
a market discount will cause it to realize 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.
Special tax considerations apply with respect to foreign investments of the
Fund. For example, foreign exchange gains and losses realized by the Fund will
generally be treated as ordinary
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<PAGE> 57
income and losses. The use of foreign currencies for nonhedging purposes and
investment by the Fund in certain "passive foreign investment companies" may be
limited in order to avoid a tax on the Fund.
Investment income received by the Fund from sources within foreign countries may
be subject to foreign income taxes withheld at the source. 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. It is
impossible to determine the effective rate of foreign tax in advance since the
amount of the Fund's assets to be invested within various countries is not
known. The Fund intends to qualify for treaty reduced rates of tax where
available.
If the Fund holds more than 50% of its assets in foreign securities at the close
of its taxable year, the Fund may elect to "pass through" to the Fund's
shareholders foreign income taxes paid. If the Fund so elects, shareholders will
be required to treat their pro rata portion of the foreign income taxes paid by
the Fund as part of the amounts distributed to them by the Fund and thus
includable in their gross income for federal income tax purposes. Shareholders
who itemize deductions would then be allowed to claim a deduction or credit (but
not both) on their federal income tax returns for such amounts, subject to
certain limitations. Shareholders who do not itemize deductions would be able
(subject to such limitations) to claim a credit but not a deduction. No
deduction for such amounts will be permitted to individuals in computing their
alternative minimum tax liability. If the Fund does not qualify or elect to
"pass through" to the Fund's shareholders foreign income taxes paid by it,
shareholders will not be able to claim any deduction or credit for any part of
the foreign taxes paid by the Fund.
Dividends and certain other payments to persons who are not citizens or
residents of the United States ("Non-U.S. Persons") are generally subject to
U.S. tax withholding at a rate of 30%. The Fund intends to withhold U.S. federal
income tax at the rate of 30% on any taxable dividends and other payments to
Non-U.S. Persons that are subject to such withholding, regardless of whether a
lower rate may be permitted under an applicable treaty. Any amounts overwithheld
may be recovered by such persons by filing a claim for refund with the U.S.
Internal Revenue Service within the time period appropriate to such claims.
Distributions received from the Fund by Non-U.S. Persons may also be subject to
tax under the laws of their own jurisdictions. The Fund is also required in
certain circumstances to apply backup withholding at a rate of 31% on taxable
dividends and the proceeds of redemption and exchanges paid to any shareholder
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.
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 in certain states. Residents of certain states
may be subject to an intangibles tax or a personnel property tax on all or a
portion of the value of their shares. Shareholders are urged to consult their
tax advisors regarding the possible exclusion of such portion of Fund
distributions for state and local income tax purposes as well as regarding the
tax consequences of an investment in the Fund.
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.
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 Statement of Additional Information, the Exchange is open for
trading every weekday except for the following holidays or the days on which
they are observed: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) This
determination is made once each day as of the close of regular trading on the
Exchange by deducting the amount of the liabilities attributable to the class
from the value of the assets attributable to the class and dividing the
difference by the number of shares of the class outstanding. Bonds and other
fixed income securities (other than short-term obligations) of U.S. issuers in
the Fund's portfolio 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 quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect the fair
value of such securities. Forward Contracts will be valued using a pricing
model taking into consideration market data from an external pricing source.
Use of the pricing services has been approved by the Fund's Board of Trustees.
All other securities, futures contracts and options in the Fund's portfolio
(other than short-term obligations) for which the principal market is one or
more securities or commodities exchanges (whether domestic or foreign) will be
valued at the last reported sale price or at the settlement price prior to the
determination (or if there has been no current sale, at the closing bid price)
on the primary exchange on which such securities, futures contracts or options
are traded; but if a securities exchange is not the principal market for
securities, such securities will, if market quotations are readily available,
be valued at current bid prices, unless such securities are reported on the
NASDAQ system, in which case they are valued at the last sale price or, if no
sales occurred during the day, at the last quoted bid price. Short-term
obligations with a remaining maturity in excess of 60 days will be valued based
upon dealer supplied valuations. Other short-term obligations in the Fund's
portfolio are valued at amortized cost, which constitutes fair value as
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determined by the Board of Trustees. Portfolio investments 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.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of regular trading on the Exchange.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the close of regular trading on the
Exchange which will not be reflected in the computation of the Fund's net asset
value unless the Trustees deem that such event would materially affect the net
asset value in which case an adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. A share's net asset value is effective for orders
received by the dealer prior to its calculation and received by MFD, the Fund's
principal underwriter, prior to the close of that business day.
The Trustees annually review the appropriateness of the time of day as of which
the net asset value is computed.
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
public 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 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's average annual
total rate of return for Class A shares reflecting the current maximum sales
charge on the initial investment (4.75%) for the one-year, five-year and
ten-year periods ended November 30, 1994 was, respectively, -9.18%, 7.96% and
12.83%. The Fund's average annual total rate of return for Class A shares not
giving effect to the sales charge on the initial investment and reinvested
dividends for the one-year, five-year and ten-year periods ended November 30,
1994 was, respectively, -4.63%, 9.02% and 13.38%. The Fund's average annual
total rate of return for Class B shares, reflecting the CDSC, for the one-year
period ended November 30, 1994 and for the period from September 7, 1993
(commencement of offering of this class of shares) to November 30, 1994 was
-8.77% and -6.45%. The Fund's average annual total rate of return for Class B
shares, not giving the effect to the CDSC, for the one-year period ended
November 30, 1994 and for the period from September 7, 1993 (commencement of
offering of this class of shares) to November 30, 1994 was -5.39% and -3.64%.
The Fund's aggregate total rate of return for Class C shares from January 3,
1994 (commencement of offering of this class of shares) to November 30, 1994 was
-6.92%.The aggregate total rate of return represents a limited time frame and,
like the total rates of return presented above for Class A and B shares, may not
be indicative of future performances. Certain total rate of return figures would
have been lower if fee waivers were not in place.
PERFORMANCE RESULTS: The performance results for Class A shares below, based on
an assumed initial investment of $10,000 in Class A shares, cover the period
from January 1, 1985 to December 31, 1994. It has been assumed that dividend 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 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 and total rates of return should be considered when
comparing the yield and total rate of return of the Fund 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. The current net asset value of shares and account balance information
may be obtained by calling 1-800-MFS-TALK (637-8255).
MFS WORLD GOVERNMENTS FUND -- CLASS A
<TABLE>
<CAPTION>
VALUE OF
VALUE OF REINVESTED VALUE OF
YEAR ENDED INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
DECEMBER 31 INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
----------- ---------------- ------------- ---------- -------
<S> <C> <C> <C> <C>
1985 $ 10,278 $ 706 $ 1,707 $12,691
1986 10,999 2,707 2,787 16,493
1987 11,402 3,077 6,094 20,573
1988 10,672 3,105 7,697 21,474
1989 10,999 3,200 8,837 23,036
1990 11,527 4,460 11,174 27,161
1991 12,132 5,214 13,459 30,805
1992 11,047 4,748 15,424 31,219
1993 11,844 5,172 19,944 36,960
1994 10,480 5,768 18,284 34,532
</TABLE>
EXPLANATORY NOTES: The results in the table assume that the initial investment
on January 1, 1985 has been reduced by the current maximum sales charge of
4.75%. No adjustment has been made for any income taxes payable by shareholders.
YIELD: Any yield quotation for a class of shares of the Fund will be based on
the annualized net investment income per share of that class of the Fund over a
30-day period. The yield is calculated by dividing the net investment income per
share allocated to a particular class of the Fund earned during the
22
<PAGE> 59
period by the maximum offering price per share of such class 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 earned
by the Fund allocated to the class during the period, minus accrued expenses of
such class for the period, by (ii) the average number of shares of such 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 assume a maximum sales charge of 4.75% in the case of Class A
shares and no payment of any CDSC in the case of Class B and Class C shares. The
Fund's yield for the 30-day period ended November 30, 1994 was 6.46% for Class A
shares, taking into account the distribution fee waiver; without the waiver, the
yield would have been 6.36% for Class A shares. The Fund's yield for the 30-day
period ended November 30, 1994 was 5.93% for Class B shares. The yield
calculation for Class C shares for the 30-day period ended November 30, 1994 was
6.0%. There was no waiver in effect for either Class B shares or Class C shares
for the 30-day period ended November 30, 1994.
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 paid 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. The current distribution rate for
Class A shares of the Fund for the 12 month period ended on November 30, 1994
was 8.56%. The current distribution rate for Class B shares of the Fund for the
12 month period ended November 30, 1994 was 8.52%. The current distribution rate
for Class C shares of the Fund based on the annualization of the last dividend
paid during the last fiscal year was 0%.
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 Services, Inc., 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.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first 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.
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to let
shareholders take capital gain distributions either in additional shares or
in cash.
-- 1976 -- MFS[REGISTERED TRADEMARK] 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[REGISTERED TRADEMARK] World Governments Fund is established as
America's first globally diversified fixed income mutual fund.
23
<PAGE> 60
-- 1984 -- MFS[REGISTERED TRADEMARK] Municipal High Income Fund is the first
mutual fund to seek high tax-free income from lower-rated
municipal securities.
-- 1986 -- MFS[REGISTERED TRADEMARK] Managed Sectors Fund becomes the first
mutual fund to target and shift investments among industry sectors
for shareholders.
-- 1986 -- MFS[REGISTERED TRADEMARK] Municipal Income Trust is the first
closed-end, high-yield municipal bond fund traded on the New York
Stock Exchange.
-- 1986 -- MFS[REGISTERED TRADEMARK] Lifetime Investment ProgramSM is
established as the first complete family of 12b-1 mutual funds with no
initial sales charge.
-- 1987 -- MFS[REGISTERED TRADEMARK] Multimarket Income Trust is the first
closed-end, multimarket high income fund listed on the New York
Stock Exchange.
-- 1989 -- MFS[REGISTERED TRADEMARK] Regatta becomes America's first
non-qualified market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS[REGISTERED TRADEMARK] World Total Return Fund is
the first global balanced fund.
-- 1993 -- MFS[REGISTERED TRADEMARK] 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 Union Standard Trust, the first
trust to invest in companies deemed to be union-friendly by an Advisory
Board of senior labor officials, senior managers of companies with
significant labor contracts, academics and other national labor leaders of
experts.
8. DISTRIBUTION PLANS
The Trustees have adopted a Distribution Plan for each of Class A, Class B and
Class C Shares (the "Distribution Plans") 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 each Distribution Plan would benefit the Fund and
the respective class of shareholders. The Distribution Plans are designed to
promote sales, thereby increasing the net assets of the Fund. Such an increase
may reduce the 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.
CLASS A DISTRIBUTION PLAN: The Distribution Plan relating to Class A shares
(the "Class A Distribution Plan") provides that the Fund will pay MFD up to (but
not necessarily all of) an aggregate of 0.35% of the average daily net assets
attributable to the Class A shares annually in order that MFD may pay expenses
on behalf of the Fund related to the distribution and servicing of its Class A
shares. The expenses to be paid by MFD on behalf of the Fund include a service
fee to securities dealers which enter into a sales agreement with MFD of up to
0.25% per annum of the portion of the Fund's average daily net assets
attributable to the Class A shares owned by investors for whom that securities
dealer is the holder or dealer of record. These payments are partial
consideration for personal services and/or account maintenance performed by such
dealers with respect to Class A shares. MFD may from time to time reduce the
amount of the service fee paid for shares sold prior to a certain date. MFD may
also retain a distribution fee of 0.10% of the Fund's average daily net assets
attributable to Class A shares as partial consideration for services performed
and expenses incurred in the performance of MFD's obligations as to Class A
shares under the Distribution Agreement with the Fund. MFD, however, currently
is waiving this 0.10% per annum distribution fee and will not accept payment of
this fee in the future unless it first obtains the approval of the Trust's Board
of Trustees. Any remaining funds may be used to pay for other distribution
related expenses as described in the Prospectus. Service fees may be reduced for
a securities dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having a net asset value at or above a certain dollar
level. No service fee will be paid (i) to any securities 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 if the dealer satisfies certain criteria), or (ii)
to any insurance company which has entered into an agreement with the Fund and
MFD that permits such insurance company to purchase 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. MFD or
its affiliates are entitled to retain all service fees payable under the Class A
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts. Certain banks and other financial institutions that
have agency agreements with MFD will receive agency transaction and service fees
that are the same as commissions and service fees to dealers.
During the fiscal year ended November 30, 1994, the Fund incurred expenses of
$1,022,465 (equal to 0.25% of its average daily net assets attributable to Class
A shares) relating to the distribution and servicing of its Class A shares, of
which MFD received $0 and securities dealers of the Fund and certain banks and
other financial institutions received $1,022,465.
CLASS B DISTRIBUTION PLAN: The Distribution Plan relating to Class B shares
(the "Class B Distribution Plan") provides that the Fund shall pay MFD, as the
Fund's distributor for its Class B shares, a daily distribution fee equal on an
annual basis to 0.75% of the Fund's average daily net assets attributable to
Class B shares and will pay MFD an annual service fee of up to
24
<PAGE> 61
0.25% per annum of the Fund's average daily net assets attributable to Class B
shares (which MFD will in turn pay to securities dealers which enter into a
sales agreement with MFD at a rate of up to 0.25% of the Fund's average daily
net assets attributable to Class B shares owned by investors for whom that
securities dealer is the holder or dealer of record). This service fee is
intended to be additional consideration for all personal services and/or account
maintenance services rendered by the dealer with respect to Class B shares. MFD
will advance to dealers the first-year service fee at a rate equal to 0.25% of
the amount invested. As compensation therefor, 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 for additional service fees with respect to such
shares commencing in the thirteenth month following purchase. Except in the case
of the first year service fee, no service fee 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 MFD. MFD, however, may waive this
minimum amount requirement from time to time if the dealer satisfies certain
criteria. Dealers may from time to time be required to meet certain other
criteria in order to receive service fees. MFD or its affiliates are entitled to
retain all service fees payable under the Class B Distribution Plan for which
there is no dealer of record or for which qualification standards have not been
met as partial consideration for personal services and/or account maintenance
services performed by MFD or its affiliates for shareholder accounts.
The purpose of distribution payments to MFD under the Class B Distribution Plan
is to compensate MFD for its distribution services to the Fund. MFD pays for
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. The Class B Distribution Plan also provides that MFD will receive
all CDSCs attributable to Class B shares (see "Distribution Plan" and
"Purchases" in the Prospectus).
During the fiscal year ended November 30, 1994, the Fund incurred expenses of
$607,003 (equal to 1.0% of its average daily net assets attributable to Class B
shares) relating to the distribution and servicing of its Class B shares, of
which MFD received $455,252 and securities dealers of the Fund and certain banks
and other financial institutions received $151,751.
CLASS C DISTRIBUTION PLAN: The Distribution Plan relating to Class C shares (the
"Class C Distribution Plan") provides that the Fund will pay MFD a distribution
fee of up to 0.75% per annum of the Fund's average daily net assets attributable
to Class C shares and will annually pay MFD a service fee of up to 0.25% per
annum of the Fund's average daily net assets attributable to Class C shares
(which MFD will in turn pay to securities dealers which enter into a sales
agreement with MFD at a rate of up to 0.25% per annum of the Fund's daily net
assets attributable to Class C shares owned by investors for whom that
securities dealer is the holder or dealer of record).
The distribution/service fees attributable to Class C shares are designed to
permit an investor to purchase such shares through a broker-dealer without the
assessment of an initial sales charge or a CDSC while allowing MFD to compensate
broker-dealers in connection with the sale of such shares.
The service fee is intended to be additional consideration for all personal
services and/or account maintenance services rendered by the dealer with respect
to Class C shares. MFD or its affiliates are entitled to retain all service fees
payable under the Class C Distribution Plan with respect to accounts for which
there is no dealer of record as partial consideration for personal services
and/or account maintenance services performed by MFD or its affiliates for
shareholder accounts.
The purpose of the distribution payments to MFD under the Class C Distribution
Plan is to compensate MFD for its distribution services to the Fund.
Distribution payments under the Plan will be used by MFD to pay securities
dealers a distribution fee in an amount equal on an annual basis to 0.75% of the
Fund's average daily net assets attributable to Class C shares owned by
investors for whom securities dealer is the holder or dealer of record.
(Therefore, the total amount of distribution/service fees paid to a dealer on an
annual basis is 1.00% of the Fund's average daily net assets attributable to
Class C shares owned by investors for whom the securities dealer is the holder
or dealer of record.) MFD also pays expenses of printing prospectuses and
reports used for sales purposes, expenses with respect to the preparation and
printing of sales literature and other distribution-related expenses, including,
without limitation, the compensation of personnel and all costs of travel,
office expense and equipment. Since MFD's compensation is not directly tied to
its expenses, the amount of compensation received by MFD during any year may be
more or less than its actual expenses. For this reason, this type of
distribution fee arrangement is characterized by the staff of the SEC as being
of the "compensation" variety. However, the Fund is not liable for any expenses
incurred by MFD in excess of the amount of compensation it receives. Certain
banks and other financial institutions that have agency agreements with MFD will
receive agency transaction and service fees that are the same as distribution
and service fees to dealers. Fees payable under the Class C Distribution Plan
are charged to, and therefore reduce, income allocated to Class C shares.
For the period January 3, 1994 to November 30, 1994, the Fund incurred expenses
of $63,031 (equal to 1.0% of its average daily net assets attributable to Class
C) shares relating to the distribution and servicing of Class C shares, all of
which was paid by MFD to securities dealers of the Fund and certain banks and
other financial institutions.
GENERAL: Each of the Distribution Plans will remain in effect until August 1,
1995, 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
25
<PAGE> 62
"interested persons" or financially interested parties to such Plan
("Distribution Plan Qualified Trustees"). Each of the Distribution Plans also
requires that the Fund and MFD each shall provide to the Trustees, and the
Trustees shall review, at least quarterly, a written report of the amounts
expended (and purposes therefor) under such Plan. Each of the Distribution Plans
may be terminated at any time by a 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 any of the Distribution Plans 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 any of the Distribution Plans must be in writing, will be terminated
automatically if assigned, and may be terminated at any time without payment or
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. None of the Distribution Plans may 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 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 any of
the Distribution Plans 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
three classes of each of the Trust's two series, (Class A, Class B and Class C
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, the 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 shareholders. The Trust reserves the right to create and issue
additional series or classes of shares, in which case the shares of each series
or class would participate equally in the earnings, dividends and assets of the
particular series or class.
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 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
outstanding shares of the Trust. Shares have no pre-emptive or conversion rights
(except as set forth 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, obligations or affairs 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 the Trust shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust and its shareholders and the Trustees, officers,
employees and agents of the Trust 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 his willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office.
26
<PAGE> 63
10. INDEPENDENT AUDITORS AND
FINANCIAL STATEMENTS
Ernst & Young LLP were the Fund's independent auditors, providing audit
services, tax return preparation, and assistance and consultation with respect
to the preparation of filings with the SEC for the fiscal year ended November
30, 1994.
The financial statements of the Fund, including the Portfolio of Investments and
Statement of Assets and Liabilities at November 30, 1994, and the Statement of
Operations, Statement of Changes in Net Assets and Financial Highlights for the
year then ended, each of which is included in the Annual Report to Shareholders
of the Fund, have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report therein. Such financial statements are incorporated by
reference into this Statement of Additional Information in reliance upon the
report of Ernst & Young LLP given upon their authority as experts in accounting
and auditing.
Coopers & Lybrand LLP were the Fund's independent accountants from January 1,
1991 to November 30, 1993, and were responsible for providing audit services,
tax return preparation and assistance and consultation with respect to the
preparation of filings with the SEC. The Statement of Changes in Net Assets for
the year ended November 30, 1993 and the Financial Highlights table for the
period from January 1, 1991 to November 30, 1993 each of which is included in
the Annual Report to Shareholders, were audited by Coopers & Lybrand LLP and are
incorporated by reference into this Statement of Additional Information in
reliance upon the report of Coopers & Lybrand LLP given upon their authority as
experts in accounting and auditing.
Deloitte & Touche, LLP were the Fund's independent accountants from the Fund's
commencement of operations to December 31, 1990, and were responsible for
providing audit services, tax return preparation and assistance and consultation
with respect to the preparation of filings with the SEC. The Statement of
Changes in Net Assets for the year ended December 31, 1990 and the Financial
Highlights table for the period from January 3, 1994 (commencement of
operations) to December 31, 1990, each of which included in the Annual Report to
Shareholders, were audited by Deloitte & Touche LLP and are incorporated by
reference into this Statement of Additional Information in reliance upon the
report of Deloitte & Touche LLP given upon their authority as experts in
accounting and auditing.
27
<PAGE> 64
APPENDIX A
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL TRUSTEE
RETIREMENT BENEFIT ESTIMATED FEES FROM
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FUND AND FUND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) COMPLEX(3)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $2,956 $ 447 8 $ 226,221
Peter G. Harwood 3,166 144 5 105,812
J. Atwood Ives 3,236 445 17 106,482
Lawrence T. Perera 2,956 1,459 23 96,592
William Poorvu 3,146 1,428 23 106,482
Charles W. Schmidt 2,956 1,371 16 98,397
Elaine R. Smith 2,956 429 27 98,397
David B. Stone 3,166 677 11 104,007
---------------
<FN>
(1) For fiscal year ended November 30, 1994.
(2) Based on normal retirement age of 73.
(3) For calendar year 1994. All Trustees served as Trustees of 20 funds within the MFS fund complex (having
aggregate net assets at December 31, 1994, of approximately $14.7 billion) except Mr. Bailey, who
served as Trustee of 56 funds within the MFS fund complex (having aggregate net assets at December
31, 1994, of approximately $24.4 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<TABLE>
<CAPTION>
AVERAGE YEARS OF SERVICE
TRUSTEE 10 OR
FEES 3 5 7 MORE
----------------------------------------------
<S> <C> <C> <C> <C>
$2,700 $405 $675 $ 945 $1,350
2,900 435 725 1,015 1,450
3,100 465 775 1,085 1,550
3,300 495 825 1,155 1,650
3,500 525 875 1,225 1,750
3,700 555 925 1,295 1,850
---------------
<FN>
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
</TABLE>
28
<PAGE> 65
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[REGISTERED TRADEMARK]
WORLD
GOVERNMENTS FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO]
MWG-13-4/95/500 20/220/320
<PAGE> 66
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - November 30, 1994
Bonds - 93.7%
---------------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Dollar Denominated - 32.3%
U.S. Treasury Notes, 11.25s, 1995 $ 55,500 $ 56,713,785
U.S. Treasury Notes, 5.875s, 1996 32,815 32,153,450
U.S. Treasury Notes, 7.25s, 2004 60,000 57,253,200
-----------
$146,120,435
---------------------------------------------------------------------------------------------------------------------
Foreign - Non-U.S. Dollar Denominated - 61.4%
Australian Dollars - 4.1%
Queensland Treasury Corp., 8s, 1999 AUD 9,340 $ 6,530,039
Treasury Corp. of Victoria, 10.25s, 1999 16,000 12,113,952
-----------
$ 18,643,991
---------------------------------------------------------------------------------------------------------------------
British Pounds - 10.6%
United Kingdom Gilts, 9s, 2000 GBP 18,250 $ 29,265,404
United Kingdom Gilts, 10s, 2001 11,245 18,774,751
-----------
$ 48,040,155
---------------------------------------------------------------------------------------------------------------------
Czech Republic Koruna - 1.1%
Czech Electric, 16.5s, 1998 CSK 66,000 $ 2,521,272
Czech Republic, 11.125s, 1997 70,000 2,481,741
-----------
$ 5,003,013
---------------------------------------------------------------------------------------------------------------------
Danish Kroner - 5.0%
Danish Nykredit, 9s, 2026 DKK 1 $ 152
Kingdom of Denmark, 9s, 1998 97,200 16,193,417
Kingdom of Denmark, 9s, 2000 39,600 6,597,318
-----------
$ 22,790,887
---------------------------------------------------------------------------------------------------------------------
Deutsche Marks - 9.5%
Deutschland Republic, 6.5s, 2003 DEM 32,840 $ 19,706,090
Deutschland Republic, 6.75s, 2004 9,000 5,500,796
Treuhandanstalt Obligationen, 6.375s, 1999 28,700 17,861,025
-----------
$ 43,067,911
---------------------------------------------------------------------------------------------------------------------
Dutch Guilders - 7.9%
Dutch State Loan, 6.25s, 1998 NLG 51,280 $ 28,472,691
Dutch State Loan, 7.5s, 1999 12,590 7,266,077
-----------
$ 35,738,768
---------------------------------------------------------------------------------------------------------------------
Finnish Markkaa - 1.1%
Finnish Export Ltd., Principal Linked Notes, 5.5s, 1995<F1> FIM 30,212 $ 5,028,512
---------------------------------------------------------------------------------------------------------------------
French Francs - 5.4%
Government of France, 6.5s, 1996 FRF 48,680 $ 8,984,366
Government of France, 7s, 1999 85,350 15,506,663
-----------
$ 24,491,029
---------------------------------------------------------------------------------------------------------------------
Irish Punts - 1.8%
Republic of Ireland, 9.25s, 2003 IEP 5,000 $ 7,972,683
---------------------------------------------------------------------------------------------------------------------
Italian Lire - 1.6%
Republic of Italy, 10s, 1996 ITL 7,540,000 $ 4,589,808
Republic of Italy, 8.5s, 1999 4,750,000 2,655,270
-----------
$ 7,245,078
---------------------------------------------------------------------------------------------------------------------
Japanese Yen - 5.6%
Italian Government Euro-Yen, 3.5s, 2001 JPY 443,000 $ 4,124,575
Japanese Development Bank, 5s, 1999 374,000 3,909,381
Sallie Mae Euro-Yen, 3.2s, 1997 450,000 4,549,131
World Bank Euro-Yen, 5.25s, 2002 1,220,000 12,783,361
-----------
$ 25,366,448
---------------------------------------------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Bonds - continued
---------------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
---------------------------------------------------------------------------------------------------------------------
Foreign - Non-U.S. Dollar Denominated - continued
New Zealand Dollars - 1.9%
Government of New Zealand, 8s, 1995 NZD 13,500 $ 8,359,080
---------------------------------------------------------------------------------------------------------------------
Spanish Pesetas - 3.1%
Government of Spain, 8.3s, 1998 ESP 1,499,500 $ 10,506,794
Government of Spain, 7.4s, 1999 525,700 3,525,919
-----------
$ 14,032,713
---------------------------------------------------------------------------------------------------------------------
Swedish Kronor - 1.6%
Sallie Mae, Swedish Index Notes, 0s, 1995<F1> SEK 7,350 $ 7,274,295
---------------------------------------------------------------------------------------------------------------------
Thailand Bhat - 1.1%
Industrial Finance Corp. Trust, 8.4s, 1995 THB 120,000 $ 4,780,457
---------------------------------------------------------------------------------------------------------------------
Total Foreign - Non-U.S. Dollar Denominated $277,835,020
---------------------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $429,458,234) $423,955,455
---------------------------------------------------------------------------------------------------------------------
Call Options Purchased - 0.1%
---------------------------------------------------------------------------------------------------------------------
Principal Amount
of Contracts
Expiration Month/Strike Price (000 Omitted)
---------------------------------------------------------------------------------------------------------------------
Japanese Bonds
December/105.826 JPY 2,303,000 $ 55,272
December/106.106 3,418,500 44,441
January/96.458 3,364,000 90,828
February/104.19 2,279,000 312,223
Japanese Yen
December/95 5,259,717 0
December/96 5,231,620 5,232
---------------------------------------------------------------------------------------------------------------------
Total Call Options Purchased (Premiums Paid, $1,609,626) $ 507,996
---------------------------------------------------------------------------------------------------------------------
Put Options Purchased - 0.5%
---------------------------------------------------------------------------------------------------------------------
Deutsche Marks
December/1.535 DEM 132,273 $ 2,006,446
Japanese Bonds
February/104.25 JPY 1,139,500 51,278
Swiss Francs/Deutsche Marks
March/0.85 CHF 21,051 88,635
---------------------------------------------------------------------------------------------------------------------
Total Put Options Purchased (Premiums Paid, $811,693) $ 2,146,359
---------------------------------------------------------------------------------------------------------------------
Short-Term Obligations - 6.5%
---------------------------------------------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
---------------------------------------------------------------------------------------------------------------------
U.S. Dollar Denominated - 4.5%
Federal Home Loan Bank, due 1/03/95 $ 650 $ 646,568
Pitney Bowes, Inc., due 12/19/94 7,300 7,279,925
Wal-Mart Stores, Inc., due 12/01/94-12/05/94 12,140 12,137,856
-----------
$ 20,064,349
---------------------------------------------------------------------------------------------------------------------
Foreign - Non-U.S. Dollar Denominated -- 2.0%
Nafinsa Pagares, due 1/19/95 MXP 3,206,710 $ 9,129,254
---------------------------------------------------------------------------------------------------------------------
Total Short-Term Obligations (Amortized Cost, $29,267,996) $ 29,193,603
---------------------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $461,147,549) $455,803,413
---------------------------------------------------------------------------------------------------------------------
<PAGE>
Portfolio of Investments - continued
Call Options Written - (0.9)%
---------------------------------------------------------------------------------------------------------------------
Principal Amount
of Contracts
Issuer (000 Omitted) Value
---------------------------------------------------------------------------------------------------------------------
Deutsche Marks
December/1.63 DEM 147,651 $ (3,380,913)
Japanese Bonds
February/104.25 JPY 1,139,500 (167,507)
Japanese Yen
December/100 2,391,348 (272,613)
Swiss Francs/Deutsche Marks
March/0.8378 CHF 21,051 (88,621)
---------------------------------------------------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $2,497,284) $ (3,909,654)
---------------------------------------------------------------------------------------------------------------------
Put Options Written
---------------------------------------------------------------------------------------------------------------------
Canadian Dollars
March/1.38 CAD 13,696 $ (77,503)
Japanese Bonds
February/104.19 JPY 2,279,000 (77,486)
---------------------------------------------------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $316,385) $ (154,989)
---------------------------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 0.1% $ 516,654
---------------------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $452,255,424
---------------------------------------------------------------------------------------------------------------------
Abbreviations have been used throughout this report to indicate amounts shown in
currencies other than the U.S. dollar. A list of abbreviations is shown below.
AUD = Australian Dollars ESP = Spanish Pesetas JPY = Japanese Yen
CAD = Canadian Dollars FIM = Finnish Markkaa MXP = Mexican Pesos
CHF = Swiss Francs FRF = French Francs NLG = Dutch Guilders
CSK = Czech Republic Koruna GBP = British Pounds NZD = New Zealand Dollars
DEM = Deutsche Marks IEP = Irish Punts SEK = Swedish Kronor
DKK = Danish Kroner ITL = Italian Lire THB = Thailand Bhat
<FN>
<F1>Indexed security.
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
---------------------------------------------------------------------------------------------
<CAPTION>
November 30, 1994
---------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $461,147,549) $455,803,413
Foreign currency, at value (identified cost, $1,045,913) 1,090,039
Net receivable for forward foreign currency exchange contracts
purchased 15,969,160
Net receivable for forward foreign currency exchange contracts 6,497,078
Premium receivable on options written 88,635
Receivable for Fund shares sold 683,939
Interest receivable 7,542,203
Other assets 5,851
------------
Total assets $487,680,318
------------
Liabilities:
Payable for investments purchased $ 5,380,015
Payable for Fund shares reacquired 935,387
Written options outstanding, at value (premiums received, $2,813,669) 4,064,643
Net payable for forward foreign currency exchange contracts sold 24,491,181
Payable to affiliates -
Management fee 11,161
Distribution fee 179,382
Shareholder servicing agent fee 2,002
Accrued expenses and other liabilities 361,123
------------
Total liabilities $ 35,424,894
------------
Net assets $452,255,424
------------
Net assets consist of:
Paid-in capital $442,322,230
Unrealized depreciation on investments and translation of assets and
liabilities in foreign currencies (8,617,785)
Accumulated net realized gain on investments and foreign currency
transactions 25,643,043
Accumulated distributions in excess of net investment income (7,092,064)
------------
Total $452,255,424
------------
Shares of beneficial interest outstanding 39,757,442
------------
Class A shares:
Net asset value and redemption price per share
(net assets of $370,110,320 / 32,498,842 shares of beneficial
interest outstanding) $11.39
------
Offering price per share (100/95.25 of net asset value per share) $11.96
------
Class B shares:
Net asset value, redemption price and offering price per share (net assets of
$73,457,628 / 6,490,809 shares of beneficial interest outstanding) $11.32
------
Class C shares:
Net asset value, redemption price and offering price per share (net assets of
$8,687,476 / 767,791 shares of beneficial interest outstanding) $11.31
------
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares. See notes to financial statements
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
--------------------------------------------------------------------------------
Year Ended November 30, 1994
--------------------------------------------------------------------------------
Net investment income:
Interest income $ 33,282,124
------------
Expenses -
Management fee $ 4,278,028
Trustees' compensation 34,823
Shareholder servicing agent fee (Class A) 605,730
Shareholder servicing agent fee (Class B) 133,541
Shareholder servicing agent fee (Class C) 9,455
Distribution and service fee (Class A) 1,429,142
Distribution and service fee (Class B) 607,003
Distribution and service fee (Class C) 63,031
Custodian fee 469,399
Printing 105,000
Auditing fees 73,897
Postage 63,913
Registration fees 29,040
Legal fees 22,299
Miscellaneous 347,014
------------
Total expenses $ 8,271,315
Reduction of expenses by distributor (406,677)
------------
Net expenses $ 7,864,638
------------
Net investment income $ 25,417,486
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(44,257,381)
Written option transactions (2,519,993)
Foreign currency transactions (2,922,749)
Futures contracts 1,018,226
------------
Net realized loss on investments $(48,681,897)
------------
Change in unrealized appreciation (depreciation) -
Investments $ 7,138,356
Written options (3,803,837)
Translation of assets and liabilities in foreign currencies (3,169,388)
Futures contracts (996,158)
------------
Net unrealized loss on investments $ (831,027)
------------
Net realized and unrealized loss on investments $(49,512,924)
------------
Net decrease in net assets from operations $(24,095,438)
------------
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended November 30, 1994 1993<F1>
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 25,417,486 $ 20,177,253
Net realized gain (loss) on investments and foreign currency transactions (48,681,897) 32,286,417
Net unrealized gain (loss) on investments and foreign currency transactions (831,027) 5,116,237
-------------- --------------
Increase (decrease) in net assets from operations $ (24,095,438) $ 57,579,907
-------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (38,773,645) $ --
From net investment income (Class B) (3,332,371) --
From net investment income (Class C) (99,440) --
From net realized gain on investments and foreign currency
transactions (Class A) (9,595,121) --
From net realized gain on investments and foreign currency
transactions (Class B) (754,139) --
-------------- --------------
Total distributions declared to shareholders $ (52,554,716) $ --
-------------- --------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 180,053,701 $ 143,230,010
Net asset value of shares issued to shareholders in reinvestment
of distributions 37,130,247 --
Cost of shares reacquired (156,172,084) (73,263,542)
-------------- --------------
Increase in net assets from Fund share transactions $ 61,011,864 $ 69,966,468
-------------- --------------
Total increase (decrease) in net assets $ (15,638,290) $ 127,546,375
Net assets:
At beginning of period 467,893,714 340,347,339
-------------- --------------
At end of period (including undistributed (distributions in excess
of) net investment income of $(7,092,064) and $25,945,488, respectively) $ 452,255,424 $ 467,893,714
-------------- --------------
<FN>
<F1>For the eleven months ended November 30, 1993.
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Financial Highlights
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended November 30, Year Ended December 31,
------------------------------------------------------------------------ --------------------------------------------------------
1994 1993<F1> 1992 1991 1990 1989 1988
------------------------------------------------------------------------------------------------------------------------------------
Class A
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 13.37 $ 11.50 $ 12.63 $ 12.00 $ 11.45 $ 11.11 $ 11.87
------- ------- ------- ------- ------- ------- -------
Income from investment operations -<F3>
Net investment income<F6> $ 0.63 $ 0.58 $ 0.87 $ 0.94 $ 0.98 $ 1.07 $ 0.94
Net realized and unrealized gain
(loss) on investments (1.17) 1.29 (0.70) 0.67 1.07 (0.26) (0.42)
------- ------- ------- ------- ------- ------- -------
Total from investment operations $ (0.54) $ 1.87 $ 0.17 $ 1.61 $ 2.05 $ 0.81 $ 0.52
------- ------- ------- ------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (1.15) $ -- $ (1.30) $ (0.75) $ (0.95) $ (0.47) $ (0.90)
From net realized gain
on investments (0.29) -- -- -- (0.50) -- (0.32)
From paid-in capital -- -- -- (0.23) (0.05) -- (0.06)
------- ------- ------- ------- ------- ------- -------
Total distributions declared to shareholders $ (1.44) $ -- $ (1.30) $ (0.98) $ (1.50) $ (0.47) $ (1.28)
------- ------- ------- ------- ------- ------- -------
Net asset value - end of period $ 11.39 $ 13.37 $ 11.50 $ 12.63 $ 12.00 $ 11.45 $ 11.11
------- ------- ------- ------- ------- ------- -------
Total return<F4> (4.63)% 17.77%<F2> 1.35% 13.42% 17.90% 7.27% 3.68%
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.54% 1.54%<F2> 1.53% 1.61% 1.44% 1.42% 1.12%
Net investment income 5.45% 5.66%<F2> 6.78% 7.75% 8.06% 8.42% 7.91%
Portfolio turnover<F3> 358% 179%<F2> 163% 208% 220% 282% 232%
Net assets at end of period (000 omitted) $370,110 $443,304 $340,347 $286,089 $145,202 $124,935 $190,590
<FN>
<F1>For the eleven months ended November 30, 1993.
<F2>Annualized.
<F3>The portfolio turnover for 1985 and subsequent years includes portfolio
activity applicable to U.S. government securities, while the preceding years
do not.
<F4>Total returns for Class A shares do not include the applicable sales charge
(except for reinvested dividends prior to October 1, 1989). If the charge
had been included, the results would have been lower.
<F5>Per share data for the year ended November 30, 1994 is based on average
shares outstanding.
<F6>The distributor waived a portion of the distribution fee for the periods
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 $ 0.62 $ 0.58 -- -- -- -- --
Ratios (to average net assets):
Expenses 1.64% 1.57%<F2> -- -- -- -- --
Net investment income 5.35% 5.63%<F2> -- -- -- -- --
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights - continued
------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31, Year Ended November 30,
-------------------------------------------------------------- ------------------------------
1987 1986 1985 1984 1994 1993<F1> 1994<F2>
------------------------------------------------------------------------------------------------------
Class A Class B Class C
------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value -
beginning of period $11.45 $10.70 $ 9.40 $ 9.92 $13.35 $13.22 $12.30
------ ------ ------ ------ ------ ------ ------
Income from investment
operations<F6> -
Net investment income $ 0.91 $ 0.82 $ 0.75 $ 0.78 $ 0.56 $ 0.07 $ 0.50
Net realized and
unrealized gain (loss)
on investments 1.86 2.35 1.94 (0.51) (1.19) 0.06 (1.35)
------ ------ ------ ------ ------ ------ ------
Total from investment
operations $ 2.77 $ 3.17 $ 2.69 $ 0.27 $ (0.63) $ 0.13 $(0.85)
------ ------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders -
From net investment
income $(0.90) $(0.82) $(0.74) $(0.79) $(1.11) $ -- $(0.14)
From net realized
gain on investments (1.40) (1.52) (0.65) -- (0.29) -- --
From paid-in capital (0.05) (0.08) -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders $(2.35) $(2.42) $(1.39) $(0.79) $(1.40) $ -- $(0.14)
------ ------ ------ ------ ------ ------ ------
Net asset value -
end of period $11.87 $11.45 $10.70 $ 9.40 $11.32 $13.35 $11.31
------ ------ ------ ------ ------ ------ ------
Total return<F5> 23.29% 29.36% 28.72% 2.36% (5.39)% 4.32%<F3> (6.92)%
Ratios (to average net assets)/Supplemental data:
Expenses 1.13% 1.17% 1.43% 1.40% 2.38% 2.48%<F3> 2.32%<F3>
Net investment income 7.54% 6.57% 7.45% 7.98% 4.81% 4.72%<F3> 5.06%<F3>
Portfolio turnover<F4> 378% 371% 307% 135% 358% 179%<F3> 358%
Net assets at end of
period (000 omitted) $182,738 $142,183 $69,581 $35,486 $73,458 $24,590 $8,687
<FN>
<F1> For the period from the commencement of offering of Class B shares,
September 7, 1993 to November 30, 1993.
<F2> For the period from the commencement of offering of Class C shares, January
3, 1994 to November 30, 1994.
<F3> Annualized.
<F4> The portfolio turnover for 1985 and subsequent years includes portfolio
activity applicable to U.S. government securities, while the preceding
years do not.
<F5> Total returns for Class A shares do not include the applicable sales charge
(except for reinvested dividends prior to October 1, 1989). If the charge
had been included, the results would have been lower.
<F6> Per share data for the year ended November 30, 1994 is based on average
shares outstanding.
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS World Governments Fund (the Fund) is a non-diversified series of MFS(R)
Series Trust VII (the Trust). The Trust is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended, as
an open-end management investment company.
(2) Significant Accounting Policies
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues and forward contracts, are
valued on the basis of valuations furnished by dealers or by a pricing service
with consideration to factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in 60
days or less, are valued at amortized cost, which approximates value. Non-U.S.
dollar denominated short-term obligations are valued at amortized cost as
calculated in the base currency and translated into U.S. dollars at the closing
daily exchange rate. Futures contracts, options and options on futures contracts
listed on commodities exchanges are valued at closing settlement prices.
Over-the-counter options are valued by brokers through the use of a pricing
model which takes into account closing bond valuations, implied volatility and
short-term repurchase rates. Securities for which there are no such quotations
or valuations are valued at fair value as determined in good faith by or at the
direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments and income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Futures Contracts - The Fund may enter into financial futures contracts for the
delayed delivery of securities, currency or contracts based on financial indices
at a fixed price on a future date. In entering such contracts, the Fund is
required to deposit either in cash or securities an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received by
the Fund each day, depending on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes as
unrealized gains or losses by the Fund. The Fund's investment in financial
futures contracts is designed to hedge against anticipated future changes in
interest or exchange rates or securities prices. The Fund may also invest in
financial futures contracts for non-hedging purposes. Should interest or
exchange rates or securities prices move unexpectedly, the Fund may not achieve
the anticipated benefits of the financial futures contracts and may realize a
loss.
Security Loans - The Fund may lend its securities to member banks of the Federal
Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of securities
loaned. As with other extensions of credit, the Fund may bear the risk of delay
in recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending its
securities in the form of fees or from all or a portion of the income from
investment of the collateral. The Fund would also continue to earn income on the
securities loaned. At November 30, 1994, the Fund had no securities on loan.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to meet
the terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The Fund will enter into forward
contracts for hedging purposes as well as for non-hedging purposes. The forward
foreign currency exchange contracts are adjusted by the daily exchange rate of
the underlying currency and any gains or losses are recorded for financial
statement purposes as unrealized until the contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for both financial statement
and tax reporting purposes as required by federal income tax regulations.
Interest payments received in additional securities are recorded on the
ex-interest date in an amount equal to the value of the security on such date.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded
ratably by the Fund at a constant yield to maturity. Legal fees and other
related expenses incurred to preserve and protect the value of a security owned
are added to the cost of the security; other legal fees are expensed. Capital
infusions, which are generally non-recurring, incurred to protect or enhance the
value of high-yield debt securities, are reported as an addition to the cost
basis of the security. Costs that are incurred to negotiate the terms or
conditions of capital infusions or that are expected to result in a plan of
reorganization are considered workout expenses and are reported as realized
losses. Ongoing costs incurred to protect or enhance an investment, or costs
incurred to pursue other claims or legal actions, are reported as operating
expenses.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV. Foreign taxes have been provided for on interest
income earned on foreign investments in accordance with the applicable country's
tax rates and to the extent unrecoverable are recorded as a reduction of
investment income. Distributions to shareholders are recorded on the ex-dividend
date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended November 30, 1994, accumulated undistributed net
investment income was decreased by $16,249,582, accumulated net realized gain on
investments was increased by $54,865,987 and paid-in capital was decreased by
$38,616,405, primarily due to foreign currency transactions and a tax basis net
operating loss.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. Class B and Class C shares were first offered to the
public on September 7, 1993 and January 3, 1994, respectively. The three classes
of shares differ in their respective shareholder servicing agent, distribution
and service fees. Shareholders of each class also bear certain expenses that
pertain only to that particular class. All shareholders bear the common expenses
of the Fund pro rata based on the average daily net assets of each class,
without distinction between share classes. Dividends are declared separately for
each class. No class has preferential dividend rights; differences in per share
dividend rates are generally due to differences in separate class expenses,
including distribution and shareholder service fees.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee, computed daily and paid monthly at an effective annual rate of
0.90% of average daily net assets, amounted to $4,278,028 for the year ended
November 30, 1994.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all its independent Trustees. Included in Trustees' compensation is a net
periodic pension expense of $10,051 for the year ended November 30, 1994.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Distributor - FSI, a wholly owned subsidiary of MFS, as distributor, received
$245,666 as its portion of the sales charge on sales of Class A shares of the
Fund. The Trustees have adopted separate distribution plans for Class A, Class B
and Class C shares pursuant to Rule 12b-1 of the Investment Company Act of 1940
as follows:
The Class A Distribution Plan provides that the Fund will pay FSI up to 0.35% of
its average daily net assets attributable to Class A shares annually in order
that FSI may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with FSI of up to 0.25% per annum of
the Fund's average daily net assets attributable to Class A shares which are
attributable to that securities dealer, a distribution fee to FSI of up to 0.10%
per annum of the Fund's average daily net assets attributable to Class A shares,
commissions to dealers and payments to FSI wholesalers for sales at or above a
certain dollar level, and other such distribution-related expenses that are
approved by the Fund. FSI is currently waiving the 0.10% distribution fee which
amounted to $406,677 for the year ended November 30, 1994. Fees incurred under
the distribution plan during the year ended November 30, 1994 were 0.25% of
average daily net assets attributable to Class A shares on an annualized basis,
net of waiver, and amounted to $1,022,465 (of which FSI retained $142,879).
The Class B and Class C Distribution Plans provide that the Fund will pay FSI a
monthly distribution fee, equal to 0.75% per annum, and a quarterly service fee
of up to 0.25% per annum, of the Fund's average daily net assets attributable to
Class B and Class C shares. FSI will pay to securities dealers that enter into a
sales agreement with FSI, all or a portion of the service fee attributable to
Class B and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended to
be additional consideration for services rendered by the dealer with respect to
Class B or Class C shares. Fees incurred under the distribution plans during the
year ended November 30, 1994 were 1.00% of average daily net assets attributable
to Class B and Class C shares on an annualized basis and amounted to $607,003
and $63,031, respectively (of which FSI retained $5,953 and $6,407 for Class B
and Class C shares, respectively).
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a share
redemption within twelve months following the share purchase. A contingent
deferred sales charge is imposed on shareholder redemptions of Class B shares in
the event of a shareholder redemption within six years of purchase. FSI receives
all contingent deferred sales charges. Contingent deferred sales charges imposed
during the year ended November 30, 1994 were $10,087 and $107,170 for Class A
and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earned
$605,730, $133,541 and $9,455 for Class A, Class B and Class C shares,
respectively, for its services as shareholder servicing agent. The fee is
calculated as a percentage of the average daily net assets of each class of
shares at an effective annual rate of up to 0.15%, up to 0.22% and up to 0.15%
attributable to Class A, Class B and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
Purchases Sales
------------------------------------------------------------------------------
U.S. government securities $ 360,427,021 $ 237,728,461
-------------- --------------
Investments (non-U.S. government securities) $1,098,550,347 $1,185,190,726
-------------- --------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $ 461,147,549
-------------
Gross unrealized depreciation $ (7,881,141)
Gross unrealized appreciation 2,537,005
-------------
Net unrealized depreciation $ (5,344,136)
-------------
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares 1994 1993<F1>
-------------------------------- ----------------------------------
Year Ended November 30, Shares Amount Shares Amount
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 6,994,122 $ 83,202,907 9,265,108 $116,419,994
Shares issued to shareholders in
reinvestment of distributions 2,765,118 33,750,055 -- --
Shares reacquired (10,416,982) (120,789,728) (5,699,782) (70,911,858)
----------- ------------- ---------- ------------
Net increase (decrease)
(657,742) $ (3,836,766) 3,565,326 $ 45,508,136
----------- ------------- ---------- ------------
<FN>
<F1> For the eleven months ended November 30, 1993.
<CAPTION>
Class B Shares 1994 1993<F2>
-------------------------------- ----------------------------------
Year Ended November 30, Shares Amount Shares Amount
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 7,078,760 $ 83,400,018 2,020,202 $ 26,810,016
Shares issued to shareholders in
reinvestment of distributions 275,106 3,329,286 -- --
Shares reacquired (2,704,874) (30,935,821) (178,385) (2,351,684)
----------- ------------- ---------- ------------
Net increase 4,648,992 $ 55,793,483 1,841,817 $ 24,458,332
----------- ------------- ---------- ------------
<FN>
<F2> For the period from the commencement of offering of Class B shares,
September 7, 1993 to November 30, 1993.
<CAPTION>
Class C Shares 1994<F3>
--------------------------------
Period Ended November 30, Shares Amount
-----------------------------------------------------------------------
<S> <C> <C>
Shares sold 1,159,179 $ 13,450,776
Shares issued to shareholders in
reinvestment of distributions 4,578 50,906
Shares reacquired (395,966) (4,446,535)
----------- -------------
Net increase 767,791 $ 9,055,147
----------- -------------
<FN>
<F3> For the period from the commencement of offering of Class C shares, January
3, 1994 to November 30, 1994.
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS, or an affiliate of MFS, in an unsecured line of credit
with a bank which permits borrowings up to $300 million, collectively.
Borrowings may be made to temporarily finance the acquisition of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended November 30, 1994 was $7,421.
(7) Financial Instruments
The Fund regularly trades financial instruments with off-balance sheet risk in
the normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options, forward foreign currency exchange
contracts and indexed securities. The notional or contractual amounts of these
instruments represent the investment the Fund has in particular classes of
financial instruments and does not necessarily represent the amounts potentially
subject to risk. The measurement of the risks associated with these instruments
is meaningful only when all related and offsetting transactions are considered.
A summary of obligations under these financial instruments at November 30, 1994,
is as follows:
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
<TABLE>
Written Option Transactions
<CAPTION>
1994 Calls 1994 Puts
--------------------------------- -----------------------------------
Principal Amount Principal Amount
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OUTSTANDING, BEGINNING OF PERIOD -
Australian Dollars 10,529 $ 75,286 10,529 $ 71,600
British Pounds/Deutsche Marks -- -- 13,920 312,023
Canadian Dollars -- -- 28,837 178,110
Deutsche Marks 38,074 420,336 91,489 572,371
Deutsche Marks/Italian Lire 20,354 131,781 -- --
Japanese Yen 5,158,091 718,451 9,960,000 1,146,269
Swedish Kronor/Deutsche Marks -- -- 291,137 284,361
Swiss Francs 73,062 1,140,752 -- --
Options written -
Australian Dollars 34,966 158,936 19,200 116,191
Canadian Dollars 13,000 53,300 26,696 175,455
Deutsche Marks 654,106 5,658,379 599,505 4,106,617
Deutsche Marks/British Pounds 31,177 199,293 -- --
Italian Lire -- -- 6,270,993 30,776
Italian Lire/Deutsche Marks 19,853,468 33,346 60,064,548 222,710
Japanese Yen 5,922,196 975,972 39,593,433 5,948,782
Japanese Yen/Deutsche Marks 4,378,032 1,006,947 -- --
Spanish Pesetas/Deutsche Marks -- -- 3,115,513 223,281
Swedish Kronor/Deutsche Marks 57,691 43,565 251,010 266,906
Swiss Francs/Deutsche Marks 21,051 88,635 -- --
Options terminated in closing transactions -
Australian Dollars (8,835) (62,781) -- --
Canadian Dollars -- -- (13,000) (103,998)
Deutsche Marks (117,714) (823,995) (361,571) (3,492,098)
Deutsche Marks/British Pounds (31,177) (199,293) -- --
Italian Lire -- -- (6,270,993) (30,776)
Italian Lire/Deutsche Marks -- -- (26,181,395) (130,220)
Japanese Yen (4,494,849) (620,307) (39,766,330) (5,548,909)
Japanese Yen/Deutsche Marks (4,378,032) (1,006,947) -- --
Spanish Pesetas/Deutsche Marks -- -- (3,115,513) (223,281)
Swedish Kronor/Deutsche Marks (57,691) (43,565) -- --
Options exercised -
Australian Dollars (17,460) (116,180) (19,200) (116,191)
Deutsche Marks (276,336) (1,473,720) (41,242) (276,319)
Italian Lire/Deutsche Marks -- -- (20,052,003) (33,987)
Japanese Yen -- -- (3,204,324) (904,398)
Swedish Kronor/Deutsche Marks -- -- (191,955) (238,747)
Options expired -
Australian Dollars (19,200) (55,261) (10,529) (71,600)
British Pounds/Deutsche Marks -- -- (13,920) (312,023)
Canadian Dollars (13,000) (53,300) (28,837) (178,110)
Deutsche Marks (150,479) (1,905,923) (288,181) (910,571)
Deutsche Marks/Italian Lire (20,354) (131,781) -- --
Italian Lire/Deutsche Marks (19,853,468) (33,346) (13,831,150) (58,503)
Japanese Yen (3,054,590) (540,544) (4,303,779) (396,816)
Swedish Kronor/Deutsche Marks -- -- (350,192) (312,520)
Swiss Francs (73,062) (1,140,752) -- --
------------ ------------
OUTSTANDING, END OF PERIOD -
Canadian Dollars -- $ -- 13,696 $ 71,457
Deutsche Marks 147,651 1,875,077 -- --
Japanese Yen 3,530,848 533,572 2,279,000 244,928
Swiss Francs/Deutsche Marks 21,051 88,635 -- --
------------ ------------
$ 2,497,284 $ 316,385
------------ ------------
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
At November 30, 1994, the Fund had sufficient cash and/or securities at least
equal to the value of the written options.
<TABLE>
Forward Foreign Currency Exchange Contracts
<CAPTION>
Net Unrealized
Contracts to Contracts Appreciation
Settlement Date Deliver/Receive In Exchange for at Value (Depreciation)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 12/19/94 - 2/21/95 AUD 17,113,483 $ 12,814,428 $ 13,101,090 $ (286,662)
1/23/95 CAD 13,606,406 9,911,066 9,889,749 21,317
1/12/95 CHF 5,142,224 3,984,367 3,880,369 103,998
12/02/94 - 2/21/95 DEM 887,251,611 578,030,923 565,463,093 12,567,830
1/03/95 DKK 78,683,048 13,363,289 12,793,548 569,741
12/22/94 - 1/31/95 ESP 2,384,420,379 18,590,655 18,167,571 423,084
12/05/94 - 5/03/95 FRF 316,030,041 60,093,784 58,750,877 1,342,907
12/30/94 - 1/18/95 GBP 23,625,496 37,210,212 36,980,432 229,780
12/02/94 - 3/08/95 IEP 28,090,595 43,995,642 43,132,017 863,625
12/06/94 - 2/16/95 ITL 17,345,407,530 10,984,595 10,682,163 302,432
2/10/95 JPY 1,443,232,870 14,787,830 14,697,884 89,946
12/15/94 - 2/22/95 NLG 67,642,858 38,715,614 38,486,677 228,937
12/09/94 - 12/20/94 SEK 180,674,359 23,450,500 23,938,275 (487,775)
-------------- ------------ ------------
$ 865,932,905 $849,963,745 $ 15,969,160
-------------- ------------ ------------
Purchases 1/23/95 CAD 18,539,520 $ 13,711,718 $ 13,475,357 $ (236,361)
2/01/95 CHF 13,550,813 10,849,330 10,237,260 (612,070)
12/02/94 - 3/20/95 DEM 1,127,239,524 737,243,985 718,460,399 (18,783,586)
12/19/94 DKK 34,479,550 5,509,852 5,605,272 95,420
12/05/94 - 5/02/95 FRF 181,159,661 34,624,504 33,667,978 (956,526)
2/01/95 - 2/21/95 GBP 21,572,368 34,870,063 33,762,370 (1,107,693)
12/02/94 - 12/30/94 IEP 13,323,864 20,461,318 20,453,076 (8,242)
12/06/94 - 2/16/95 ITL 43,113,959,545 27,218,622 26,564,713 (653,909)
1/24/95 - 2/14/95 JPY 9,797,377,159 101,421,519 99,743,130 (1,678,389)
12/09/94 - 2/06/95 SEK 172,518,686 23,372,146 22,822,321 (549,825)
-------------- ------------ ------------
$1,009,283,057 $984,791,876 $(24,491,181)
-------------- ------------ ------------
</TABLE>
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts, excluded from above,
amounted to a net receivable of $6,497,078 at November 30, 1994.
At November 30, 1994, the Fund had sufficient cash and/or securities to cover
any commitments under these contracts.
The Fund also invests in indexed securities whose value may be linked to foreign
currencies, interest rates, commodities, indices or other financial indicators.
Indexed securities are fixed-income securities whose proceeds at maturity
(principal-indexed securities) or interest rates (coupon-indexed securities)
rise and fall according to the change in one or more specified underlying
instruments. Indexed securities may be more volatile than the underlying
instrument itself.
The following is a summary of such securities held at November 30, 1994:
<TABLE>
<CAPTION>
Principal Amount Unrealized
Description Index (000 Omitted) Value Depreciation
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finnish Export Ltd., Principal Linked 3 year Finnish swap rate FIM 30,212 $5,028,512 $(323,109)
Notes, 5.5s, 1995
Sallie Mae, Swedish Index Notes, 0s, 1995 1 year Swedish swap rate SEK 7,350 7,274,295 (62,705)
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees of MFS Series Trust VII and Shareholders of
MFS World Governments Fund:
We have audited the accompanying statement of assets and liabilities of MFS
World Governments Fund, including the portfolio of investments, as of November
30, 1994, and the related statements of operations and changes in net assets for
the year then ended and financial highlights for the year then ended for Class A
and Class B shares, and for the period from January 3, 1994 (commencement of
offering) to November 30, 1994 for Class C shares. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The financial statements of MFS World
Governments Fund for the period from January 1, 1993 to November 30, 1993 and
the financial highlights for the period from January 1, 1993 to November 30,
1993 and for each of the nine years in the period ended December 31, 1992 for
Class A shares, and for the period from September 7, 1993 (commencement of
offering) to November 30, 1993 for Class B shares, were audited by other
auditors whose report dated January 19, 1994 expressed an unqualified opinion on
those statements and financial highlights.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of November 30, 1994, by
correspondence with the custodian and brokers, or other appropriate auditing
procedures where replies from brokers were not received. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
World Governments Fund as of November 30, 1994, and the results of its
operations, the changes in its net assets, and the financial highlights for the
year then ended for Class A shares and Class B shares, and for the period
January 3, 1994 to November 30, 1994 for Class C shares, in conformity with
generally accepted accounting principles.
Boston, Massachusetts
January 9, 1995
ERNST & YOUNG LLP
--------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE> 67
</TABLE>
<TABLE>
<CAPTION>
MFS[REGISTERED TRADEMARK] VALUE FUND PROSPECTUS
April 1, 1995
(A member of the MFS Family of Funds) Class A Shares of Beneficial Interest
Class B Shares of Beneficial Interest
--------------------------------------------------------------------------------
PAGE
------
<S> <C>
1. Expense Summary....................................................... 2
2. The Fund.............................................................. 3
3. Condensed Financial Information....................................... 4
4. Investment Objective and Policies..................................... 6
5. Management of the Fund................................................ 11
6. Information Concerning Shares of the Fund............................. 12
Purchases......................................................... 12
Exchanges......................................................... 18
Redemptions and Repurchases....................................... 18
Distribution Plans................................................ 20
Distributions..................................................... 21
Tax Status........................................................ 22
Net Asset Value................................................... 22
Description of Shares, Voting Rights and Liabilities.............. 22
Performance Information........................................... 23
7. Shareholder Services.................................................. 23
Appendix.............................................................. 26
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS VALUE FUND 500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
The investment objective of MFS Value Fund ("the Fund") is to seek capital
appreciation. The Fund is a diversified portfolio of MFS Series Trust VII (the
"Trust"). THE FUND IS DESIGNED FOR INVESTORS WHO UNDERSTAND AND ARE WILLING TO
ACCEPT THE RISKS INHERENT IN SEEKING CAPITAL APPRECIATION. See "Investment
Objective and Policies". The minimum initial investment generally is $1,000 per
account (see "Purchases").
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.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
This Prospectus sets forth concisely the information concerning the Trust and
the Fund that a prospective investor ought to know before investing. The Trust,
on behalf of the Fund, has filed with the Securities and Exchange Commission
(the "SEC") a Statement of Additional Information, dated April 1, 1995, which
contains more detailed information about the Trust and the Fund and is
incorporated into this Prospectus by reference. See page 25 for a further
description of the information set forth in the Statement of Additional
Information. A copy of the Statement of Additional Information may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number).
<PAGE> 68
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B
------- -------
<S> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund Shares (as
a percentage of offering price)..................................... 5.75% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)............... See Below(1) 4.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees...................................................... 0.75% 0.75%
Rule 12b-1 Fees (after applicable fee reduction)..................... 0.23%(2) 1.00%(3)
Other Expenses....................................................... 0.37% 0.44%
Total Operating Expenses (after applicable fee reduction)............ 1.35%(4) 2.19%
<FN>
---------------
(1) Purchases of $1 million or more 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 "Purchases").
(2) The Fund has adopted a Distribution Plan for its Class A shares in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to Class A
shares (see "Distribution Plans"). Currently, 0.10% of the
distribution/service fee is being waived. After a substantial period of
time, distribution expenses paid under this Plan, together with the initial
sales charge, may total more than the maximum sales charge that would have
been permissible if imposed entirely as an initial sales charge.
(3) The Fund has adopted a Distribution Plan for its Class B shares in
accordance with Rule 12b-1 under the 1940 Act, which provides that it will
pay distribution/service fees aggregating up to 1.00% per annum of the
average daily net assets attributable to the Class B shares (see
"Distribution Plans"). After a substantial period of time, distribution
expenses paid under this Plan, together with any CDSC, may total more than
the maximum sales charge that would have been permissible if imposed
entirely as an initial sales charge.
(4) Absent expenses reduction, "Total Operating Expenses" would be 1.45%.
</TABLE>
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 indicated):
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B
------ ------- ------------------
(1)
<S> <C> <C> <C>
1 year................................... $ 70 $ 62 $ 22
3 years.................................. 98 99 69
5 years.................................. 127 137 117
10 years.................................. 211 231(2) 231(2)
<FN>
---------------
(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.
</TABLE>
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. More complete descriptions of the following
expenses are set forth in the following sections: (i) varying sales charges on
share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii)
management fees -- "Investment Adviser"; and (iv) Rule 12b-1 (i.e., distribution
plan) fees -- "Distribution Plans".
2
<PAGE> 69
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
2. THE FUND
The Fund is a diversified portfolio of the Trust, an open-end management
investment company which was organized in 1981 as a business trust under the
laws of The Commonwealth of Massachusetts. The Trust presently consists of two
series, each of which represents a portfolio with separate investment policies.
Shares of the Fund are continuously sold to the public and the Fund buys
securities (stocks, bonds and other instruments) for its portfolio. Two classes
of shares of the Fund are currently offered to the general public. Class A
shares are offered at net asset value plus an initial sales charge (or a CDSC in
the case of certain purchases of $1 million or more) and are subject to a
Distribution Plan, providing for an annual distribution fee and service fee.
Class B shares are offered at net asset value without an initial sales charge
but are subject to a CDSC and a Distribution Plan providing for an annual
distribution fee and service fee which are greater than the Class A distribution
fee and service fee. Class B shares will convert to Class A shares approximately
eight years after purchase.
The Trust's 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 Fund are responsible for its operations. The Adviser manages the
portfolio daily in accordance with the Fund's investment objective and policies.
The selection of investments and the way they are managed depends on the
conditions and trends in the economy and the financial marketplaces. The Trust
also offers to buy back (redeem) its shares from its shareholders at any time at
net asset value, less any applicable CDSC.
3
<PAGE> 70
3. CONDENSED FINANCIAL INFORMATION
The following information should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the Statement of Additional Information in
reliance upon the report of Deloitte & Touche LLP, independent certified public
accountants, as experts in accounting and auditing.
FINANCIAL HIGHLIGHTS
--------------------
CLASS A AND CLASS B SHARES
--------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED NOVEMBER 30, NOVEMBER 30, YEAR ENDED MAY 31,
-------------------------------------------- ------------ ----------------------------
1994 1993 1992 1991 1990 1990 1989
-------- -------- -------- -------- ------------ ------------ ------------
CLASS A
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH
PERIOD):
Net asset value -- beginning of
period........................... $ 10.82 $ 10.17 $ 8.73 $ 7.46 $ 8.99 $ 10.52 $ 8.70
-------- -------- -------- -------- ------------ ------------ ------------
Income from investment
operations++ --
Net investment income
(loss)sec.................... $ (0.01) $ 0.02 $ -- $ 0.14 $ 0.09 $ 0.33 $ 0.21
Net realized and unrealized
gain (loss) on investments... 0.26 1.96 2.03 1.21 (1.38) 0.17 2.17
-------- -------- -------- -------- ------------ ------------ ------------
Total from investment
operations............... $ 0.25 $ 1.98 $ 2.03 $ 1.35 $ (1.29) $ 0.50 $ 2.38
-------- -------- -------- -------- ------------ ------------ ------------
Less distributions declared to
shareholders --
From net investment income....... $ (0.03) $ -- $ (0.07) $ (0.08) $ (0.11) $ (0.34) $ (0.17)
From net realized gain on
investments.................... (1.60) (1.33) (0.52) -- (0.05) (1.69) (0.39)
From paid-in capital............. -- -- -- -- (0.08) -- --
-------- -------- -------- -------- ------------ ------------ ------------
Total distributions declared to
shareholders................. $ (1.63) $ (1.33) $ (0.59) $ (0.08) $ (0.24) $ (2.03) $ (0.56)
-------- -------- -------- -------- ------------ ------------ ------------
Net asset value -- end of period... $ 9.44 $ 10.82 $ 10.17 $ 8.73 $ 7.46 $ 8.99 $ 10.52
======== ======== ======== ======== ============ ======== ========
TOTAL RETURN**..................... 1.92% 22.10% 24.60% 18.26% (29.48)%+ 5.13% 28.47%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA[SEC].:
Expenses......................... 1.37% 1.42% 1.53% 1.50% 1.51%+ 1.26% 1.41%
Net investment income (loss)..... (0.05)% 0.09% 0.00% 1.65% 2.30%+ 3.38% 2.29%
PORTFOLIO TURNOVER................. 91% 95% 111% 132% 36% 88% 80%
Net assets at end of period (000
omitted)......................... $141,790 $132,207 $112,958 $104,600 $100,398 $ 125,191 $ 133,219
---------------
<FN>
+Annualized.
++Per share data for the period subsequent to November 30, 1993 is based on average shares outstanding.
**Total returns for Class A do not include the sales charge (except for reinvested dividends prior to October 1, 1989). If the
charge had been included, the results would have been lower.
[sec]The distributor did not impose a portion of its Class A distribution fee for the periods indicated. If this fee had been
incurred by the Fund the net investment income (loss) per share and the ratios, would have been:
Net investment income (loss)..... $ (0.03) $ 0.02 -- -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses......................... 1.47% 1.45% -- -- -- -- --
Net investment income (loss)..... (0.15)% 0.07% -- -- -- -- --
</TABLE>
4
<PAGE> 71
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, YEAR ENDED
---------------------------------------------- NOVEMBER 30,
1988 1987 1986 1985 1994 1993**
-------- -------- -------- ------- ------------ ------
CLASS A CLASS B
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period........ $ 9.60 $ 9.81 $ 7.59 $ 6.45 $ 10.79 $ 10.61
-------- -------- -------- ------- ------------ ------
Income from investment operations++ --
Net investment income (loss).............. $ 0.10 $ 0.04 $ 0.03 $ 0.12 $ (0.09) $ (0.01)
Net realized and unrealized gain (loss) on
investments............................. (0.86) 1.60 2.79 1.16 0.27 0.19
-------- -------- -------- ------- ------------ ------
Total from investment operations...... $ (0.76) $ 1.64 $ 2.82 $ 1.28 $ 0.18 $ 0.18
-------- -------- -------- ------- ------------ ------
Less distributions declared to shareholders --
From net investment income.................. $ (0.03) $ (0.04) $ (0.04) $ (0.14) $ -- $ --
In excess of net investment income.......... -- -- -- -- (0.03) --
From net realized gain on investments....... (0.11) (1.81) (0.53) -- (1.60) --
From paid-in capital........................ -- -- (0.03) -- -- --
-------- -------- -------- ------- ------------ ------
Total distributions declared to
shareholders............................ $ (0.14) $ (1.85) $ (0.60) $ (0.14) $ (1.63) $ --
-------- -------- -------- ------- ------------ ------
Net asset value -- end of period.............. $ 8.70 $ 9.60 $ 9.81 $ 7.59 $ 9.34 $ 10.79
======== ======== ======== ======= ============ ======
TOTAL RETURN**................................ (7.63)% 17.95% 37.15% 20.04% 1.15% 1.70%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL
DATA:
Expenses.................................... 1.33% 1.31% 1.39% 1.25% 2.25% 2.46%+
Net investment income (loss)................ 1.12% 0.38% 0.44% 1.54% (0.96)% (1.37)%+
PORTFOLIO TURNOVER............................ 99% 135% 156% 125% 91% 95%
Net assets at end of period (000 omitted)..... $116,218 $148,227 $128,135 $92,044 $ 17,189 $ 1,097
---------------
<FN>
**For the period from the commencement of offering of Class B shares, September 7, 1993 to November 30, 1993.
+Annualized.
++Per share data for the period subsequent to November 30, 1993 is based on average shares outstanding.
**Total returns for Class A do not include the sales charge (except for reinvested dividends prior to October 1, 1989). If the
charge had been included, the results would have been lower.
</TABLE>
5
<PAGE> 72
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The Fund's investment objective is to seek capital
appreciation. Dividend income, if any, is a consideration incidental to the
Fund's objective of capital appreciation. Any investment involves risk and there
can be no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES -- While the Fund's policy is to invest primarily in common
stocks, it may seek appreciation in other types of securities such as fixed
income securities (which may be unrated), convertible bonds, convertible
preferred stocks and warrants when relative values make such purchases appear
attractive either as individual issues or as types of securities in certain
economic environments. The Fund may invest in fixed income securities rated
lower than "investment grade" (rated at least Baa by Moody's Investors Service,
Inc. ("Moody's"), BBB by Standard & Poor's Ratings Group ("S&P") or Fitch
Investors Service, Inc. ("Fitch")) or in comparable unrated securities, when, in
the opinion of the Adviser, such an investment presents a greater opportunity
for appreciation with comparable risk to an investment in "investment grade"
securities. Under normal market conditions, the Fund will invest not more than
25% of its assets in these securities. Such lower rated or unrated fixed income
securities may have speculative risk characteristics as described below under
"Risks of Investing in Lower Rated Bonds". For a description of the rating
categories discussed above, see the Appendix to this Prospectus. Fixed income
securities that the Fund may invest in also include zero coupon bonds, deferred
interest bonds and bonds on which the interest is payable in kind ("PIK bonds").
See the Statement of Additional Information for further information regarding
these securities. There is no formula as to the percentage of assets that may be
invested in any one type of security. Cash, commercial paper, short-term
obligations, repurchase agreements or debt securities are held to provide a
reserve for future purchases of common stock or other securities and may also be
held as a defensive measure when the Adviser determines security markets to be
overvalued.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933 (the "1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a continuing
review of the trading markets for a specific Rule 144A security, whether such
security is illiquid and thus subject to the Fund's limitations on investing not
more than 15% of its net assets in illiquid investments, or liquid and thus not
subject to such limitation. The Board of Trustees has adopted guidelines and
delegated to MFS the daily function of determining and monitoring the liquidity
of Rule 144A securities. The Board, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Board will carefully
monitor the Fund's investments in Rule 144A securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in 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
may not be able to sell these securities when the Adviser wishes to do so, or
may have to sell them at less that 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.
FOREIGN SECURITIES: The Fund may invest up to 50% (and expects generally to
invest between 10% to 50%) of its total assets in foreign securities which are
not traded on a U.S. exchange (not including American Depositary Receipts).
Investing in securities of foreign issuers generally involves risks not
ordinarily associated with investing in securities of domestic issuers. These
include changes in currency rates, exchange control regulations, governmental
administration or economic or monetary policy (in the United States or abroad)
or circumstances in dealings between nations. Costs may be incurred in
connection with conversions between various currencies. Special considerations
may also include more limited information about foreign issuers, higher
brokerage costs, different accounting standards and thinner trading markets.
Foreign securities markets may also be less liquid, more volatile and less
subject to government supervision than in the United States. Investments in
foreign countries could be affected by other factors including expropriation,
confiscatory taxation and potential difficulties in enforcing contractual
obligations and could be subject to extended settlement periods. The Fund may
hold foreign currency received in connection with investments in foreign
securities when, in the judgment of the Adviser, it would be beneficial to
convert such currency into U.S.
6
<PAGE> 73
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. See the Statement of Additional Information for further
discussion of foreign securities and the holding of foreign currency, as well as
the associated risks.
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, Ecuador, Mexico, Nigeria, the Philippines, Poland, Uruguay and
Venezuela. Brady Bonds have been issued only recently, and for that reason do
not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the U.S.
dollar) and are actively traded in over-the-counter secondary markets. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed-rate bonds or
floating-rate bonds, are generally collateralized in full as to principal by
U.S. Treasury zero coupon bonds having the same maturity as the bonds. Brady
Bonds are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
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 ADR's 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 exchange rates and more limited information about foreign issuers.
LENDING OF SECURITIES: The Fund may make loans of its portfolio securities. Such
loans will usually be made only to member banks of the Federal Reserve System
and member firms (and subsidiaries thereof) of the New York Stock Exchange (the
"Exchange") and would be required to be secured continuously by collateral
consisting of cash, cash equivalents or U.S. Government securities maintained on
a current basis at an amount at least equal to the market value of the
securities loaned. The Fund would continue to collect the equivalent of the
interest on the securities loaned and would also receive either interest
(through investment of cash collateral) or a fee (if the collateral is U.S.
Government Securities).
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn additional income on available cash or as a temporary defensive measure.
Under a repurchase agreement, the Fund acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Fund's right to liquidate the securities
may be restricted (during which time the value of the securities could decline).
As discussed in the Statement of Additional Information, the Fund has adopted
certain procedures intended to minimize any risk.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion
of its assets in "loan participations." By purchasing a loan participation, 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 loan participations 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. Loan
participations and other direct investments may not be in the form of securities
or may be subject to
7
<PAGE> 74
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, the Fund may be unable to sell such investments
at an opportune time or may have to resell them at less than fair market value.
For a further discussion of loan participations and the risks related to
transactions therein, see the Statement of Additional Information.
"WHEN-ISSUED" SECURITIES: The Fund may purchase some securities on a "when
issued" or on a "forward delivery" basis, which means that the securities will
be delivered to the Fund at a future date usually beyond customary settlement
time. The commitment to purchase a security for which payment will be made on a
future date may be deemed a separate security. The Fund does not pay for the
securities until received, and does not start earning interest on the securities
until the contractual settlement date. In order to invest its assets
immediately, while awaiting delivery of securities purchased on such bases, the
Fund will normally invest in cash, short-term money market instruments and high
quality debt securities.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call options on
securities and purchase put and call options on securities. The Fund will write
such options for the purpose of increasing its return and/or to protect the
value of its portfolio. In particular, where the Fund writes an option which
expires unexercised or is closed out by the Fund at a profit, it will retain the
premium paid for the option, which will increase its gross income and will
offset in part the reduced value of a portfolio security in connection with
which the option may have been written or the increased cost of portfolio
securities to be acquired. In contrast, however, if the price of the security
underlying the option moves adversely to the Fund's position, the option may be
exercised and the Fund will be required to purchase or sell the security at a
disadvantageous price, resulting in losses which may only be partially offset by
the amount of the premium. The Fund may also write combinations of put and call
options on the same security, known as "straddles". Such transactions can
generate additional premium income but also present increased risk.
The Fund may purchase put or call options in anticipation of declines in the
value of portfolio securities or increases in the value of securities to be
acquired. In the event that such declines or increases occur, the Fund may be
able to offset the resulting adverse effect on its portfolio, in whole or in
part, through the options purchased. The risk assumed by the Fund in connection
with such transactions is limited to the amount of the premium and related
transaction costs associated with the option, although the Fund may be required
to forfeit such amounts in the event that the prices of securities underlying
the options do not move in the direction or to the extent anticipated.
The Fund may also enter into options on the yield "spread," or yield
differential, between two securities, a transaction referred to as a "yield
curve" option, for hedging and non-hedging (an effort to increase current
income) purposes. In contrast to other types of options, a yield curve option is
based on the difference between the yields of designated securities rather than
the actual prices of the individual securities, and is 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 written by the Fund will be covered as described
in the Statement of Additional Information. The trading of yield curve options
is subject to all the risks associated with trading other types of options, as
discussed below under "Risk Factors" and in the Statement of Additional
Information. In addition, such options present risks of loss even if the yield
on one of the underlying securities remains constant, if the spread moves in a
direction or to an extent which was not anticipated.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put options
and purchase call and put options on stock indices. The Fund may write options
on stock indices for the purpose of increasing its gross income and to protect
its portfolio against declines in the value of securities it owns or increases
in the value of securities to be acquired. When the Fund writes an option on a
stock index, and the value of the index moves adversely to the holder's
position, the option will not be exercised, and the Fund will either close out
the option at a profit or allow it to expire unexercised. The Fund will thereby
retain the amount of the premium, which will increase its gross income and
offset part of the reduced value of portfolio securities or the increased cost
of securities to be acquired. Such transactions, however, will constitute only
partial hedges against adverse price fluctuations, since any such fluctuations
will be offset only to the extent of the premium received by the Fund for the
writing of the option. In addition, if the value of an underlying index moves
adversely to the Fund's option position, the option may be exercised, and the
Fund will experience a loss which may only be partially offset by the amount of
the premium received.
8
<PAGE> 75
The Fund may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. The Fund's
possible loss in either case will be limited to the premium paid for the option,
plus related transaction costs.
OPTIONS ON FOREIGN CURRENCIES: The Fund may also purchase and write options on
foreign currencies ("Options on Foreign Currencies") for the purpose of
protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. As in the
case of other types 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 may 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 paid for
the option plus related transaction costs. The Fund may also choose to, or be
required to, receive delivery of the foreign currencies underlying 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. See "Investment Objectives and
Policies -- Foreign Securities" in the Statement of Additional Information for
information on the risks associated with holding foreign currency.
FUTURES CONTRACTS: The Fund may enter into stock index and foreign currency
futures contracts (collectively "Futures Contracts"). Such transactions will be
entered into for hedging purposes, in order to protect the Fund's current or
intended investments from the effects of changes in exchange rates or declines
in the stock market, as well as for non-hedging purposes to the extent permitted
by applicable law. The Fund will incur brokerage fees when it purchases and
sells Futures Contracts, and will be required to maintain margin deposits. In
addition, Futures Contracts entail risks. Although the Adviser believes that use
of such contracts will benefit the Fund, if its investment judgment about the
general direction of exchange rates or the stock market is incorrect, the Fund's
overall performance may be poorer than if it had not entered into any such
contract and the Fund may realize a loss. The Fund will not enter into any
Futures Contract if immediately thereafter the value of all such securities and
other obligations underlying all such Futures Contracts would exceed 50% of the
value of its total assets.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options on Futures
Contracts ("Options on Futures Contracts") in order to protect against declines
in the values of portfolio securities or against increases in the cost of
securities to be acquired. Purchases of Options on Futures Contracts may present
less risk in hedging the Fund's portfolio than the purchase or sale of the
underlying Futures Contracts since the potential loss is limited to the amount
of the premium plus related transaction costs, although it may be necessary to
exercise the option to realize any profit, which results in the establishment of
a futures position. The writing of Options on Futures Contracts, however, does
not present less risk than the trading of Futures Contracts and will constitute
only a partial hedge, up to the amount of the premium received. In addition, if
an option is exercised, the Fund may suffer a loss on the transaction. The Fund
may also purchase and write Options on Futures Contracts for non-hedging
purposes to the extent permitted by applicable law.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a fixed quantity of a foreign currency at
a future date ("Forward Contracts"). The Fund may enter into Forward Contracts
for hedging purposes as well as for non-hedging purposes (i.e., speculative
purposes). By entering into transactions in Forward Contracts, for hedging
purposes, the Fund may be required to forego the benefits of advantageous
changes in exchange rates and, in the case of Forward Contracts entered into for
non-hedging purposes, the Fund may sustain losses which will reduce its gross
income. Such transactions, therefore, could be considered speculative. Forward
Contracts are traded over-the-counter and not on organized commodities or
securities exchanges. As a result, Forward Contracts operate in a manner
distinct from exchange-traded instruments, and their use involves certain risks
beyond those associated with transactions in Futures Contracts or options traded
on exchanges. The Fund may choose to, or be required to, receive delivery of the
foreign currencies underlying Forward Contracts 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
9
<PAGE> 76
improve, the Fund may hold such currencies for an indefinite period of time. The
Fund may also enter into a Forward Contract on one currency 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
statements of the SEC and its staff regarding the use of Forward Contracts by
registered investment companies, which require use of segregated assets or
"cover", in connection with the purchase and sale of such contracts. See
"Investment Objective and Policies -- Foreign Securities" in the Statement of
Additional Information for information on the risks associated with holding
foreign currency.
RISK FACTORS
LOWER RATED BONDS: The Fund may invest in fixed income securities rated Baa by
Moody's or BBB by S&P or by Fitch 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 securities rated Ba or lower by Moody's or BB or
lower by S&P or by Fitch and comparable unrated securities (commonly known as
"junk bonds") to the extent described above. 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. However, since yields
vary over time, no specific level of income can ever be assured. These lower
rated high yielding fixed income securities generally tend to reflect economic
changes and short-term corporate and industry developments to a greater extent
than higher rated securities which react primarily to fluctuations in the
general level of interest rates. These lower rated fixed income securities are
also affected by changes in interest rates, the market's perception of their
credit quality, and the outlook for economic growth. 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. Changes in the value of securities subsequent to their acquisition
will not affect cash income or yield to maturity to the Fund but will be
reflected in the net asset value of shares of the Fund. The market for these
lower rated fixed income securities may be less liquid than the market for
investment grade fixed income securities, and judgment may at times play a
greater role in valuing these securities than in the case of investment grade
fixed income securities. See the Statement of Additional Information for more
information on lower rated securities.
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although the Fund will enter
into transactions in options, Futures Contracts, Options on Futures Contracts
and Options on Foreign Currencies in part for hedging purposes, such
transactions nevertheless involve certain 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 such instruments other than hedging purposes, to
the extent permitted by applicable law which involves greater risk. In
particular, such transactions may result in losses for the Fund which are not
offset by gains on other portfolio positions, thereby reducing gross income. In
addition, foreign currency markets may be extremely volatile from time to time.
There also can be no assurance that a liquid secondary market will exist for any
contract purchased or sold, and the Fund may be required to maintain a position
until exercise or expiration, which could result in losses. The Statement of
Additional Information contains a description of the nature and trading
mechanics of options, Futures Contracts, Options on Futures Contracts, Forward
Contracts and Options on Foreign Currencies, and includes a discussion of the
risks related to transactions therein.
10
<PAGE> 77
Transactions in 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 U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities underlying
options, Futures Contracts and Options on Futures Contracts traded by the Fund
will include both domestic and foreign securities.
PORTFOLIO TRADING: The Fund's portfolio is aggressively managed and therefore an
investment in shares of the Fund should not be considered to be a complete
investment program. Each prospective purchaser should take into account his
investment objectives as well as his other investments when considering the
purchase of shares of an investment company such as the Fund, which assumes
above average risk of loss. Portfolio changes are made without regard to the
length of time a security has been held, or whether a sale would result in a
profit or loss. Therefore, the rate of portfolio turnover is not a limiting
factor when changes are appropriate. A relatively high level of portfolio
activity may result in relatively substantial brokerage commissions and may also
result in taxes on realized capital gains to be borne by the Fund's
shareholders.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. (the "NASD"),
and such other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund and of the other investment company clients of MFD,
a factor in the selection of broker-dealers to execute the Fund's portfolio
transactions. 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 Statement of Additional
Information.
----------------------------------
The investment objective and policies described above are not fundamental and
may be changed without shareholder approval.
The Statement of Additional Information includes a discussion of other
investment policies and a listing of specific investment restrictions which
govern the Fund's investment policies. The specific investment restrictions
listed in the Statement of Additional Information may not be changed without
shareholder approval. See "Investment Restrictions" in the Statement of
Additional Information. The Fund's investment limitations, policies and rating
standards are adhered to at the time of purchase or utilization of assets; a
subsequent change in circumstances will not be considered to result in a
violation of policy.
5. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement, dated September 1, 1993, as amended. The Adviser provides
the Fund with overall investment advisory and administrative services, as well
as general office facilities. John Brennan, a Vice President of the Adviser, has
been the Fund's portfolio manager since September 1991. Mr. Brennan has been
employed by the Adviser since 1985. Subject to such policies as the Trustees may
determine, the Adviser makes investment decisions for the Fund. For its services
and facilities, the Adviser receives a management fee, computed and paid monthly
at the annual rate of 0.75% of the Fund's average daily net assets for its
then-current fiscal year. For the fiscal year ended November 30, 1994, MFS
received management fees of $1,141,475.
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)/Sun Life Series Trust, MFS
Institutional Trust, MFS Union Standard Trust, MFS Variable Insurance Trust, MFS
Municipal Income Trust, MFS Government Markets Income Trust, MFS Multimarket
Income Trust, MFS Intermediate Income Trust, MFS Charter Income Trust, MFS
Special Value Trust, Sun Growth Variable Annuity Fund, Inc. and seven variable
accounts, each of which is a registered investment company established by Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)") in
connection with the sale of Compass-2 and Compass-3 combination fixed/variable
annuity contracts. MFS and its wholly-owned subsidiary, MFS Asset Management,
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
Fund. Net assets under the management of the MFS organization were approximately
$34.5 billion on behalf of approximately 1.6 million investor
11
<PAGE> 78
accounts as of February 28, 1995. MFS is a subsidiary of Sun Life Assurance
Company of Canada (U.S.) which in turn is a subsidiary of Sun Life Assurance
Company of Canada ("Sun Life"). The Directors of MFS are A. Keith Brodkin,
Jeffrey L. Shames, John R. Gardner, John D. McNeil and Arnold D. Scott. Mr.
Brodkin is the Chairman, Mr. Shames is the President and Mr. Scott is the
Secretary and a Senior Executive Vice President of MFS. Messrs. McNeil and
Gardner are the Chairman and the President, respectively, of Sun Life. Sun Life,
a mutual life insurance company, is one of the largest international life
insurance companies and has been operating in the United States since 1895,
establishing a headquarters office here in 1973. The executive officers of MFS
report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman, President
and a Trustee of the Trust. Leslie J. Nanberg, Stephen C. Bryant, W. Thomas
London, Stephen E. Cavan, James O. Yost and James R. Bordewick, Jr., all of whom
are officers of MFS, are also officers of the Trust.
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. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and certain other services for the Fund.
6. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
securities dealer, certain banks and other financial institutions having selling
agreements with MFD. Non-securities dealer financial institutions will receive
transaction fees that are the same as commission fees to dealers. Securities
dealers and other financial institutions may also charge their customers fees
relating to investments in the Fund.
The Fund offers two classes of shares which bear sales charges and distribution
fees in different forms and amounts:
CLASS A SHARES: The Class A shares are offered at net asset value per share plus
an initial sales charge (or CDSC in the case of certain purchases of $1 million
or more) as follows:
<TABLE>
<CAPTION>
SALES CHARGE*
AS PERCENTAGE OF: DEALER ALLOWANCE
--------------------------------- AS A PERCENTAGE
NET AMOUNT OF OFFERING
AMOUNT OF PURCHASE OFFERING PRICE INVESTED PRICE
<S> <C> <C> <C>
Less than $50,000............................... 5.75% 6.10% 5.00%
$50,000 but 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**
---------------
<FN>
*Because of rounding in the calculation of offering price, actual sales charges
may be more or less than those calculated using the percentages above.
**A CDSC may apply in certain instances. MFD will pay a commission on purchases
of $1 million or more (see below).
</TABLE>
No sales charge is payable at the time of purchase of Class A shares on
investments of $1 million or more. However, a CDSC shall be imposed on such
investments in the event of a share redemption within 12 months following the
share purchase, at the rate of 1% of the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares.
In determining whether a CDSC on Class A shares is payable, and, if so, the
amount of the charge, it is assumed that shares not subject to the CDSC are the
first redeemed followed by other shares held for the longest period of time. All
investments made
12
<PAGE> 79
during a calendar month, regardless of when during the month the investment
occurred, will age one month on the last day of that month and each subsequent
month. Except as noted below, the CDSC on Class A shares, will be waived in the
case of: (i) exchanges (except that if the shares acquired by exchange were then
redeemed within 12 months of the initial purchase (other than in connection with
subsequent exchanges to other MFS Funds), the charge would not be waived); (ii)
distributions to participants from a retirement plan qualified under section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code") (a
"Retirement Plan"), due to: (a) a loan from the plan (repayments of loans,
however, will constitute new sales for purposes of assessing the CDSC); (b)
"financial hardship" of the participant in the plan, as that term is defined in
Treasury Regulations Section 1.401(k)-1(d)(2), as amended from time to time; or
(c) the death of a participant in such a plan; (iii) distributions from a 403(b)
plan or an Individual Retirement Account ("IRA") due to death, disability, or
attainment of age 59 1/2; (iv) tax-free returns of excess contributions to an
IRA; (v) distributions by other employee benefit plans to pay benefits and (vi)
certain involuntary redemptions and redemptions in connection with certain
automatic withdrawals from a qualified retirement plan. The CDSC on Class A
shares will not be waived, however, if the Retirement Plan withdraws from the
Fund, except that if the Retirement Plan has invested its assets in Class A
shares of one or more of the MFS funds for more than 10 years from the later to
occur of (i) January 1, 1993 or (ii) the date such Retirement Plan first invests
its assets in Class A shares of one or more of the MFS Funds, the CDSC on Class
A shares will be waived in the case of a redemption of all of the Retirement
Plan's shares (including shares of any other class) in all MFS Funds (i.e., all
the assets of the Retirement Plan invested in the MFS Funds are withdrawn),
unless, immediately prior to the redemption, the aggregate amount invested by
the Retirement Plan in Class A shares of the MFS Funds (excluding the
reinvestment of distributions) during the prior four-year period equals 50% or
more of the total value of the Retirement Plan's assets in the MFS Funds, in
which case the CDSC will not be waived. The CDSC on Class A shares will be
waived upon redemption by a Retirement Plan where the redemption proceeds are
used to pay expenses of the Retirement Plan or certain expenses of participants
under the Retirement Plan (e.g., participant account fees), provided that the
Retirement Plan's sponsor subscribes to the MFS Fundamental 401(k) Plan(sm) or
another similar recordkeeping system made available by the Shareholder Servicing
Agent. The CDSC on Class A shares will be waived upon the transfer of
registration from shares held by a Retirement Plan through a single account
maintained by the Shareholder Servicing Agent to multiple Class A share accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants in the Retirement Plan, provided that the Retirement Plan's sponsor
subscribes to the MFS Fundamental 401(k) Plan(sm) or another similar
recordkeeping system made available by the Shareholder Servicing Agent. Any
applicable CDSC will be deferred upon an exchange of Class A shares of the Fund
for units of participation of the MFS Fixed Fund (a bank collective investment
fund) (the "Units"), and the CDSC will be deducted from the redemption proceeds
when such Units are subsequently redeemed (assuming the CDSC is then payable).
No CDSC will be assessed upon an exchange of Units for Class A shares of the
Fund. For purposes of calculating the CDSC payable upon redemption of Class A
shares of the Fund or Units acquired pursuant to one or more exchanges, the
period during which the Units are held will be aggregated with the period during
which the Class A shares are held. MFD shall receive all CDSCs which it intends
to apply for the benefit of the Fund.
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 5% 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 MFS Funds and other funds
owned or being purchased, the existence of an agreement to purchase additional
shares during a 13-month period (or a 36-month period for purchases of $1
million or more) or other special purchase programs. A description of the Right
of Accumulation, Letter of Intent and Group Purchases privileges by which the
sales charge may be reduced is set forth in the Statement of Additional
Information. In addition, MFD, will pay a commission to dealers who initiate and
are responsible for purchases of $1 million or more as follows: 1.00% on sales
up to $5 million, plus 0.25% on the amount in excess of $5 million. Purchases of
$1 million or more for each shareholder account will be aggregated over a
12-month period (commencing from the date of the first such purchase) for
purposes of determining the level of commissions to be paid during that period
with respect to such account.
13
<PAGE> 80
Class A shares of the Fund may be sold at their net asset value to officers of
the Trust, to any of the subsidiary companies of Sun Life, to eligible
Directors, officers, employees (including retired employees), and agents of MFS,
Sun Life or any of their subsidiary companies, to any trust, pension,
profit-sharing or any other benefit plan for such persons, to any trustees and
retired trustees of any investment company for which MFD serves as distributor
or principal underwriter, and to certain family members of such individuals and
their spouses, provided such shares will not be resold except to the Fund. Class
A shares of the Fund may be sold at net asset value to any employee, partner,
officer or trustee of any sub-adviser to any MFS Fund and to certain family
members of such individuals and their spouses, or to any trust, pension,
profit-sharing or other retirement plan for the sole benefit of such employee or
representative, provided such shares will not be resold except to the Fund.
Class A shares of the Fund may also be sold at their net asset value to any
employee or registered representative of any dealer or other financial
institution which has a sales agreement with MFD or its affiliates, to certain
family members of such employees or representative and their spouses, or to any
trust, pension, profit-sharing or other retirement plan for the sole benefit of
such employee or representative, and to clients of the MFS Asset Management,
Inc. Class A shares of the Fund also may be sold at net asset value, subject to
appropriate documentation, through a dealer where the amount invested represents
redemption proceeds from a registered open-end management investment company not
distributed or managed by MFD or its affiliates: (i) the redeemed shares were
subject to an initial sales charge or a deferred sales charge (whether or not
actually imposed); (ii) such redemption has occurred no more than 90 days prior
to the purchase of Class A shares of the Fund; and (iii) the Fund, MFD or its
affiliates have not agreed with such company or its affiliates, formally or
informally, to sell Class A shares at net asset value or provide any other
incentive with respect to such redemption and sale. Class A shares of the Fund
may also be sold at net asset value where the amount invested represents
redemption proceeds from MFS Fixed Fund. In addition, Class A shares of the Fund
may be sold at net asset value in connection with the acquisition or liquidation
of the assets of other investment companies or personal holding companies.
Insurance company separate accounts may also purchase Class A shares of the Fund
at their net asset value. Class A shares of the Fund may be purchased at net
asset value by retirement plans whose third party administrators have entered
into an administrative services agreement with MFD or one or more of its
affiliates to perform certain administrative services, subject to certain
operational requirements specified from time to time by MFD or one or more of
its affiliates. Class A shares of the Fund may be purchased at net asset value
through certain broker-dealers and other financial institutions which have
entered into an agreement with MFD which includes a requirement that such shares
be sold for the benefit of clients participating in a "wrap-account" or a
similar program under which such clients pay a fee to such broker-dealer or
other financial institution.
Class A shares of the Fund may be purchased at net asset value by certain
retirement plans subject to the Employee Retirement Income Security Act of 1974,
as amended, subject to the following:
(i) The sponsoring organization must demonstrate to the satisfaction of MFD
that either (a) the employer has at least 25 employees or (b) the aggregate
purchases by the retirement plan of Class A shares of the MFS Funds will be
in an amount of at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion; and
(ii) a CDSC of 1% will be imposed on such purchases in the event of certain
redemption transactions within 12 months following such purchases.
Dealers who initiate and are responsible for purchases of Class A shares of the
Fund in this manner will be paid in a commission by MFD, as follows: 1.00% on
sales up to $5 million, plus 0.25% on the amount in excess of $5 million;
provided, however, that MFD may pay a commission, on sales in excess of $5
million to certain retirement plans, of 1.00% to certain dealers which, at MFD's
invitation, enter into an agreement with MFD in which the dealer agrees to
return any commission paid to it on the sale (or on a pro rata portion thereof)
if the shareholder redeems his or her shares within a period of time after
purchase as specified by MFD. Purchases of $1 million or more for each
shareholder account will be aggregated over a 12-month period (commencing from
the date of the first such purchase) for purposes of determining the level of
commissions to be paid during that period with respect to such account. Class A
shares of the Fund may be purchased at net asset value by retirement plans
qualified under section 401(k) of the Code through certain broker-dealers and
other financial institutions which have entered into an agreement
14
<PAGE> 81
with MFD which includes certain minimum size qualifications for such retirement
plans and provides that the broker-dealer or other financial institution will
perform certain administrative services with respect to the plan's account.
Class A shares of the Fund may be sold at net asset value through the automatic
reinvestment of Class A and Class B distributions which constitute withdrawals
from qualified retirement plans. Furthermore, Class A shares of the Fund may be
sold at net asset value through the automatic reinvestment of distributions of
dividends and capital gains of other MFS Funds pursuant to the Distribution
Investment Program (see "Shareholder Services" in the Statement of Additional
Information).
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC as follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
<S> <C>
First................................................ 4%
Second............................................... 4%
Third................................................ 3%
Fourth............................................... 3%
Fifth................................................ 2%
Sixth................................................ 1%
Seventh and following................................ 0%
</TABLE>
---------------
For Class B shares purchased prior to January 1, 1993, the Fund imposes a CDSC
as a percentage of original purchase price or redemption proceeds, as
applicable:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
<S> <C>
First................................................ 6%
Second............................................... 5%
Third................................................ 4%
Fourth............................................... 3%
Fifth................................................ 2%
Sixth................................................ 1%
Seventh and following................................ 0%
</TABLE>
No CDSC is paid upon an exchange of shares. For purposes of calculating the CDSC
upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares. See "Redemptions and Repurchases --
Contingent Deferred Sales Charge" for further discussion of the CDSC.
The CDSC on Class B shares will be waived upon the death or disability (as
defined in section 72(m)(7) of the Code) of any investor, provided the account
is registered (i) in the case of a deceased individual, solely in the deceased
individual's name, (ii) in the case of a disabled individual, solely or jointly
in the disabled individual's name or (iii) in the name of a living trust for the
benefit of the deceased or disabled individual. The CDSC on Class B shares will
also be waived in the case of redemptions of shares of the Fund pursuant to a
systematic withdrawal plan. In addition, the CDSC on Class B shares will be
waived in the case of distributions from an IRA, SAR-SEP or any other retirement
plan qualified under section 401(a) or 403(b) of the Code, due to death or
disability, or in the case of required minimum distributions from any such
retirement plan due to attainment of age 70 1/2. The CDSC on Class B shares will
be waived in the case of distributions from a retirement plan qualified under
Section 401(a) of the Code due to (i) returns of excess contribution to the
plan, (ii) retirement of a participant in the plan, (iii) a loan from the plan
(repayments of loans, however, will constitute new sales for purposes of
assessing the CDSC), (iv) "financial hardship" of the
15
<PAGE> 82
participant in the plan, as that term is defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time, and (v) termination of
employment of the participant in the plan (excluding, however, a partial or
other termination of the plan). The CDSC on Class B shares will be waived in the
case of distributions from a SAR-SEP due to (i) returns of excess contribution
to the plan, (ii) retirement of a participant in the plan and (iii) termination
of employment of the participant in the plan (excluding, however, a partial or
other termination of the plan). The CDSC on Class B shares will also be waived
upon redemptions by (i) officers of the Trust, (ii) any of the subsidiary
companies of Sun Life, (iii) eligible Directors, officers, employees (including
retired employees) and agents of MFS, Sun Life or any of their subsidiary
companies, (iv) any trust, pension, profit-sharing or any other benefit plan for
such persons, (v) any trustees and retired trustees of any investment company
for which MFD serves as distributor or principal underwriter, and (vi) certain
family members of such individuals and their spouses, provided in each case that
the shares will not be resold except to the Fund. The CDSC on Class B shares
will also be waived in the case of redemptions by any employee or registered
representative of any dealer or other financial institution which has a sales
agreement with MFD, by certain family members of such employee or representative
and their spouses, by any trust, pension, profit-sharing or other retirement
plan for the sole benefit of such employee or representatives and by clients of
the MFS Asset Management, Inc. A retirement plan qualified under section 401(a)
of the Code (a "Retirement Plan") that has invested its assets in Class B shares
of one or more of the MFS Family of Funds (the "MFS Funds") for more than 10
years from the later to occur of (i) January 1, 1993 or (ii) the date the
Retirement Plan first invests its assets in Class B shares of one or more of the
funds in the MFS Funds will have the CDSC on Class B shares waived in the case
of a redemption of all the Retirement Plan's shares (including shares of any
other class) in all MFS Funds (i.e., all the assets of the Retirement Plan
invested in the MFS Funds are withdrawn), except that if, immediately prior to
the redemption, the aggregate amount invested by the Retirement Plan in Class B
shares of the MFS Funds (excluding the reinvestment of distributions) during the
prior four year period equals 50% or more of the total value of the Retirement
Plan's assets in the MFS Funds, then the CDSC will not be waived. The CDSC on
Class B shares will be waived upon redemption by a Retirement Plan where the
redemption proceeds are used to pay expenses of the Retirement Plan or certain
expenses of participants under the Retirement Plan (e.g., participant account
fees), provided that the Retirement Plan's sponsor subscribes to the MFS
Fundamental 401(k) Plan(sm) or another similar recordkeeping system made
available by the Shareholder Servicing Agent. The CDSC on Class B shares will be
waived upon the transfer of registration from shares held by a Retirement Plan
through a single account maintained by the Shareholder Servicing Agent to
multiple Class B share accounts maintained by the Shareholder Servicing Agent on
behalf of individual participants in the Retirement Plan, provided that the
Retirement Plan's sponsor subscribes to the MFS Fundamental 401(k) Plan(sm) or
another similar recordkeeping system made available by the Shareholder Servicing
Agent. The CDSC on Class B shares may also be waived in connection with the
acquisition or liquidation of the assets of other investment companies or
personal holding companies.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund will convert to Class A
shares of the Fund approximately eight years after the purchase date. Shares
purchased through the reinvestment of distributions paid in respect of Class B
shares will be treated as Class B shares for purposes of the payment of the
distribution and service fees under the Distribution Plan applicable to Class B
shares. However, for purposes of conversion to Class A shares, all shares in a
shareholder's account that were purchased through the reinvestment of dividends
and distributions paid in respect of Class B shares (and which have not
converted to Class A shares as provided in the following sentence) will be held
in a separate sub-account. Each time any Class B shares in the shareholder's
account (other than those in the sub-account) convert to Class A shares, a
portion of the Class B shares then in the sub-account will also convert to Class
A shares. The portion will be determined by the ratio that the shareholder's
Class B shares not acquired through reinvestment of dividends and distributions
that are converting to Class A shares bear to the shareholder's total Class B
shares not acquired through reinvestment. The conversion of Class B shares to
Class A shares is subject to the continuing availability of a ruling from the
Internal Revenue Service or an opinion of counsel that such conversion will not
constitute a taxable event for federal tax purposes. There can be no assurance
that such ruling or opinion will be available, and the conversion of Class B
shares to Class A shares will not occur if such ruling or opinion is not
available. In such event, Class B shares would continue to be subject to higher
expenses than Class A shares for an indefinite period.
16
<PAGE> 83
GENERAL: Except as described below, the minimum initial investment is $1,000 per
account and the minimum additional investment is $50 per account. Accounts being
established for monthly automatic investments and under payroll savings programs
and tax-deferred retirement programs (other than IRAs) involving the submission
of investments by means of group remittal statements are subject to a $50
minimum on initial and additional investments per account. The minimum initial
investment for IRAs is $250 per account and the minimum additional investment is
$50 per account. Accounts being established for participation in the Automatic
Exchange Plan are subject to a $50 minimum on initial and additional investments
per account. There are also other limited exceptions to these minimums for
certain tax-deferred retirement programs. Any minimums may be changed at any
time at the discretion of MFD. The Fund reserves the right to cease offering its
shares at any time.
For shareholders who elect to participate in certain investment programs (e.g.,
the Automatic Investment Plan) or avail themselves of certain 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.
A shareholder whose shares are held in the name of, or controlled by, an
investment dealer might not receive many of the privileges and services from the
Fund (such as Right of Accumulation, Letter of Intent and certain recordkeeping
services) that the Fund ordinarily provides.
Purchases and exchanges should be made for investment purposes only. The Fund
and MFD each reserve the right to reject any specific purchase order or to
restrict purchases by a particular purchaser (or group of related purchasers).
The Fund or MFD may reject or restrict any purchases by a particular purchaser
or group, for example, when such purchase is contrary to the best interests of
the Fund's other shareholders or otherwise would disrupt the management of the
Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of certain MFS Funds (as determined by MFD) which follow a
timing pattern, and with individuals or entities acting on such shareholders'
behalf (collectively, "market timers"), setting forth the terms, procedures and
restrictions with respect to such exchanges. In the absence of such an
agreement, it is the policy of the Fund and MFD to reject or restrict purchases
by market timers if (i) more than two exchange purchases are effected in a timed
account in the same calendar quarter or (ii) a purchase would result in shares
being held in timed accounts by market timers representing more than (x) one
percent of the Fund's net assets or (y) specified dollar amounts in the case of
certain MFS Funds which may include the Fund and which may change from time to
time. The Fund and MFD each reserve the right to request market timers to redeem
their shares at net asset value, less any applicable CDSC, if either of these
restrictions is violated.
Securities dealers and other financial institutions may receive different
compensation with respect to sales of Class A and Class B shares. In some
instances promotional incentives to dealers may be offered only to certain
dealers who have sold or may sell significant amounts of Fund shares. From time
to time, MFD may pay dealers 100% of the applicable sales charge on sales of
Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset value
of all of the Class B shares of certain specified MFS Funds sold by such dealer
during a specified sales period. In addition, from time to time MFD, at its
expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of the Fund. The staff
of the SEC has indicated that dealers who receive more than 90% of the sales
charge may be considered underwriters. Such concessions provided by MFD may
include financial assistance to dealers in connection with preapproved
conferences or seminars, sales or training programs for invited registered
representatives, payment for travel expenses, including lodging, incurred by
registered representatives and members of their families or other invited guests
to various locations 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. In some instances, these concessions may be
offered to dealers or only to certain dealers who have sold or may sell, during
specified periods, certain minimum amounts of shares of the Fund. From time to
time, MFD may make expense reimbursements for special training of a dealer's
registered representatives in group meetings or to help pay the expenses of
sales contests. Other concessions may be offered to the extent not prohibited by
the laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. (the "NASD").
<PAGE> 84
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 (as described
above). If, however, a bank were prohibited from so acting, the Trustees would
consider what actions, if any, would be necessary to continue to provide
efficient and effective shareholder services. It is not expected that
shareholders would suffer any adverse financial consequence as a result of these
occurrences. In addition, state securities laws on this issue may differ from
the interpretation of federal law expressed herein and banks and financial
institutions may be required to register as broker-dealers pursuant to state
law.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds (if available for sale) at net asset value. Shares of one class
may not be exchanged for shares of any other class. Exchanges will be made only
after instructions in writing or by telephone (an "Exchange Request") are
received for an established account by the Shareholder Servicing Agent in proper
form (i.e., if in writing -- signed by the record owner(s) exactly as the shares
are registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in the case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by 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, the exchange usually will occur
on that day if all the requirements set forth above have been complied with at
that time. No more than five exchanges may be made in any one Exchange Request
by telephone. Additional information concerning this exchange privilege and
prospectuses for any of the other MFS Funds may be obtained from investment
dealers or the Shareholder Servicing Agent. A shareholder should read the
prospectus of the other MFS Fund and consider the differences in objectives and
policies before making any exchange. For federal and (generally) state income
tax purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, an exchange could result in a gain or loss to the shareholder making
the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone, see "Redemptions By Telephone."
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timers. Special procedures, privileges and restrictions with respect
to exchanges may apply to market timers who enter into an agreement with MFD, as
set forth in such agreement (see "Purchases").
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the amount in his account on
any date on which the Fund is open for business by redeeming shares at their net
asset value or by selling such shares to the Fund through a dealer (a
repurchase). Since the net asset value of shares of the account fluctuate,
redemptions or repurchases, which are taxable transactions, are likely to result
in gains or losses to the shareholder. When a shareholder withdraws an amount
from his account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except for shares purchased, or received in
exchange for shares purchased, by check (including certified checks or cashier's
checks); payment of redemption proceeds may be delayed for up to 15 days from
the purchase date in an effort to assure that such check has cleared. Payment of
redemption proceeds may be delayed for up to seven days from the redemption date
if the Fund determines that such a delay would be in the best interest of all
its shareholders.
A. REDEMPTION BY MAIL -- Each shareholder has the right to redeem all or any
portion of the shares in his account by mailing or delivering to the Shareholder
Servicing Agent (see back cover for address) a stock power with a written
request for redemption, or a letter of instruction, together with his share
certificates (if any were issued), all in "good order" for transfer. "Good
order" generally means that the stock power, written request for redemption,
letter of instructions or certificate must be
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<PAGE> 85
endorsed by the record owner(s) exactly as the shares are registered and the
signature(s) must be guaranteed in the manner set forth below under the caption
"Signature Guarantee". In addition, in some cases, "good order" may require the
furnishing of additional documents. The Shareholder Servicing Agent may make
certain de minimis exceptions to the above requirements for redemption. Within
seven days after receipt of a redemption request by the Shareholder Servicing
Agent in "good order," the Fund will make payment in cash, of the net asset
value of the shares next determined after such redemption request was received,
reduced by the amount of any applicable CDSC 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 the Exchange is restricted or to the extent
otherwise permitted by the 1940 Act if an emergency exists.
B. REDEMPTION BY TELEPHONE -- Each shareholder may redeem an amount from his
account by telephoning toll-free at (800) 225-2606. Shareholders wishing to
avail themselves of this telephone redemption privilege must so elect on their
Account Application, designate thereon a commercial bank and account number to
receive the proceeds of such redemption, and sign the Account Application Form
with the signature(s) guaranteed in the manner set forth below under the caption
"Signature Guarantee." The proceeds of such a redemption, reduced by the amount
of any applicable CDSC described above and the amount of any income tax required
to be withheld, are mailed by check to the designated account, without charge.
As a special service, investors may arrange to have proceeds in excess of $1,000
wired in federal funds to the designated account. If a telephone redemption
request is received by the Shareholder Servicing Agent by the close of regular
trading on the Exchange on any business day, shares will be redeemed at the
closing net asset value of the Fund on that day. Subject to the conditions
described in this section, proceeds of a redemption are normally mailed or wired
on the next business day following the date of receipt of the order for
redemption. The Shareholders 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
Shareholders Servicing Agent will request personal or other information from the
caller, and will normally also record calls. Shareholders should verify the
accuracy of confirmation statements immediately after their receipt.
C. REPURCHASE THROUGH A DEALER -- If a shareholder desires to sell his shares
at net asset value through his securities dealer (a repurchase), the shareholder
can place a repurchase order with his dealer, who may charge the shareholder a
fee. IF THE DEALER RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF
REGULAR TRADING ON THE EXCHANGE AND COMMUNICATES IT TO MFD ON THE SAME DAY
BEFORE MFD CLOSES FOR BUSINESS, THE SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE
CALCULATED ON THAT DAY, REDUCED BY THE AMOUNT OF ANY APPLICABLE CDSC AND THE
AMOUNT OF ANY INCOME TAX REQUIRED TO BE WITHHELD.
GENERAL: Shareholders of the Fund who have redeemed their shares have a one-time
right to reinvest the redemption proceeds in the same class of shares of any of
the MFS Funds (if shares of such Fund are available for sale) at net asset value
(with a credit for any CDSC paid) within 90 days of the redemption pursuant to
the Reinstatement Privilege. If the shares credited for any CDSC paid are then
redeemed within six years of the initial purchase in the case of Class B shares,
or within 12 months of the initial purchase for certain Class A share purchases,
a CDSC will be imposed upon redemption. Such purchases under the Reinstatement
Privilege are subject to all limitations in the Statement of Additional
Information regarding this privilege.
Subject to the Fund's compliance with applicable regulations, the Fund has
reserved the right to pay the redemption or repurchase price of shares of the
Fund, either totally or partially, by a distribution in kind of securities
(instead of cash) from the Fund's portfolio. The securities distributed in such
a distribution would be valued at the same amount as that assigned to them in
calculating the net asset value for the shares being sold. If a shareholder
received a distribution in kind, the shareholders could incur brokerage or
transaction charges when converting the securities to cash.
Due to the relatively high cost of maintaining small accounts, the Fund reserves
the right to redeem shares in any account for their then-current value (which
will be promptly paid to the shareholder) if at any time the total investment in
such account drops below $500 because of redemptions, except in the case of
accounts 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
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<PAGE> 86
minimum investment requirement. (See "Purchases"). Shareholders will be notified
that the value of their account is less than the minimum investment requirement
and allowed 60 days to make an additional investment before the redemption is
processed. No CDSC will be imposed with respect to such involuntary redemptions.
SIGNATURE GUARANTEE: In order to protect shareholders against fraud to the
greatest extent possible, the Fund requires in certain instances as indicated
above that the shareholder's signature be guaranteed. In these cases the
shareholder's signature must be guaranteed by an eligible bank, broker, dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association. Signature guarantees shall be accepted
in accordance with policies established by the Shareholder Servicing Agent.
CONTINGENT DEFERRED SALES CHARGE -- Investments ("Direct Purchases") will be
subject to a CDSC for a period of 12 months (in the case of purchases of $1
million or more of Class A shares) or six years (in the case of purchases of
Class B shares). Purchases of Class A shares made during a calendar month,
regardless of when during the month the investment occurred, will age one month
on the last day of the month and each subsequent month. Class B shares purchased
on or after January 1, 1993 will be aggregated on a calendar month basis -- all
transactions made during a calendar month, regardless of when during the month
they have occurred, will age one year at the close of business on the last day
of such month in the following calendar year and each subsequent year. For Class
B shares of the Fund purchased prior to January 1, 1993, transactions will be
aggregated on a calendar year basis -- all transactions made during a calendar
year, regardless of when during the year they have occurred, will age one year
at the close of business on December 31 of that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class represented by Direct Purchases exceeds the sum
of the six calendar year aggregations (12 months in the case of purchases of $1
million or more of Class A shares) of Direct Purchases may be redeemed without
charge ("Free Amount"). Moreover, no CDSC is ever assessed on additional shares
acquired through the automatic reinvestment of dividends or capital gain
distributions ("Reinvested Shares").
Therefore, at the time of redemption of shares of a particular class, (i) any
Free Amount is not subject to the CDSC, and (ii) the amount of redemption equal
to the then-current value of Reinvested Shares is not subject to the CDSC, but
(iii) any amount of 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 made which will
result in any such charge being imposed at the lowest possible rate. The CDSC to
be imposed upon redemptions will be calculated as set forth in "Purchases"
above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except that, with respect to transfers of registration to an IRA
rollover account, the CDSC will be waived if the shares being reregistered would
have been eligible for a CDSC waiver had they been redeemed.
DISTRIBUTION PLANS
The Trustees have adopted separate distribution plans for Class A and Class B
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Rule"), after having concluded that there is a reasonable likelihood that the
plans would benefit the Fund and its shareholders.
CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan provides that the Fund
will pay MFD a distribution/service fee aggregating up to (but not necessarily
all of) 0.35% of the average daily net assets attributable to Class A shares
annually in order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of Class A shares. The expenses to be paid by MFD on
behalf of the Fund include a service fee to securities dealers which enter into
a sales agreement with MFD of up to 0.25% per annum of the Fund's average daily
net assets attributable to Class A shares that are owned by investors for whom
such securities dealer is the holder or dealer of record. This fee is intended
to be partial consideration for all personal services and/or account maintenance
services rendered by the dealer with respect to Class A shares. MFD may from
time to time reduce the amount of the service fee paid for shares sold prior to
a certain date. Currently, the service fee is reduced to 0.15% per annum for
shares sold prior to October 1, 1989. MFD may also retain a distribution fee of
0.10% per annum of the Fund's average daily net assets attributable to Class A
shares as partial consideration for services performed and expenses incurred in
the
20
<PAGE> 87
performance of MFD's obligations under its distribution agreement with the
Trust. MFD, however, currently is suspending this 0.10% per annum distribution
fee and will not in the future accept payment of this fee unless it first
obtains the approval of the Trust's Board of Trustees. In addition, to the
extent that the aggregate of the foregoing fees does not exceed 0.35% per annum
of the average daily net assets of the Fund attributable to Class A shares, the
Fund is permitted to pay other distribution-related expenses, including
commissions to dealers and payments to wholesalers employed by MFD for sales at
or above a certain dollar level. Fees payable under the Class A Distribution
Plan are charged to, and therefore reduce, income allocated to Class A shares.
Service fees may be reduced for a securities dealer that is the holder or dealer
of record for an investor who owns shares of the Fund having a net asset value
at or above a certain dollar level. Dealers may from time to time be required to
meet certain criteria in order to receive service fees. MFD or its affiliates
are entitled to retain all service fees payable under the Class A Distribution
Plan for which there is no dealer of record or for which qualification standards
have not been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates for shareholder
accounts. Certain banks and other financial institutions that have agency
agreements with MFD will receive service fees that are the same as service fees
to dealers.
CLASS B DISTRIBUTION PLAN. The Class B Distribution Plan provides that the Fund
will pay MFD a daily distribution fee equal on an annual basis to 0.75% of the
Fund's average daily net assets attributable to Class B shares and may annually
pay MFD a service fee of up to 0.25% per annum of the Fund's average daily net
assets attributable to Class B shares (which MFD will in turn pay to securities
dealers which enter into a sales agreement with MFD at a rate of up to 0.25% per
annum of the Fund's average daily net assets attributable to Class B shares
owned by investors for whom such securities dealer is the holder or dealer of
record). This service fee is intended to be additional consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to Class B shares. Fees payable under the Class B Distribution Plan
are charged to, and therefore reduce, income allocated to Class B shares. The
Class B Distribution Plan also provides that MFD will receive all CDSCs
attributable to Class B shares (see "Redemption and Repurchases" above), which
do not reduce the distribution fee. MFD will pay commissions to dealers of 3.75%
of the purchase price of Class B shares purchased through dealers. MFD may
advance to dealers the first year service fee at a rate equal to 0.25% of the
purchase price of such shares, and as compensation therefor, MFD may retain the
service fee paid by the Fund with respect to such shares for the first year
after purchase. Therefore, the total amount paid to a dealer upon the sale of
shares is 4.00% of the purchase price of the shares (commission rate of 3.75%
plus service fee equal to 0.25% of the purchase price). Dealers will become
eligible for additional service fees with respect to such shares commencing in
the thirteenth month following the purchase. 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 Class B
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts. The purpose of the distribution payments to MFD under
the Class B Distribution Plan is to compensate MFD for its distribution services
to the Fund. Since MFD's compensation is not directly tied to its expenses, the
amount of compensation received by MFD during any year may be more or less than
its actual expenses. For this reason, this type of distribution fee arrangement
is characterized by the staff of the SEC as being of the "compensation" variety.
However, the Fund is not liable for any expenses incurred by MFD in excess of
the amount of compensation it receives. The expenses incurred by MFD, including
commissions to dealers, are likely to be greater than the distribution fees for
the next several years, but thereafter such expenses may be less than the amount
of the distribution fees. Certain banks and other financial institutions that
have agency agreements with MFD will receive agency transaction and service fees
that are the same as commissions and service fees to dealers.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income for any
calendar year to its shareholders as dividends on an annual basis. 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 with respect to
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<PAGE> 88
which a distribution is paid. All distributions not paid in cash will be
reinvested in shares of the class from 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 shares because expenses attributable to
Class B shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, and to make
distributions to its shareholders in accordance with the timing requirements
imposed by the Code. It is expected that the Fund will not be required to pay
entity level federal income or excise taxes, although foreign source income
earned by the Fund may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes and any
state or local taxes on the dividends and capital gain distributions they
receive from the Fund, whether paid in cash or reinvested in additional shares.
A portion of the dividends received from the Fund (but none of the Fund's
capital gain distributions) may qualify for the dividends-received deduction for
corporations.
Promptly after the end of each calendar year, each shareholder receives
information for tax purposes on all Fund dividends and capital gain
distributions for that year, including any portion taxable as ordinary income,
any portion taxable as long-term capital gains, any portion representing a
return of capital (which is generally free of current taxes but results in a
basis reduction), and the amount, if any, of federal income tax withheld.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares just before the Fund makes a distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and are made
to persons who are neither citizens nor residents of the U.S., regardless of
whether a lower rate may be permitted under an applicable treaty. The Fund is
also required in certain circumstances to apply backup withholding at a rate of
31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the U.S.)
who does not furnish to the Fund certain information and certifications or who
is otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
Prospective investors should read the Account Application for additional
information regarding backup withholding of federal income tax and should
consult their own tax advisers as to the tax consequences 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 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 values as described in the Statement of
Additional Information. The net asset value of each class of shares is effective
for orders received by the dealer prior to its calculation and received by 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 two classes of shares, entitled
Class A and Class B Shares of Beneficial Interest (without par value). The Trust
has reserved the right to create and issue additional classes and series of
shares, in which case each class of shares of a series would participate equally
in the earnings, dividends and assets attributable to that class of that
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<PAGE> 89
particular series. Shareholders are entitled to one vote for each share held and
shares of each series would be entitled to vote separately to approve investment
advisory agreements or changes in investment restrictions, but shares of all
series would vote together in the election of Trustees and selection of
accountants. Additionally, each class of shares of a series will vote separately
on any material increases in the fees under its Distribution Plan or on any
other matter that affects solely that class of shares, but will otherwise vote
together with all other classes of shares of the series on all other matters.
The Trust does not intend to hold annual shareholder meetings. The Declaration
of Trust provides that a Trustee may be removed from office in certain instances
(see "Description of Shares, Voting Rights and Liabilities" in the Statement of
Additional Information).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of 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, shareholders of each class are
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 assignment 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 total rate of return quotations for
each class of shares and may also quote fund rankings in the relevant fund
category from various sources, such as the Lipper Analytical Services, Inc. and
Wiesenberger Investment Companies Service. 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 the shares of that class with all distributions reinvested and
which, if quoted for periods of six years or less, will give effect to the
imposition of the CDSC assessed upon redemptions of the Fund's Class B shares.
Such total rate of return quotations may be accompanied by quotations which do
not reflect the reduction in value of the initial investment due to the sales
charge or the deduction of a CDSC, and which will thus be higher. The Fund's
total rate of return quotations are based on historical performance and are not
intended to indicate future performance. 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 total rate of return, see the Statement of
Additional Information. For further information about the Fund's performance for
the fiscal year ended November 30, 1994, 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.
7. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund should contact the Shareholder Servicing
Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive income tax information
regarding reportable dividends and distributions for that year (see "Tax Status"
above).
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:
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<PAGE> 90
-- Dividends and capital gain distributions reinvested in additional
shares. This option will be assigned if no other option is
specified.
-- Dividends in cash; capital gain distributions reinvested in
additional shares.
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) 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 gain
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, 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 Statement of Additional Information) anticipates purchasing
$50,000 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 all classes of shares of
that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund), reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another 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,
as designated on the Account Application and based upon the value of his
account. Each payment under a Systematic Withdrawal Plan (a "SWP") must be at
least $100, except in certain limited circumstances. The aggregate withdrawals
of Class B shares in any year pursuant to a SWP will not be subject to a CDSC
and generally are limited to 10% of the value of the account at the time of the
establishment of the SWP. The CDSC will not be waived in the case of SWP
redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or investment
dealers.
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AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in 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 four 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 Statement of Additional
Information for further information concerning the Automatic Exchange Plan.
Investors should consult their tax advisers for information regarding the
potential capital gain and loss consequences of transactions under the Automatic
Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share 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 -- 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 adviser before establishing any of the
tax-deferred retirement plans described above.
------------------------------------
The Fund's Statement of Additional Information, dated April 1, 1995, contains
more detailed information about the Fund, including information related to: (i)
investment policies and restrictions, (ii) Trustees, officers and investment
adviser, (iii) portfolio transactions and brokerage commissions, (iv)
Distribution Plans, (v) the method used to calculate total rate of return
performance quotations of the Fund, 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.
25
<PAGE> 92
APPENDIX
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of various bonds. It should be emphasized, however, that ratings are not
absolute standards of quality. Consequently, bonds with the same maturity,
coupon and rating may have different yields while bonds of the same maturity and
coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time 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.
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
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<PAGE> 93
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated 'AAA'. Because bonds rated in the
'AAA' and 'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1+'.
A: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are an imminent default in payment of interest or principal.
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[LOGO]
<TABLE>
<S> <C>
MFS[REGISTERED TRADEMARK] VALUE FUND STATEMENT OF
(A member of the MFS Family of Funds[REGISTERED TRADEMARK]) ADDITIONAL INFORMATION
April 1, 1995
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
1. Definitions............................................................................. 2
2. Investment Objective, Policies and Restrictions......................................... 2
3. Management of the Fund.................................................................. 12
Trustees............................................................................. 12
Officers............................................................................. 13
Investment Adviser................................................................... 13
Custodian............................................................................ 14
Shareholder Servicing Agent.......................................................... 14
Distributor.......................................................................... 15
4. Portfolio Transactions and Brokerage Commissions........................................ 15
5. Shareholder Services.................................................................... 17
Investment and Withdrawal Programs................................................... 17
Exchange Privilege................................................................... 19
Tax-Deferred Retirement Plans........................................................ 19
6. Tax Status.............................................................................. 20
7. Determination of Net Asset Value and Performance........................................ 21
8. Distribution Plans...................................................................... 23
9. Description of Shares, Voting Rights and Liabilities.................................... 24
10. Independent Accountants and Financial Statements........................................ 25
</TABLE>
MFS VALUE FUND
A Series of MFS Series Trust VII
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information sets forth information which may be of
interest to investors but which is not necessarily included in the Fund's
Prospectus, dated April 1, 1995. This Statement of Additional Information 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 STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A
CURRENT PROSPECTUS.
<PAGE> 95
1. DEFINITIONS
<TABLE>
<S> <C> <C>
"Fund" -- MFS Value Fund, a series of MFS
Series Trust VII (the "Trust"), a
Massachusetts business trust.
The Trust was previously known
as "Massachusetts Financial In-
ternational Trust -- Bond Portfo-
lio" until its name was changed
on November 1, 1990, as "MFS
Worldwide Governments Trust"
until its name was changed on
August 3, 1992, and as "MFS
Worldwide Governments Fund"
until its name was changed on
August 17, 1993. The Fund is the
successor to MFS Special Fund
which was reorganized as a se-
ries of the Trust on September 7,
1993.
"MFS" or the "Adviser" -- Massachusetts Financial Ser-
vices Company, a Delaware cor-
poration.
"MFD" -- MFS Fund Distributors,Inc., a
Delaware corporation.
"Prospectus" -- The Prospectus, dated April 1,
1995, of the Fund.
</TABLE>
2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE. The Fund's investment objective is to seek capital
appreciation. Dividend income, if any, is a consideration incidental to the
Fund's objective of capital appreciation. Any investment involves risk and
there can be no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES. The investment policies of the Fund are described in the
Prospectus. In addition, certain of the Fund's investment policies are
described in greater detail below.
LENDING OF SECURITIES: The Fund may seek to increase its income by lending
portfolio securities. Such loans will usually be made only to member banks of
the Federal Reserve System and to member firms (and subsidiaries thereof) of
the New York Stock Exchange (the "Exchange") and would be required to be
secured continuously by collateral in cash, cash equivalents, or U.S.
Government securities 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 usually not exceed five days). During the
existence of a loan, the Fund would continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned and would
also receive compensation based on investment of the collateral. The Fund would
not, however, have the right to vote any securities having voting rights during
the existence of the loan, but 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 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
could be earned currently from securities loans of this type justifies the
attendant risk. If the Adviser determines to make securities loans, it is not
intended that the value of the securities loaned would exceed 20% of the value
of the Fund's total assets.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
sellers who are member firms (or a subsidiary thereof) of the Exchange or
members of the Federal Reserve System, recognized primary U.S. Government
securities dealers or institutions which the Adviser has determined to be of
comparable creditworthiness. The securities that the Fund purchases and holds
through its agent are U.S. Government securities, the values of which are equal
to or greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Fund together with the repurchase price
on repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the
time the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that
the seller is creditworthy, and the Adviser monitors that seller's
creditworthiness on an ongoing basis. Moreover, under such agreements, the
value of the securities (which are marked to market every business day) is
required to be greater than the repurchase price, and the Fund has the right to
make margin calls at any time if the value of the securities falls below the
agreed upon margin.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loan
participations and other direct claims against a borrower. In purchasing a loan
participation, 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
2
<PAGE> 96
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 loan participations 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 loan participations 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 loan participation 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, 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.
ZERO COUPON, DEFERRED INTEREST AND PIK BONDS: Fixed income securities that the
Fund may invest in also include zero coupon bonds, deferred interest bonds and
bonds on which the interest is payable in kind ("PIK bonds"). Zero coupon and
deferred interest bonds are debt obligations which are issued at a significant
discount from face value. The discount approximates the total amount of
interest the bonds will accrue and compound over the period until maturity or
the first interest payment date at a rate of interest reflecting the market
rate of the security at the time of issuance. While zero coupon bonds do not
require the periodic payment of interest, deferred interest bonds provide for a
period of delay before the regular payment of interest begins. PIK bonds are
debt obligations which provide that the issuer thereof may, at its option, pay
interest on such bonds in cash or in the form of additional debt obligations.
Such investments benefit the issuer by mitigating its need for cash to meet
debt service, but also require a higher rate of return to attract investors who
are willing to defer receipt of such cash. Such investments may experience
greater volatility in market value 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.
"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 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 cash, short-term money market instruments or high quality debt securities
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 basis 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
3
<PAGE> 97
fluctuations since the time the commitment to purchase such securities was made.
FOREIGN SECURITIES: The Fund may invest up to 50% (and expects generally to
invest between 10% to 50%) of its total assets in foreign securities which are
not traded on a U.S. exchange (not including American Depositary Receipts). As
discussed in the Prospectus, investing in foreign securities generally
represent 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. 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.
RISKS OF INVESTING IN LOWER RATED BONDS: The Fund may invest in fixed income
securities rated Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by
Standard & Poor's Ratings Group ("S&P") or by Fitch Investors Service, Inc.
("Fitch") 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 or by Fitch and comparable unrated securities
(commonly known as "junk bonds") to the extent described in the Prospectus. 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 reflect 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 fixed income securities are also affected by changes in
interest rates). 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. The prices for these securities may be
affected by legislative and regulatory developments. For example, federal rules
require that savings and loan associations gradually reduce their holdings of
high-yield securities. An effect of such legislation may be to depress the
prices of outstanding lower rated high yielding fixed income securities. The
market for these lower rated fixed income securities may be less liquid than
the market for investment grade fixed income securities. Furthermore, the
liquidity of these lower rated securities may be affected by the market's
perception of their credit quality. Therefore, the Adviser's judgment may at
times play a greater role in valuing these securities than in the case of
investment grade fixed income securities, and it also may be more difficult
during times of certain adverse market conditions to sell these lower rated
securities to meet redemption requests or to respond to changes in the market.
For a description of the rating categories described above, see Appendix A to
the Prospectus.
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. To the extent the Fund
invests in these lower rated securities, the achievement of its investment
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<PAGE> 98
objective may be more dependent on the Adviser's own credit analysis than in
the case of a fund investing in higher quality fixed income securities.
These lower rated securities may also include zero coupon bonds, deferred
interest bonds and PIK bonds which are described above.
The policies described above are not fundamental and may be changed without
shareholder approval, as may be the Fund's investment objective.
OPTIONS ON SECURITIES: The Fund may write (sell) covered call and put options
on securities and purchase call and put options on securities. The Fund
may write options on securities for the purpose of increasing its return on
such securities and for hedging purposes.
A call option written by the Fund is covered if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire such
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 a Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash or high grade government securities in a segregated account
with its custodian. A put option written by the Fund is covered if the Fund
maintains cash or high grade government securities with a value equal to the
exercise price in a segregated account with its custodian, or else holds a put
on the same security and in the same principal amount as the put written where
the exercise price of the put held (i) is equal to or greater than the exercise
price of the put written or (ii) is less than the exercise price of the put
written if the difference is maintained by the Fund in cash or high grade
government securities in a segregated account with its custodian. Put and call
options written by the Fund may also be covered in such other manner as may be
in accordance with the requirements of the exchange on which, or the
counterparty with which, the option is traded, and applicable laws and
regulations.
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 cash or
short-term securities. 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 proceeds from the concurrent
sale of any securities subject to the option to be used for other investments
of the Fund, provided that another option on such security is not written. 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 in connection
with the option 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 written by the Fund is less
than the premium received from writing the option, or if the premium received
in connection with the closing of an option purchased by the Fund 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
previously written by the Fund is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Fund.
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 option 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, less related transaction costs. 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 could be used by the
Fund in the same market environments that call options would be 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.
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
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underlying security for an exercise price above its then current market value,
resulting in a capital loss unless the security subsequently appreciates in
value. The writing of options on securities will be undertaken by the Fund for
purposes in addition to hedging, and could involve certain risks which are not
present in the case of hedging transactions. Moreover, even where options are
written for hedging purposes, such transactions will constitute only a partial
hedge against declines in the value of portfolio securities or against
increases in the value of securities to be acquired, up to the amount of the
premium.
The Fund also may purchase put and call options on securities. Put options
would be purchased to hedge against a decline in the value of securities held
in the Fund's portfolio. If such a decline occurs, the put options will permit
the Fund to sell the underlying securities at the exercise price, or to close
out the options at a profit. 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 related 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. If such
an increase occurs, the call option will permit the Fund to purchase the
securities at the exercise price or to close out the option at a profit. The
premium paid for a call or put 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 rose or declined sufficiently, the
option may expire worthless to the Fund.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put
options on stock indices and purchase call and put options on stock indexes for
the purpose of increasing its gross income and to protect its portfolio against
declines in the value of securities it owns or increases in the value of
securities to be acquired.
The Fund may cover call options on stock indices by owning securities whose
price changes, in the opinion of the Adviser, are expected to be similar to
those of the index, or by having an absolute and immediate right to acquire
such securities without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities in its portfolio. Nevertheless, where the Fund
covers a call option on a stock index through ownership of securities, such
securities may not match the composition of the index and, in that event, the
Fund will not be fully covered and could be subject to risk of loss in the
event of adverse changes in the value of the index. A Fund may also cover call
options on stock indices by holding a call on the same index and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash or high grade government securities in a
segregated account with its custodian. The Fund may cover put options on stock
indices by maintaining cash or high grade government securities with a value
equal to the exercise price in a segregated account with its custodian, or else
by holding a put on the same security and in the same principal amount as the
put written where the exercise price of the put held (a) is equal to or greater
than the exercise price of the put written or (b) is less than the exercise
price of the put written if the difference is maintained by the Fund in cash or
high grade government securities in a segregated account with its custodian.
Put and call options on stock indices written by the Fund may also be covered
in such other manner as may be in accordance with the rules of the exchange on
which, or the counterparty with which, the option is traded, and applicable
laws and regulations.
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. If the value of an index on which the Fund has
written a call option falls or remains the same, the Fund will realize a profit
in the form of the premium received (less transaction costs) that could offset
all or a portion of any decline in the value of the securities it owns. If the
value of the index rises, however, the Fund will realize a loss in its call
option position, which will reduce the benefit of any unrealized appreciation
in the Fund's stock investments. By writing a put option, the Fund assumes the
risk of a decline in the index. To the extent that the price changes of
securities owned by a Fund correlate with changes in the value of the index,
writing covered put options on indices will increase the Fund's losses in the
event of a market decline, although such losses will be offset in part by the
premium received for writing the option.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options
for this purpose, the Fund will also bear the risk of losing all or a portion
of the premium paid, and related transaction costs, if the value of the index
does not rise. The purchase of call options on stock indices when the Fund is
substantially fully invested is a form of leverage, up to the amount of the
premium and related transaction costs, and involves risks of loss and of
increased volatility similar to those involved in purchasing calls on
securities the Fund owns.
The Fund also may purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a stock
index, the Fund will seek to offset a decline in the value of securities it
owns through appreciation of the put option. If the value of the Fund's
investments does not decline as anticipated, or if the value of the option does
not increase, the Fund's loss will be limited to the premium paid for the
option, plus related transaction costs. The success of this strategy will
largely depend on the accuracy of the correlation between the changes in value
of the index and the changes in value of the Fund's security holdings.
YIELD CURVE OPTIONS: The Fund may also enter into options on the "spread," or
yield differential, between two fixed income securities, in transactions
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to
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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 (i.e., in an effort
to increase its current income) 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 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 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 is covered if the Fund holds another
call (or put) option on the spread between the same two securities and
maintains in a segregated account with its custodian cash or cash equivalents
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 counterparty 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.
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 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 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-money. The Fund will treat all or a part
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 such SEC illiquidity ceiling.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
options on foreign currencies ("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. 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 did decline, the Fund would have the right to sell such currency for a
fixed amount in dollars and would 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 Options on Foreign
Currencies would 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 Options on Foreign Currencies 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 may, instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurred, the option would most likely not be
exercised, and the diminution in value of portfolio securities would be offset
by the amount of the premium received less related transaction costs. As in the
case of other types of options, therefore, the writing of Options on Foreign
Currencies will constitute only a partial hedge.
FUTURES CONTRACTS: The Fund may enter into stock index and foreign currency
futures contracts ("Futures Contracts"). A Futures Contract is a bilateral
agreement providing for the purchase and sale of a specified type and amount of
a financial instrument, or foreign currency, or for the making and acceptance
of a cash settlement, at a stated time in the future for a fixed price. By its
terms, a Futures Contract provides for a specified settlement date on which, in
the case of the majority of foreign currency futures contracts, the currency or
the contract are delivered by the seller and paid for by the purchaser, or on
which, in the case of stock
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index futures contracts and certain foreign currency futures contracts, the
difference between the price at which the contract was entered into and the
contract's closing value is settled between the purchaser and seller in cash.
Futures contracts differ from options in that they are bilateral agreements,
with both the purchaser and the seller equally obligated to complete the
transaction. Futures Contracts call for settlement only on the expiration date
and cannot be "exercised" at any other time during their term.
The purchase or sale of a Futures Contract differs from the purchase or sale of
a security or the purchase of an option in that no purchase price is paid or
received. Instead, an amount of cash or cash equivalents, which varies but may
be as low as 5% or less of the value of the contract, must be deposited with
the broker as "initial margin". Subsequent payments to and from the broker,
referred to as "variation margin", are made on a daily basis as the value of
the index or instrument underlying the Futures Contract fluctuates, making
positions in the Futures Contract more or less valuable -- a process known as
"marking to the market".
Purchases or sales of stock index futures contracts may be used to attempt to
protect a Fund's current or intended stock investments from broad fluctuations
in stock prices. For example, a Fund may sell stock index futures contracts in
anticipation of or during a market decline to attempt to offset the decrease in
market value of the Fund's securities portfolio that might otherwise result. If
such decline occurs, the loss in value of portfolio securities may be offset,
in whole or part, by gains on the futures position. When a Fund is not fully
invested in the securities market and anticipates a significant market advance,
it may purchase stock index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Fund intends to purchase. As such purchases are made, the
corresponding positions in stock index futures contracts will be closed out. In
a substantial majority of these transactions, the Fund will purchase such
securities upon termination of the futures position, but under unusual market
conditions, a long futures position may be terminated without a related
purchase of securities.
As noted in the Prospectus, a Fund may purchase and sell foreign currency
futures contracts for hedging purposes, to attempt to protect its current or
intended investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities denominated
in foreign currencies, or increase the cost of foreign-denominated securities
to be acquired, even if the value of such securities in the currencies in which
they are denominated remains constant. A Fund may sell futures contracts on a
foreign currency, for example, where it holds securities denominated in such
currency and it anticipates a decline in the value of such currency relative to
the dollar. In the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in whole or in part,
by gains on the futures contracts.
Conversely, a Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures contracts
on the relevant currency, which could offset, in whole or in part, the
increased cost of such securities resulting from a rise in the dollar value of
the underlying currencies. Where a Fund purchases futures contracts under such
circumstances, however, and the prices of securities to be acquired instead
decline, the Fund will sustain losses on its futures position which could
reduce or eliminate the benefits of the reduced cost of portfolio securities to
be acquired. The Fund may also enter into Futures Contracts for non-hedging
purposes, to the extent permitted by applicable law.
OPTIONS ON FUTURES CONTRACTS: The Fund may write or purchase options to buy or
sell Futures Contracts ("Options on Futures Contracts"). The writing of a call
Option on a Futures Contract may constitute a partial hedge against declining
prices of the securities or other instruments required to be delivered under
the terms 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 may constitute a partial
hedge against increasing prices of the securities or other instruments required
to be delivered under the terms 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. 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 Fund may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract and
in the same principal amount as the call written where the exercise price of
the call held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call written if the
difference is maintained by the Fund in cash and high grade government
securities in a segregated account with its custodian. The Fund may cover the
writing of put Options on Futures Contracts (a) through sales of the underlying
Futures Contract, (b) through segregation of cash or cash equivalents 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 (i) is equal to or greater than the exercise price of the put written
or (ii) is less than the exercise price of the put written if the difference is
maintained by the Fund in cash or high grade government securities in a
segregated account with its custodian. Put and Call Options on Futures
Contracts written by the Fund may also be covered in such other manner as may
be in accordance with the
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rules of the exchange on which, or the counterparty with which, the option is
traded, and applicable laws and regulations. Upon the exercise of a call Option
on a Futures Contract written by the Fund, the Fund will be required to sell
the underlying Futures Contract which, if the Fund has covered its obligation
through the purchase of such Contract, will serve to liquidate its futures
position. Similarly, where a put Option on a Futures Contract written by the
Fund is exercised, the Fund will be required to purchase the underlying Futures
Contract which, if the Fund has covered its obligation through the sale of such
Contract, will close out its futures position.
The Fund may purchase Options on Futures Contracts for hedging purposes as an
alternative to purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated
as a result of a projected market-wide decline or changes in interest or
exchange rates, the Fund could, in lieu of selling Futures Contracts, purchase
put options thereon. In the event that such decrease occurs, it may be offset,
in whole or part, by a profit on the option. Conversely, where it is projected
that the value of securities to be acquired by the Fund will increase prior to
acquisition, due to a market advance or changes in interest or exchange rates,
the Fund could purchase call Options on Futures Contracts, rather than
purchasing the underlying Futures Contracts. The Fund may also enter into
Options on Futures Contracts for non-hedging purposes, to the extent permitted
by applicable law.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a specific currency at a future date at a
price set at the time of the contract (a "Forward Contract"). The Fund may
enter into Forward Contracts for hedging purposes as well as for non-hedging
purposes. The Fund may also enter into Forward Contracts for "cross-hedging" as
noted in the Prospectus. Transactions in Forward Contracts entered into for
hedging purposes will include forward purchases or sales of foreign currencies
for the purpose of protecting the dollar value of securities denominated in a
foreign currency or protecting the dollar equivalent of interest or dividends
to be paid on such securities. By entering into such transactions, however, the
Fund may be required to forego the benefits of advantageous changes in exchange
rates. The Fund may also enter into transactions in Forward Contracts for other
than hedging purposes which presents greater profit potential but also involves
increased risk. For example, if the Adviser believes that the value of a
particular foreign currency will increase or decrease relative to the value of
the U.S. dollar, the Fund may purchase or sell such currency, respectively,
through a Forward Contract. If the expected changes in the value of the
currency occur, the Fund will realize profits which will increase its gross
income. Where exchange rates do not move in the direction or to the extent
anticipated, however, the Fund may sustain losses which will reduce its gross
income. Such transactions, therefore, could be considered speculative.
The Fund has established procedures consistent with the General Statement of
Policy of the SEC concerning purchases or sales of foreign currencies. Since
that policy currently recommends that an amount of the Fund's assets equal to
the amount of the commitment be held aside or segregated to be used to pay for
the commitment, the Fund will always have cash, cash equivalents or high
quality debt securities available sufficient to cover any commitments under
contracts to purchase or sell foreign currencies or to limit any potential
risk. The segregated account will be marked to market on a daily basis. While
these contracts are not presently regulated by the Commodity Futures Trading
Commission ("CFTC"), the CFTC may in the future assert authority to regulate
Forward Contracts. In such event, the Fund's ability to utilize Forward
Contracts in the manner set forth above may be restricted.
RISK FACTORS: IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO -- The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in options, Futures Contracts, and Forward
Contracts 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. Because the securities in the Fund's portfolio will most
likely not be the same as those securities underlying a stock index, the
correlation between movements in the portfolio and in the securities underlying
the index will not be perfect. The trading of Futures Contracts 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.
The anticipated spread between the prices may be distorted due to the
differences in the nature of the markets, such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in such markets. In this regard, trading by speculators in options
and Futures Contracts has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly near
the expiration of such contracts. It should be noted that Futures Contracts or
options based upon a narrower index of securities, such as those of a
particular industry group, may present greater risk than options or Futures
Contracts based on a broad market index, because a narrower index is more
susceptible to rapid and extreme fluctuations as a result of changes in the
value of a small number of securities. The trading of Options on Futures
Contracts also entails the risk that changes in the value of the underlying
Futures Contracts will not be fully reflected in the value of the option.
Further, with respect to options on securities, options on stock indices and
Options on Futures Contracts, the Fund is subject to the risk of market
movements between the time that the option is exercised and the time of
performance thereunder. In writing a covered call option on a security, index
or Futures Contract, the Fund also incurs the risk that changes in the value of
the instruments used to cover the position will not correlate closely with
changes in the value of the option or underlying index or instrument.
The Fund will invest in a hedging instrument only if, in the judgment of its
Adviser, there would be expected to be a sufficient degree of correlation
between movements in the value of the instrument and movements in the value of
the relevant portion of the Fund's portfolio for such hedge to be effective.
There can be no assurance that the Adviser's judgment will be accurate.
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It should also be noted that the Fund may purchase and sell Options, Futures
Contracts, Options on Futures Contracts and Forward Contracts not only for
hedging purposes, but also for non hedging purposes, to the extent permitted by
applicable law, including for the purpose of increasing its return on portfolio
securities. As a result, in the event of adverse market movements, the Fund
might be subject to losses, which would not be offset by increases in the value
of portfolio securities or declines in the cost of securities to be acquired.
In addition, the method of covering an option employed by the Fund may not
fully protect it against risk of loss and, in any event, the Fund could suffer
losses on the option position which might not be offset by corresponding
portfolio gains.
With respect to the writing of straddles on securities, the Fund incurs the
risk that the price of the underlying security will not remain stable, that
one of the options written will be exercised and that the resulting loss will
not be offset by the amount of the premiums received.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET -- Prior to exercise or expiration,
a futures or option position can only be terminated by entering into a closing
purchase or sale transaction. This requires a secondary market for such
instruments on the exchange on which the initial transaction was entered into.
While the Fund will enter into options or futures positions only if there
appears to be a liquid secondary market therefor, there can be no assurance
that such a market will exist for any particular contracts at any specific
time. In that event, it may not be possible to close out a position held by the
Fund, and the Fund could be required to purchase or sell the instrument
underlying an option, make or receive a cash settlement or meet ongoing
variation margin requirements. Under such circumstances, if the Fund had
insufficient cash available to meet margin requirements, it might be necessary
to liquidate portfolio securities at a time when it would be disadvantageous to
do so. The inability to close out options and futures positions, therefore,
could have an adverse impact on the Fund's ability effectively to hedge its
portfolios, and could result in trading losses. The liquidity of a secondary
market in a Futures Contract or options thereon may also 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.
The trading of Futures Contracts and options is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN -- Because of low initial margin deposits made upon the opening of a
futures position and the writing of an option, such transactions involve
substantial leverage. As a result, relatively small movements in the price of
the contract can result in substantial unrealized gains or losses. Where the
Fund engages in the purchase or sale of Options, Options on Futures Contracts
and Forward Contracts for hedging purposes, however, any losses incurred in
connection therewith should, if the hedging strategy is successful, be offset,
in whole or in part, by increases in the value of securities held by the Fund
or decreases in the prices of securities the Fund intends to acquire. Where the
Fund purchases or sells such instruments for other than hedging purposes, the
margin requirements associated with such transactions could expose the Fund to
greater risk.
TRADING AND POSITION LIMITS -- The exchanges on which Futures Contracts 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). In addition, the CFTC and the various contract markets
have established limits referred to as "speculative position limits" on the
maximum net long or net short position which any person may hold or control in
a particular futures or option contract. An exchange may order the liquidation
of positions found to be in violation of these limits and it may impose other
sanctions or restrictions. The Adviser does not believe that these trading and
position limits will have any adverse impact on the strategies for hedging the
portfolio of the Fund.
RISK OF OPTIONS ON FUTURES CONTRACTS -- 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. In order to profit from an option
purchased, however, it may be necessary to exercise the option and to liquidate
the underlying Futures Contract, subject to the risks of the availability of a
liquid offset market described herein. The writer of an Option on a Futures
Contract is subject to the risks of commodity futures trading, including the
requirement of initial and variation margin payments, as well as the additional
risk that movements in the price of the option may not correlate with movements
in the price of the underlying index or Futures Contract.
ADDITIONAL RISKS OF TRANSACTIONS NOT CONDUCTED ON EXCHANGES -- Transactions in
Forward Contracts are subject to all of the correlation, liquidity and other
risks outlined above. In addition, however, such transactions are subject to
the risk of governmental actions affecting trading in or the prices of
currencies underlying such contracts, which could restrict or eliminate trading
and could have a substantial adverse effect on the value of positions held by
the Fund. In addition, the value of such positions could be adversely affected
by a number of other complex political and economic factors applicable to the
countries issuing the underlying currencies. Further, unlike trading in most
other types of instruments, there is no systematic reporting of last sale
information with respect to the foreign currencies underlying contracts
thereon. As a result, the available information on which trading systems will
be based may not be as complete as the comparable data on which the Fund makes
investment and trading decisions in connection with other transactions.
Moreover, because the foreign currency market is a global, 24 hour market,
events could occur on that market which would not be reflected in the forward
markets until the following day, thereby preventing the Fund from responding to
such events in a timely manner. Settlements of exercises of Forward Contracts
generally must
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occur within the country issuing the underlying currency, which in turn
requires traders to accept or make delivery of such currencies in
conformity with any United States or foreign restrictions and regulations
regarding the maintenance of foreign banking relationships, fees, taxes or
other charges.
Forward Contracts, and over-the-counter options on securities, are not traded
on exchanges regulated by the CFTC or the SEC, but through financial
institutions acting as market-makers. In an over-the-counter trading
environment, many of the protections afforded to exchange participants will not
be available. In addition, over-the-counter transactions can only be entered
into with a financial institution willing to take the opposite side, as
principal, of the Fund's position unless the institution acts as broker and is
able to find another counterparty willing to enter into the transaction with
the Fund. Where no such counterparty is available, it will not be possible to
enter into a desired transaction. There also may be no liquid secondary market
in the trading of over-the-counter contracts, and the Fund could be required to
retain options purchased or written, or Forward Contracts entered into, until
exercise, expiration or maturity. This in turn could limit the Fund's ability
to profit from open positions or to reduce losses experienced, and could result
in greater losses. Further, over-the-counter transactions are not subject to
the performance guarantee of an exchange clearing house, and the Fund will
therefore be subject to the risk of default by, or the bankruptcy of, the
financial institution serving as its counterparty.
While Forward Contracts are not presently subject to regulation by the CFTC,
the CFTC may in the future assert or be granted authority to regulate such
instruments. In such event, the Fund's ability to utilize Forward Contracts in
the manner set forth above could be restricted.
RESTRICTIONS ON THE USE OF OPTIONS AND FUTURES: In order to assure that the
Fund will not be deemed to be a "commodity pool" for purposes of the
Commodity Exchange Act, regulations of the CFTC require that the Fund enter
into transactions in Futures Contracts and Options on Futures Contracts only
(i) for bona fide hedging purposes (as defined in CFTC regulations), or (ii)
for non-hedging purposes, provided that the aggregate initial margin and
premiums on such non-hedging positions does not exceed 5% of the liquidation
value of the Fund's assets. In addition, the Fund must comply with the
requirements of various state securities laws in connection with such
transactions.
The Fund has adopted the additional policy that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
options if, as a result, more than 5% of its total assets would be invested in
such options.
When the Fund purchases a Futures Contract, an amount of cash and cash
equivalents will be deposited in a segregated account with the Fund's custodian
so that the amount so segregated will at all times equal the value of the
Futures Contract, thereby insuring that the use of such Futures Contract is
unleveraged.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the its
shares (which, as used in this Statement of Additional Information, means the
lesser of (i) more than 50% of the outstanding shares of the Trust (or a class
or series, as applicable), or (ii) 67% or more of the outstanding shares of the
Trust (or a class or series, as applicable), present at a meeting at which
holders of more than 50% of the outstanding shares of the Trust (or a class or
series, as applicable) are represented in person or by proxy):
The Fund may not:
(1) borrow money in an amount in excess of 5% of its gross assets (taken at
the lower of cost or market value), and then only as a temporary measure for
extraordinary or emergency purposes;
(2) pledge, mortgage or hypothecate an amount of its assets (taken at market
value) in excess of 33 1/3% of its gross assets taken at the lower of cost or
market value. For the purpose of this restriction, collateral arrangements
with respect to options on securities, stock indices and foreign currencies
("Options"), Futures Contracts, Options on Futures Contracts, Forward
Contracts, and payments of initial and variation margin in connection
therewith are not considered a pledge of assets;
(3) 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;
(4) concentrate its investments in any particular industry, but if it is
deemed appropriate for the achievement of its investment objective, up to 25%
of its assets, at market value at the time of each investment, may be invested
in securities of issuers in any one industry;
(5) purchase or sell real estate (including limited partnership interests
but excluding securities of companies, such as real estate investment trusts,
which deal in real estate or interests therein), or mineral leases,
commodities or commodity contracts (except for Options, Futures Contracts,
Options on Futures Contracts and Forward Contracts) in the ordinary course of
its business. The Fund reserves the freedom of action to hold and to sell real
estate or mineral leases, commodities or commodity contracts acquired as a
result of the ownership of securities. The Fund will not purchase securities
for the purpose of acquiring real estate or mineral leases, commodities or
commodity contracts (except Options, Future Contracts, Options on Future
Contracts and Forward Contracts);
(6) make loans to other persons. For these purposes, the purchase of
short-term commercial paper, the purchase of a portion or all of an issue of
debt securities in accordance with the Fund's investment objectives and
policies, the lending of portfolio securities, or the investment of the Fund's
assets in repurchase agreements, shall not be considered the making of a loan;
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<PAGE> 105
(7) purchase the securities of any issuer if such purchase, at the time
thereof, would cause more than 5% of its total assets (taken at market value)
to be invested in the securities of such issuer, other than U.S. Government
securities;
(8) 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;
(9) invest for the purpose of exercising control or management;
(10) purchase securities issued by any other investment company or
investment trust 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 investment
company or investment trust 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 issuer; and provided, further, that the
Fund shall not purchase securities issued by any open-end investment company;
(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 an 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, 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;
(12) purchase any securities or evidences of interest therein on margin,
except that the Fund may obtain such short-term credit as may be necessary for
the clearance of purchases and sales of securities and except that the Fund
may make margin deposits in connection with Options, Futures Contracts,
Options on Futures Contracts and Forward Contracts;
(13) sell any security which the Fund 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;
(14) purchase or sell any put or call option 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, foreign currencies, indexes
of securities and Futures Contracts; or
(15) invest in securities which are subject to legal or contractual
restrictions on resale, or for which there is no readily available market
(e.g., trading in the security is suspended, or, in the case of unlisted
securities, market makers do not exist or will not entertain bids or offers),
unless the Board of Trustees has determined that such securities are liquid
based upon trading markets for the specific security, or repurchase agreements
maturing in more than seven days, if more than 15% of the Fund's net assets
(taken at market value) would be invested in such securities or such
repurchase agreements.
The Fund has also adopted the following policies which are not fundamental. The
Fund's purchases of warrants will not exceed 5% of its net assets. Included
within that amount, but not exceeding 2% of its net assets, may be warrants
which are not listed on the New York or American Stock Exchange. Any such
warrants will be valued at their market value except that warrants which are
attached to securities at the time such securities are acquired by the Fund
will be deemed to be without value for the purpose of this restriction. The
Fund will not invest more than 5% of its assets 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.
These investment restrictions are adhered to at the time of purchase or
utilization of assets; a subsequent change in circumstances will not be
considered to result in a violation of policy.
3. MANAGEMENT OF THE FUND
The Board of Trustees provides broad supervision over the affairs of the Fund.
The Adviser is responsible for the management of the Fund's assets, and the
officers of the Trust are responsible for the Fund's operations. The Trust's
officers and Trustees are listed below, together with their principal
occupations during the past five years. (Their titles may have varied during
that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY*
Private investor; Massachusetts Financial Services Company, former Chairman and
Director (until September 30, 1991)
PETER G. HARWOOD
Private investor; Loomis, Sayles & Co. (investment counsel firm), Financial Vice
President, Treasurer and Director (retired October 1988)
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES
Eastern Enterprises (diversified holding company), Chairman and Chief Executive
Officer (since December 1991); General Cinema Corporation, Vice Chairman and
Chief Financial Officer (until December 1991); The Neiman Marcus Group, Inc.,
Vice Chairman and Chief Financial Officer (prior to 1987 to December 1991);
United States Filter Corporation, Director
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU
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 (from June 1990 until November
1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge, Massachusetts
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CHARLES W. SCHMIDT
Private investor; Raytheon Company (diversified electronics manufacturer),
Senior Vice President (until December 1990); OHM Corporation, Director; The
Boston Company, Director; Boston Safe Deposit and Trust Company, Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President
ELAINE R. SMITH
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (from August 1990 to September 1992); Ernst &
Young (accountants), Consultant (from February to July 1990)
Address: Weston, Massachusetts
DAVID B. STONE
North American Management Corp. (investment advisers), Chairman
Address: 10 Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
LESLIE J. NANBERG,* Vice President
Massachusetts Financial Services Company, Senior Vice President
STEPHEN C. BRYANT,* Vice President
Massachusetts Financial Services Company, Senior Vice President
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President and Assistant
Treasurer
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel (since September 1990); associated with a major law firm (prior to
August 1990)
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President
---------------
*"Interested persons" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act") of the Adviser, whose address is 500 Boylston Street,
Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary of MFS is the
investment adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs.
Shames and Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold
similar positions with certain other MFS affiliates. Mr. Bailey is a director
of Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"),
the corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $1,000 per year plus $65 per meeting and $50 per
committee meeting attended, together with such Trustee's 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
the interested Trustees except Mr. Bailey. The Fund will accrue its allocable
share of compensation expenses each year to cover current years service and
amortize past service cost.
Set forth in Appendix A hereto is certain information concerning the cash
compensation paid to non-interested Trustees and Mr. Bailey and benefits
accrued, and estimated benefits payable, under the retirement plan.
As of February 28, 1995, all Trustees and officers as a group owned less than
1% of the outstanding shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify the Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust unless, as to liabilities to the Trust or its shareholders, it is finally
adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
with respect to any matter, unless it is adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interest of the Trust. In the case of settlement, such indemnification will not
be provided unless it has been determined pursuant to the Declaration of Trust
that such officers or Trustees have not engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.), which in turn is a
subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Adviser manages the assets of the Fund pursuant to an Investment Advisory
Agreement, dated September 1, 1993 (the "Advisory Agreement"). The Adviser
provides the Fund with overall investment advisory and administrative services,
as well as general office facilities. Subject to such policies as the Trustees
may determine, the Adviser makes investment decisions for the Fund. For these
services and facilities, the Adviser receives a management fee computed and
paid monthly at the annual rate of 0.75% of the Fund's average daily net assets
for its then-current fiscal year.
MFS received management fees of $1,141,475 during the Fund's fiscal year ended
November 30, 1994. Under a prior Investment Advisory Agreement, MFS received
management fees of $928,600 during the Fund's fiscal year ended November 30,
1993 and $820,592 during the Fund's fiscal year ended November 30, 1992. In
order to comply with the requirements of certain state securities commissions,
the Adviser will reduce its management fee or otherwise reimburse the Fund for
any expenses, exclusive of interest, taxes, and brokerage commissions, incurred
by the
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<PAGE> 107
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. Any such adjustment would not become
effective until the beginning of the Fund's next fiscal year following the date
of such amendments or the date on which such requirements become no longer
applicable.
The Fund pays all of its Fund's expenses (other than those assumed by MFS or
MFD), including: Trustees 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
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 Investors Bank
& Trust Company, the Fund's custodian, for all services to the Fund, including
safekeeping of funds and securities and maintaining required books and
accounts; expenses of calculating the net asset value of shares of the Fund;
and expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of the Fund and the preparation,
printing and mailing of prospectuses 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
Fund's fiscal year ended November 30, 1994, see "Statement of Operations" in
the Annual Report to shareholders. Payment by the Fund of brokerage commissions
for brokerage and research services of value to the Adviser in serving its
clients is discussed under the caption "Portfolio Transactions and Brokerage
Commissions".
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 Fund's investments, effecting the Fund's portfolio
transactions and, in general, administering the Fund's affairs.
The Advisory Agreement will remain in effect until August 1, 1995, 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 voting securities (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 the holders of a majority of the Fund's
shares (as defined in "Investment Restrictions") or by either party 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 term "MFS" and that MFS may render services
to others and may permit fund clients in addition to the Fund to use the term
"MFS" in their names. The Advisory Agreement also provides that MFS may render
services to others and 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.
CUSTODIAN
Investors Bank & 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 Trustees have reviewed and approved as in the best interests
of the Fund and its shareholders sub-custodial arrangements with the Chase
Manhattan Bank, N.A. for securities of the Fund held outside the United States.
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 keeping records in connection with the issuance, transfer and
redemption of each class of shares of the Fund. For these services, the
Shareholder Servicing Agent receives a fee based on the net assets of each
class of shares of the Fund, computed and paid monthly. 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. For the
fiscal year ended November 30, 1994 the Fund paid the Shareholder Servicing
Agent fees of $233,568 under its Agency Agreement. State Street Bank and Trust
Company, the dividend and distribution disbursing agent of the Fund, has
contracted with the Shareholder Servicing Agent to administer and perform
certain dividend and distribution disbursing functions for the Fund.
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<PAGE> 108
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"). 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 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" in this Statement
of Additional Information). A group might qualify to obtain quantity sales
charge discounts (see "Investment and Withdrawal Programs").
Class A shares of the Fund 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 5% and MFD retains approximately 3/4 of 1% of the public
offering price. In addition, MFD, on behalf of the Fund, will pay a commission
to dealers who initiate and are responsible for purchases of $1 million or more
as described in the Prospectus.
CLASS B SHARES: As the distributor of the Fund, 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 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.
During the Fund's fiscal year ended November 30, 1994, MFD received sales
charges of $49,409 and dealers received sales charges of $386,829 (as their
concession on gross sales charges of $436,238) for selling Class A shares of the
Fund; the Fund received $15,174,670 representing the aggregate net asset value
of such shares. During the Fund's fiscal year ended November 30, 1993, MFD
received sales charges of $24,057 and dealers received sales charges of $147,827
(as their concession on gross sales charges of $171,884) for selling Class A
shares of the Fund; the Fund received $5,994,980 representing the aggregate net
asset value of such shares. During the Fund's fiscal ended November 30, 1992,
MFD received sales charges of $21,389 and dealers received sales charges of
$126,826 (as their concession on gross sales charges of $148,215) for selling
Class A shares of the Fund; the Fund received $5,352,155 representing the
aggregate net asset value of such shares.
During the Fund's fiscal year ended November 30, 1994, the CDSC imposed on
redemption of Class B shares was $16,318. During the period September 7, 1993
through November 30, 1994, there was no CDSC imposed on redemption of Class B
shares.
The Distribution Agreement will remain in effect until August 1, 1995, 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
person affiliated with the Adviser. Any such person may serve other clients of
the Adviser, or any subsidiary of the Adviser in a similar capacity. Changes in
the Fund's investments are reviewed by the Board of Trustees.
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. The Adviser attempts to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of the Fund and
other clients of the Adviser on the basis of their professional capability, the
value and
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quality of their brokerage services, and the level of their brokerage
commissions. In the case of securities traded in the over-the-counter market
(where no stated commissions are paid but the prices include a dealer's markup
or markdown), the Adviser normally seeks to deal directly with the primary
market makers, unless in its opinion, best execution is available elsewhere. In
the case of securities purchased from underwriters, the cost of such securities
generally includes a fixed underwriting commission or concession. From time to
time, soliciting dealer fees are available to the Adviser on the tender of the
Fund's portfolio securities in so-called tender or exchange offers. Such
soliciting dealer fees are in effect recaptured for the Fund by the Adviser. At
present no other recapture arrangements are in effect.
Consistent with the foregoing primary consideration, the Rules of Fair Practice
of the National Association of Securities Dealers, Inc. (the "NASD") and such
other policies as the Trustees may determine, the Adviser may consider sales of
shares of the Fund and of the other investment company clients of MFD as a
factor in the selection of broker-dealers to execute the Fund's portfolio
transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the Securities
Exchange Act of 1934, the Adviser may cause the Fund to pay a broker-dealer
which provides brokerage and research services to the Adviser an amount of
commission for effecting a securities transaction for the Fund in excess of the
amount other broker-dealers would have charged for the transaction if the
Adviser determines in good faith that the greater commission is reasonable in
relation to the value of the brokerage and research services provided by the
executing broker-dealer, viewed in terms of either a particular transaction or
the Adviser's overall responsibilities to the Fund or to its other clients. Not
all of such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing, or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to the
availability of securities or of purchasers or sellers of securities and
services in effecting securities transactions and performing functions
incidental thereto such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser for no consideration other
than brokerage or underwriting commissions. Securities may be bought or sold
through such broker-dealers, but at present, unless otherwise directed by the
Fund. A commission higher than one charged elsewhere will not be paid to such a
firm solely because it provided such Research to the Adviser. The Fund's
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $20,000 of commission business from the MFS Funds
to Pershing Division of Donaldson, Lufkin & Jenrette as consideration for the
annual renewal of the Lipper Directors' Analytical Data Service (which provides
information useful to the Trustees in reviewing the relationship between the
Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. The Adviser sometimes uses evaluations resulting
from this effort as a consideration in the selection of brokers to execute
portfolio transactions.
The management fee that the Fund pays to the Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research services. To the
extent the Fund's portfolio transactions are used to obtain such services, the
brokerage commissions paid by the Fund will exceed those that might otherwise be
paid, by an amount which cannot be presently determined. Such services would be
useful and of value to the Adviser in serving both the Fund and other clients
and, conversely, such services obtained by the placement of brokerage business
of other clients would be useful to the Adviser in carrying out its obligations
to the Fund. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through use of the services, avoid the additional
expenses which would be incurred if it should attempt to develop comparable
information through its own staff.
During the Fund's fiscal years ended November 30, 1994, 1993 and 1992, the Fund
paid total brokerage commissions of $539,320, $382,355 and $425,153,
respectively, on total transactions (excluding transactions involving U.S.
Government securities, purchased options transactions, and short-term
obligations) of $271,784,382, $250,560,443 and $278,940,382, respectively. Not
all of the Fund's transactions are equity security transactions which involve
the payment of brokerage commissions. During the Fund's fiscal year ended
November 30, 1994, the Fund acquired and retained securities issued by Salomon
Brothers Inc., a regular broker-dealer of the Fund, which securities had a value
of $2,730,000 at November 30, 1994.
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
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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 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 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 $50,000 or more of Class A shares of the Fund
alone or in combination with shares of all classes of other MFS Funds or the MFS
Fixed Fund (a bank collective investment fund) within a 13-month period (or
36-month period in the case 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 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 the holdings
of all classes of shares of that shareholder in the MFS Funds or the MFS Fixed
Fund (a bank collective investment 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 $35,000 and purchases an
additional $15,000 of Class A shares of the Fund, the sales charge for the
$15,000 purchase would be at the rate of 4.75% (the rate applicable to single
transactions of $50,000). 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.
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 the 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 will not be 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, as
designated on the Account Application and 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 the 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) any "Free Amount"; (ii) to the
extent necessary, any
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"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 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 at the close
of business on the record date for such distributions. To initiate this service,
shares having an aggregate value of at least $10,000 either must be held on
deposit by, or certificates for such shares must be deposited with, the
Shareholder Servicing Agent. Maintaining a withdrawal plan concurrently with an
investment program would be disadvantageous because of the sales charges
included in share 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. The shareholder by written instruction to the Shareholder Servicing
Agent 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, or
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
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 a MFS Fund for
investment in other MFS Funds selected by the shareholder. Under the Automatic
Exchange Plan, exchanges of at least $50 each may be made to up to four
different funds effective on the seventh day of each month or every third month,
depending on 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
exchanges 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 in such MFS Fund 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 the exchange is scheduled, such funds may not be available
for exchange 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, 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 MFS Fund are registered; if by
telephone -- proper account identification given is 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.
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REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the
other MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund
and 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. In the case of proceeds reinvested in
the MFS Money Market Fund, MFS Government Money Market Fund or Class A shares of
the 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 in the case of 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 is considered a
"wash sale" and may result in the inability to recognize currently 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 in an account for which payment has been received by the Fund
(i.e., an established account) may be exchanged for shares of the same class of
any of the other MFS Funds (if available for sale) at net asset value. 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 account identification is given by the dealer or shareholder
of record), and each exchange must involve either shares having an aggregate
value of at least $1,000 ($50 in the case of retirement plan participants whose
sponsoring organizations subscribe to the MFS FUNDamental 401(k) Plan or another
similar 401(k) recordkeeping system made available by MFS Service Center, Inc.,
or all the shares in the account. 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, 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 an Exchange Request is received by the
Shareholder Servicing Agent on any business day 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 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 (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 shares of the Fund, subject to the conditions, if any,
set forth in their respective prospectuses. In addition, unitholders of the MFS
Fixed Fund (a bank collective investment fund) have the right to exchange their
units (except units acquired through direct purchases) for shares of the Fund,
subject to the conditions, if any, imposed upon such unitholders by the MFS
Fixed Fund.
Any state income tax advantages for investment in shares of each state specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available through investment
dealers plans, and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their nonemployed
spouses who desire to make limited contributions to a tax-deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain qualified corporate pension and profit-sharing plans.
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The plan documents 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.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
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, and the composition and holding period
of the Fund's portfolio assets. Because the Fund intends to distribute all of
its net investment income and net realized capital gains to shareholders in
accordance with the timing requirements imposed by the Code, it is expected that
the Fund will not 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 shareholders.
Shareholders of the Fund 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 from net short-term capital gains
(whether paid in cash or additional shares) are taxable to the Fund's
shareholders as ordinary income for federal income tax purposes. A portion of
these dividends (but none of the Fund's capital gain distributions) is normally
eligible for the dividends received deduction for corporations if the recipient
otherwise qualifies for that deduction with respect to its holding of Fund
shares. Availability of the deduction for particular shareholders is subject to
certain limitations and deducted amounts may be subject to the alternative
minimum tax and result in certain basis adjustments. Distributions from net
capital gains (i.e., the excess of long-term capital gains over net short-term
capital losses), whether paid in cash or in additional shares, are taxable to
the Fund's shareholders as long-term capital gains for federal income tax
purposes without regard to the length of time shareholders have owned their
shares.
Fund dividends declared in October, November or December to shareholders of
record in such a month and paid the following January will be taxable to
shareholders as if received on December 31 of the year in which they are
declared. Any dividend or distribution will have the effect of reducing the per
share net asset value of shares in the Fund by the amount of the dividend or
distribution. Shareholders purchasing shares shortly before the record date of
any taxable dividend or other 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 long-term capital gain or loss if the shares have been held for more
than twelve months and otherwise as a short-term capital gain or loss. However,
any loss realized upon a redemption 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 gains made with respect to those shares. Any loss
realized upon a redemption of shares may also be disallowed under rules relating
to wash sales. Gain may be increased (or loss reduced) upon a redemption of
Class A shares of the Fund within ninety days after their purchase followed by
any purchase (including purchases by exchange or by reinvestment) without
payment of an additional sales charge of Class A shares of the Fund or of
another MFS Fund (or any other shares of an MFS Fund generally sold subject to a
sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. Any
investment in zero coupon bonds, deferred interest bonds, and PIK 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 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.
The Fund's transactions in options, Futures Contracts, and Forward Contracts
will be subject to special tax rules that may affect the amount, timing, and
character of Fund income and distributions to shareholders. For example, certain
positions held by the Fund on the last business day of each taxable year will be
marked to market (i.e., treated as if closed out) on that day, and any gain or
loss associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, Futures Contracts, and
Forward Contracts 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. For example, 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
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purposes and investment by the Fund in certain "passive foreign investment
companies" may be limited in order to avoid imposition of a tax on the Fund.
The Fund may be subject to foreign taxes on its income from foreign securities
and generally will be unable to pass through to shareholders foreign tax credits
and deductions with respect to foreign taxes paid by the Fund. 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 ("Non-U.S. Persons") are generally subject to
U.S. tax withholding at the rate of 30%. The Fund intends to withhold 30% of any
payments made to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower rate may be permitted under an applicable treaty.
Any amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period applicable
to such claims. The Fund is also required in certain circumstances to apply
backup withholding at a rate of 31% on taxable dividends and redemption proceeds
paid to any shareholder (including a 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. Distributions received from the Fund
by Non-U.S. Persons may also be subject to tax under the laws of their own
jurisdiction.
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.
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 Statement of Additional Information, the Exchange is open for
trading every weekday except for the following holidays or the day on which they
are observed: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) This
determination is made once during each day as of the close of regular trading on
the Exchange by deducting the amount of the liabilities attributable to the
class from the value of the assets attributable to the class and dividing the
difference by the number of shares of the class outstanding.
Bonds and other fixed income securities (other than short-term obligations) in
the Fund's portfolio 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 quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Forward Contracts will be valued
using a pricing model taking into consideration market data from an external
pricing source. Use of the pricing service has been approved by the Trust's
Board of Trustees. All other securities, futures contracts and options in the
Fund's portfolio (other than short-term obligations) for which the principal
market is one or more securities or commodities exchanges (whether domestic or
foreign) will be valued at the last reported sale price or at the settlement
price prior to the determination (or if there has been no current sale, at the
closing bid price) on the primary exchange on which such securities, futures
contracts or options are traded; but if a securities exchange is not the
principal market for securities, such securities will, if market quotations are
readily available, be valued at current bid prices, unless such securities are
reported on the NASDAQ system, in which case they are valued at the last sale
price or, if no sales occurred during the day, at the last quoted bid price.
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. 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.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of regular trading on the Exchange.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the close of regular trading on the
Exchange which will not be reflected in the computation of the Fund's net asset
value unless the Trustees deem that such event would materially affect the net
asset value in which case an adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. 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.
The Trustees annually review the appropriateness of the time of day as of which
the net asset value is computed.
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 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 purchased on or after September 1, 1993)
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 5.75%), and/or (iii) total rates of
return which represent aggregate performance over a period or year-by-year
performance, and
21
<PAGE> 115
which may or may not reflect the effect of the maximum or other sales charge or
CDSC. The Fund's average annual total rate of return for Class A shares,
reflecting the current maximum sales charge (5.75%) on an initial investment for
the one-year, five-year and ten-year period ended November 30, 1994, was,
respectively, -3.94%, 8.23% and 13.41%. The Fund's average annual total rate of
return for Class A shares, not giving effect to the sales charge on the initial
investment, for the one-year, five-year and ten-year period ended November 30,
1994, was, respectively, 1.92%, 9.51% and 14.08%. The Fund's average annual
total rate of return for Class B shares reflecting the CDSC, for the one-year
period ended November 30, 1994 and for the period from September 7, 1993
(commencement of offering of this class of shares) to November 30, 1994 was
-2.85% and -3.26%. The Fund's average annual total rate of return for Class B
shares, not giving effect of the CDSC, for the one-year period ended November
30, 1994 and for the period from September 7, 1993 (commencement of offering of
this class of shares) to November 30, 1994 was 1.15% and 2.32%. Certain total
return figures would have been lower if fee waivers were not in place.
PERFORMANCE RESULTS: The performance results for Class A shares below, based on
an assumed initial investment of $10,000 in Class A shares, cover the period
from January 1, 1985 to December 31, 1994. It has been assumed that dividends
and capital gain distributions were reinvested in additional shares. These
performance results, as well as any 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 total rates of
return should be considered when comparing the total rate of return of the Fund
to 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).
MFS VALUE FUND -- CLASS A
<TABLE>
<CAPTION>
DIRECT CAP GAIN DIVIDEND TOTAL
YEAR ENDED INVESTMENT REINVESTMENT REINVESTMENT VALUE
---------- ---------- ------------ ------------ ------
<S> <C> <C> <C> <C>
12/31/85 11,518 0 151 11,669
12/31/86 12,081 1,427 168 13,676
12/31/87 10,646 3,100 260 14,006
12/31/88 12,686 4,413 632 17,731
12/31/89 12,616 7,763 1,314 21,693
12/31/90 10,717 6,863 1,546 19,126
12/31/91 12,419 9,304 1,983 23,706
12/31/92 12,770 13,162 2,039 27,971
12/31/93 13,699 16,272 5,080 35,051
12/31/94 12,376 17,217 4,590 34,183
</TABLE>
EXPLANATORY NOTES: The results in the table assume that the initial investment
on January 1, 1985 has been reduced by the current maximum sales charge of
5.75%. No adjustment has been made for any income taxes payable by shareholders.
From time to time each Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund performance and operations appearing in
various independent publications, including but not limited to the following:
Money, Fortune, U.S. News and World Report, Kiplinger's Personal Finance, The
Wall Street Journal, Barron's, Investors Business Daily, Newsweek, Financial
World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., 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.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first 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.
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to let
shareholders take capital gain distributions either in additional shares
or in cash.
-- 1976 -- MFS 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.
22
<PAGE> 116
-- 1981 -- MFS World Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
-- 1984 -- MFS Municipal High Income Fund is the first mutual fund to seek
high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
-- 1986 -- MFS Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS Multimarket Income Trust is the first closed-end, multimarket
high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS[REGISTERED TRADEMARK] Regatta becomes America's first
non-qualified market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS[REGISTERED TRADEMARK] 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[REGISTERED TRADEMARK] Union
Standard Trust, the first trust to invest in companies deemed to be
union-friendly by an Advisory Board of Senior labor officials, senior
managers of companies with significant labor contracts, academics
and other national labor leaders of experts.
8. DISTRIBUTION PLANS
CLASS A DISTRIBUTION PLAN: The Trustees have adopted a Distribution Plan
relating to Class A shares (the "Class A 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 Class A Distribution
Plan would benefit the Fund and its Class A shareholders. The Class A
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the 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.
The Class A Distribution Plan provides that the Fund will pay MFD up to (but not
necessarily all of) an aggregate of 0.35% of the average daily net assets
attributable to the Class A shares annually in order that MFD may pay expenses
on behalf of the Fund related to the distribution and servicing of its Class A
shares. The expenses to be paid by MFD on behalf of the Fund include a service
fee to securities dealers which enter into a sales agreement with MFD of up to
0.25% of the portion of the Fund's average daily net assets attributable to the
Class A shares owned by investors for whom that securities dealer is the holder
or dealer of record. These payments are partial consideration for personal
services and/or account maintenance performed by such dealers with respect to
Class A shares. MFD may from time to time reduce the amount of the service fee
paid for shares sold prior to a certain date. Currently the service fee is
reduced to 0.15% per annum for shares sold prior to October 1, 1989. MFD may
also retain a distribution fee of 0.10% per annum of the Fund's average daily
net assets attributable to Class A shares as partial consideration for services
performed and expenses incurred in the performance of MFD's obligations as to
Class A shares under the Distribution Agreement with the Fund. MFD, however, is
currently suspending this 0.10% distribution fee and will not accept payment of
this fee unless it first obtains the approval of the Trust's Board of Trustees.
Any remaining funds may be used to pay for other distribution related expenses
as described in the Prospectus. Service fees may be reduced for a securities
dealer that is the holder or dealer of record for an investor who owns shares of
the Fund having a net asset value at or above a certain dollar level. No service
fee will be paid (i) to any securities 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 if the dealer satisfies certain criteria), or (ii) to any insurance company
which has entered into an agreement with the Fund and MFD that permits such
insurance company to purchase 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. MFD or its affiliates
are entitled to retain all service fees payable under the Class A Distribution
Plan for which there is no dealer of record or for which qualification standards
have not been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates for shareholder
accounts. Certain banks and other financial institutions that have agency
agreements with MFD will receive agency transaction and service fees that are
the same as commissions and service fees to dealers. During the fiscal year
ended November 30, 1994, the Fund incurred expenses of $324,271 (equal to 0.23%
of its average daily net assets) relating to the distribution and servicing of
its Class A shares, of which MFD received $77,534 and securities dealers of the
Fund and certain banks and other financial institutions retained $246,737.
The Class A Distribution Plan will remain in effect until August 1, 1995, 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 to
the Plan ("Class A Distribution Plan Qualified Trustees"). The Class A
Distribution Plan requires that the Fund and MFD each shall provide to the
Trustees, and the Trustees shall review, at least quarterly, a written report of
the amounts expended (and purposes therefor) under such Plan. The Class A
Distribution Plan may be terminated at any time by vote of a majority of the
Class A Distribution Plan Qualified Trustees or by vote of the holders of a
majority of the Fund's Class A shares (as defined in "Investment Restrictions").
Agreements under the Class A Distribution Plan must be in writing, will be
terminated automatically if assigned, and may be
23
<PAGE> 117
terminated at any time without payment of any penalty, by vote of a majority of
the Class A Distribution Plan Qualified Trustees or by vote of the holders of a
majority of the Fund's Class A shares. The Class A Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the Fund's Class A shares (as defined in
"Investment Restrictions") and may not be materially amended in any case without
a vote of the Trustees and a majority of the Class A Distribution Plan Qualified
Trustees. No Trustee who is not an "interested person" has any financial
interest in the Class A Distribution Plan or in any related agreement.
CLASS B DISTRIBUTION PLAN: The Trustees have adopted a Distribution Plan
relating to Class B shares (the "Class B Distribution Plan") pursuant to Section
12(b) of the 1940 Act and the Rule, after having concluded that there was a
reasonable likelihood that the Class B Distribution Plan would benefit that Fund
and its Class B shareholders. The Class B Distribution Plan is designed to
promote sales, thereby increasing the net assets of the Fund. Such an increase
may reduce the 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 Class B Distribution Plan provides that the Fund shall pay MFD, as the
Fund's distributor for its Class B shares, a daily distribution fee equal on an
annual basis to 0.75% of the Fund's average daily net assets attributable to
Class B shares and will pay MFD a service fee equal to 0.25% of the Fund's
average daily net assets attributable to Class B shares (which MFD will in turn
pay to securities dealers which enter into a sales agreement with MFD at a rate
of up to 0.25% per annum of the Fund's average daily net assets attributable to
Class B shares owned by investors for whom that securities dealer is the holder
or dealer of record). This service fee is intended to be additional
consideration for all personal services and/or account maintenance services
rendered by the dealer with respect to Class B shares. MFD will advance to
dealers the first-year service fee at a rate equal to 0.25% of the amount
invested. As compensation therefor, 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 for additional service fees with respect to such shares
commencing in the thirteenth month following purchase. Except in the case of the
first year service fee, no service fee 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 if the dealer satisfies certain criteria. Dealers
may from time to time be required to meet certain other criteria in order to
receive service fees. MFD or its affiliates are entitled to retain all service
fees payable under the Class B Distribution Plan for which there is no dealer of
record or for which qualification standards have not been met as partial
consideration for personal services and/or account maintenance services
performed by MFD or its affiliates for shareholder accounts.
The purpose of distribution payments to MFD under the Class B 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. The Class B Distribution Plan
also provides that MFD will receive all CDSCs attributable to Class B shares
(see "Distributions Plans" and "Purchases" in the Prospectus).
In accordance with the Rule, all agreements relating to the Class B 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 Trustees who are
not "interested persons" (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Class B Distribution Plan or
in any agreement related to such Plan ("Class B Distribution Plan Qualified
Trustees"). The Class B Distribution Plan further provides that the selection
and nomination of Class B Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office.
During the fiscal year ended November 30, 1994, the Fund incurred expenses of
$89,062 (equal to 1.00% of its average daily net assets attributable to Class B
shares) relating to the distribution and servicing of its Class B shares, of
which MFD retained $1,680 and securities dealers of the Fund and certain banks
and other financial institutions retained $87,382.
The Class B Distribution Plan will remain in effect until August 1, 1995, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of the Trustees and a majority of the Class B
Distribution Plan Qualified Trustees. The Class B Distribution Plan requires
that the Fund and MFD shall provide to the Trustees, and the Trustees shall
review, at least quarterly, a written report of the amounts expended (and
purposes therefor) under such Plan. The Class B Distribution Plan may be
terminated at any time by vote of a majority of the Class B Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the Class B shares
of the Fund (as defined in "Investment Restrictions" above). The Class B
Distribution Plan may not be amended to increase materially the amount of
permitted distribution expenses without the approval of Class B shareholders and
may not be materially amended in any case without a vote of the majority of both
the Trustees and the Class B Distribution Plan Qualified Trustees. No Trustee
who is not an interested person of the Fund has any financial interest in the
Class B 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 Declara-
24
<PAGE> 118
tion of Trust further authorizes the Trustees to classify or reclassify any
series of the shares into one or more classes. Pursuant thereto, the Trustees
have authorized the issuance of two classes of shares of each of the Trust's two
series, Class A shares and Class B 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 Fund's net assets allocable to such
class available for distribution to shareholders. The Trust reserves 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") or
by an instrument in writing without a meeting, signed by a majority of Trustees
and consented to by the holders of not less than a majority of the shares
outstanding and entitled to vote. Shares have no pre-emptive or conversion
rights (except as described in the Prospectus under "Purchases -- Conversion of
Class B Shares"). 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, obligations or affairs 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 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 his willful misfeasance, bad
faith, gross negligence, or reckless disregard of his duties involved in the
conduct of his office.
10. INDEPENDENT ACCOUNTANTS AND
FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent certified public accountants.
The Portfolio of Investments at November 30, 1994, the Statement of Assets and
Liabilities at November 30, 1994, the Statement of Operations for the year ended
November 30, 1994, the Statement of Changes in Net Assets for the years ended
November 30, 1994 and 1993, the Financial Highlights table for each of the years
in the ten year period ended November 30, 1994, 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 Statement of Additional Information and have been so incorporated in
reliance upon the report of Deloitte & Touche LLP, independent public
accountants, as experts in accounting and auditing. A copy of the Annual Report
accompanies this Statement of Additional Information.
25
<PAGE> 119
APPENDIX A
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL TRUSTEE
RETIREMENT BENEFIT ESTIMATED FEES FROM
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FUND AND FUND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) COMPLEX(3)
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------
Richard B. Bailey $2,091 $ 423 8 $226,221
Peter G. Harwood 2,241 222 5 105,812
J. Atwood Ives 2,241 398 17 106,482
Lawrence T. Perera 2,041 1,124 23 96,592
William Poorvu 2,176 1,122 23 106,482
Charles W. Schmidt 2,091 1,063 16 98,397
Elaine R. Smith 2,091 412 27 98,397
David B. Stone 2,191 652 11 104,007
---------------
<FN>
(1) For fiscal year ended November 30, 1994.
(2) Based on normal retirement age of 73.
(3) For calendar year 1994. All Trustees served as Trustees of 20 funds within the MFS fund complex (having aggregate net assets at
December 31, 1994, of approximately $14.7 billion) except Mr. Bailey, who served as Trustee of 56 funds within the MFS fund
complex (having aggregate net assets at December 31, 1994, of approximately $24.4 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE ----------------
TRUSTEE FEES 3 5 7 10 OR MORE
----------------------------------------------------
<S> <C> <C> <C> <C>
$1,850 $278 $463 $648 $ 925
1,980 297 495 693 990
2,110 317 528 739 1,055
2,240 336 560 784 1,120
2,370 356 593 830 1,185
2,500 375 625 875 1,250
---------------
<FN>
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
26
<PAGE> 120
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
Investors Bank & Trust Company
89 South Street, Boston, MA 02111
DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: 800-225-2606
Mailing Address
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS[REGISTERED TRADEMARK]
VALUE FUND
500 Boylston Street
Boston, MA 02116
[LOGO]
MVF-13-4/95 500 23/223
<PAGE> 121
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - November 30, 1994
Common Stocks and Warrants - 87.6%
---------------------------------------------------------------------------------------------------------------------
<CAPTION>
Issuer Shares Value
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automotive - 5.6%
General Motors Corp. 75,000 $ 2,859,375
Harvard Industries, Inc., "B"<F1><F4> 360,000 5,985,000
------------
$ 8,844,375
---------------------------------------------------------------------------------------------------------------------
Banks and Credit Companies - 2.7%
First Interstate Bancorp 60,000 $ 4,327,500
---------------------------------------------------------------------------------------------------------------------
Business Services - 1.0%
Affiliated Computer Services, Inc.<F1> 80,300 $ 1,565,850
---------------------------------------------------------------------------------------------------------------------
Chemicals - 4.3%
Grace (W.R.) & Co. 50,000 $ 1,850,000
Grow Group, Inc. 100,000 1,387,500
Methanex Corp.<F1> 96,200 1,430,975
Sterling Chemicals, Inc.<F1> 200,000 2,150,000
------------
$ 6,818,475
---------------------------------------------------------------------------------------------------------------------
Computer Software - Personal Computers - 1.2%
Autodesk, Inc. 50,000 $ 1,881,250
---------------------------------------------------------------------------------------------------------------------
Computer Software - Systems - 2.5%
Compuware Corp.<F1> 60,000 $ 2,220,000
Sybase, Inc.<F1> 35,000 1,697,500
------------
$ 3,917,500
---------------------------------------------------------------------------------------------------------------------
Consumer Goods and Services - 6.3%
Baker (J.), Inc. 80,000 $ 1,310,000
Brunswick Corp. 120,000 2,070,000
Loewenstein Furniture Group<F1> 120,000 870,000
Philip Morris Cos., Inc. 50,000 2,987,500
RJR Nabisco Holdings Corp.<F1> 350,000 2,187,500
Team Rental Group, Inc.<F1> 66,000 627,000
------------
$ 10,052,000
---------------------------------------------------------------------------------------------------------------------
Entertainment - 6.3%
Argosy Gaming Co.<F1> 50,000 $ 600,000
Bally Gaming International, Inc.<F1> 370,000 3,376,250
Casino America, Inc.<F1> 112,900 973,763
Hollywood Park, Inc.<F1> 100,000 1,025,000
International Family Entertainment, Inc., "B"<F1> 89,800 1,245,975
Promus Cos., Inc.<F1> 100,000 2,775,000
------------
$ 9,995,988
---------------------------------------------------------------------------------------------------------------------
Financial Institutions - 5.2%
Federal Home Loan Mortgage Corp. 75,000 $ 3,740,625
Salomon, Inc. 60,000 2,175,000
Student Loan Corp. 120,000 2,340,000
------------
$ 8,255,625
---------------------------------------------------------------------------------------------------------------------
Food and Beverage Products - 1.7%
Archer-Daniels-Midland Co. 100,000 $ 2,762,500
---------------------------------------------------------------------------------------------------------------------
Forest and Paper Products - 2.9%
Boise Cascade Corp. 125,000 $ 3,031,250
Longview Fibre Co. 100,000 1,625,000
------------
$ 4,656,250
---------------------------------------------------------------------------------------------------------------------
Insurance - 0.7%
MBIA, Inc. 20,000 $ 1,050,000
---------------------------------------------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks and Warrants - continued
---------------------------------------------------------------------------------------------------------------------
Issuer Shares Value
---------------------------------------------------------------------------------------------------------------------
Machinery - 1.6%
Tokheim Corp.<F1><F3> 71,200 $ 596,300
Watts Industries, Inc., "A" 96,300 1,926,000
------------
$ 2,522,300
---------------------------------------------------------------------------------------------------------------------
Medical and Health Products - 1.0%
Sofamor Danek Group, Inc.<F1> 100,000 $ 1,612,500
---------------------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 5.6%
HealthWise of America, Inc.<F1> 69,500 $ 2,232,687
Living Centers of America, Inc.<F1> 100,000 3,225,000
Mid Atlantic Medical Services, Inc.<F1> 60,000 1,387,500
PacifiCare Health Systems, Inc., "B"<F1> 30,000 1,980,000
------------
$ 8,825,187
---------------------------------------------------------------------------------------------------------------------
Oils - 1.0%
Beau Canada Exploration Ltd.<F1> 398,900 $ 545,256
Newfield Exploration Co.<F1> 47,700 1,079,213
------------
$ 1,624,469
---------------------------------------------------------------------------------------------------------------------
Photographic Products - 2.2%
Eastman Kodak Co. 75,000 $ 3,421,875
---------------------------------------------------------------------------------------------------------------------
Pollution Control - 1.8%
Continental Waste Industries, Inc.<F1> 35,000 $ 332,500
WMX Technologies, Inc. 100,000 2,575,000
------------
$ 2,907,500
---------------------------------------------------------------------------------------------------------------------
Printing and Publishing - 0.9%
American Media, Inc., "A" 91,200 $ 1,356,600
---------------------------------------------------------------------------------------------------------------------
Railroads - 5.8%
CSX Corp. 50,000 $ 3,475,000
Santa Fe Pacific Corp. 150,000 2,512,500
Santa Fe Pacific Gold Corp.<F1> 1 10
Wisconsin Central Transportation Corp.<F1> 78,700 3,266,050
------------
$ 9,253,560
---------------------------------------------------------------------------------------------------------------------
Restaurants and Lodging - 3.0%
Servico, Inc.<F1> 274,600 $ 2,540,050
Showbiz Pizza Time, Inc.<F1> 300,000 2,287,500
-----------
$ 4,827,550
---------------------------------------------------------------------------------------------------------------------
Special Products and Services - 1.5%
Gillett Holdings, Inc.<F1><F3> 37,656 $ 866,088
Topps, Inc. 250,000 1,500,000
------------
$ 2,366,088
---------------------------------------------------------------------------------------------------------------------
Stores - 3.7%
Intelligent Electronics, Inc. 200,000 $ 2,575,000
National Convenience Stores, Inc.<F1> 150,000 1,068,750
Tandy Corp. 50,000 2,306,250
------------
$ 5,950,000
---------------------------------------------------------------------------------------------------------------------
Telecommunications - 5.8%
AirTouch Communications, Inc.<F1> 111,400 $ 3,021,725
Cisco Systems, Inc.<F1> 75,000 2,418,750
Rogers Communications, Inc., "B"<F1> 270,000 3,729,942
------------
$ 9,170,417
---------------------------------------------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks and Warrants - continued
---------------------------------------------------------------------------------------------------------------------
Issuer Shares Value
---------------------------------------------------------------------------------------------------------------------
Trucking - 1.8%
Celadon Group, Inc.<F1> 100,000 $ 1,750,000
Leaseway Transportation Corp.<F1> 100,000 1,100,000
-----------
$ 2,850,000
---------------------------------------------------------------------------------------------------------------------
Foreign - 11.5%
Finland - 3.4%
Nokia AB (telecommunications) 40,000 $ 5,457,324
---------------------------------------------------------------------------------------------------------------------
France - 0.3%
Michelin, "B" (automotive)<F1> 14,100 $ 541,921
---------------------------------------------------------------------------------------------------------------------
Germany - 1.4%
Hornbach Baumarkt A.G. (retail)<F1> 1,637 $ 833,992
Metallgesellschaft A.G. (special products and services) 16,000 1,253,280
Volkswagen A.G. (automotive)<F1> 700 190,348
-----------
$ 2,277,620
---------------------------------------------------------------------------------------------------------------------
Great Britain - 1.1%
Takare PLC (medical and health technology and services)<F1><F5> 535,150 $ 1,717,082
---------------------------------------------------------------------------------------------------------------------
Italy - 0.6%
Telecom Italia S.p.A. (telecommunications) 470,700 $ 970,972
---------------------------------------------------------------------------------------------------------------------
Sweden - 4.7%
Astra AB, "B", free shares (medical and health products)<F1> 30,000 $ 804,081
Avesta-Sheffield (steel)<F1> 150,000 1,522,575
Hennes & Mauritz AB (retail) 30,000 1,560,396
Rottneros Bruks AB, free shares (forest and paper products)<F1> 488,800 661,542
Skandinaviska Enskilda Banken, "A", free shares
(banks and credit companies)<F1> 200,000 1,212,740
Svenska Handelsbanken (banks and credit companies) 127,500 1,750,958
------------
$ 7,512,292
---------------------------------------------------------------------------------------------------------------------
Total Common Stocks and Warrants (Identified Cost, $133,814,194) $139,292,570
---------------------------------------------------------------------------------------------------------------------
Bonds - 1.9%
---------------------------------------------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
---------------------------------------------------------------------------------------------------------------------
Argosy Gaming Corp., 12s, 2001 $2,734 $ 2,686,155
Continental Airlines, Inc., 11.75s, 1995<F2> 3,000 360,000
Wang Talon, 0s, 2000 1 5,325
---------------------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $3,147,390) $ 3,051,480
---------------------------------------------------------------------------------------------------------------------
Short-Term Obligations - 9.6%
---------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank, due 12/01/94 $4,950 $ 4,949,223
Federal National Mortgage Assn., due 12/02/94 3,000 2,995,096
Federal National Mortgage Assn., due 12/29/94 4,020 4,001,508
Philip Morris Cos., Inc., due 12/08/94 3,350 3,341,347
---------------------------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost and Value $ 15,287,174
---------------------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $152,248,758) $157,631,224
Other Assets, Less Liabilities - 0.9% 1,347,924
---------------------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $158,979,148
---------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Non-income producing security.
<F2> Non-income producing security - in default.
<F3> Restricted security.
<F4> Affiliated issuers are those in which the Fund's holdings of an issuer
represent 5% or more of the outstanding voting securities of the issuer.
<F5> SEC Rule 144A restriction.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
------------------------------------------------------------------------------
November 30, 1994
------------------------------------------------------------------------------
Assets:
Investments at value -
Unaffiliated Issuers (identified cost, $148,224,215) $151,646,224
Affiliated Issuers (identified cost, $4,024,543) 5,985,000
------------
Total Investments, at value (identified
cost, $152,248,758) $157,631,224
Cash 5,144
Net receivable for forward foreign currency
exchange contracts sold 59,091
Receivable for investments sold 5,348,485
Receivable for Fund shares sold 311,343
Interest and dividends receivable 379,031
Other assets 2,185
------------
Total assets $163,736,503
------------
Liabilities:
Payable for investments purchased $ 4,483,727
Payable for Fund shares reacquired 67,931
Payable to affiliates -
Management fee 3,257
Shareholder servicing agent fee 684
Distribution fee 61,979
Accrued expenses and other liabilities 139,777
------------
Total liabilities $ 4,757,355
------------
Net assets $158,979,148
------------
Net assets consist of:
Paid-in capital $142,471,483
Unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies 5,441,127
Accumulated undistributed net realized gain on
investments and foreign currency transactions 10,858,098
Accumulated undistributed net investment income 208,440
------------
Total $158,979,148
------------
Shares of beneficial interest outstanding 16,868,263
------------
Class A shares:
Net asset value and redemption price per share
(net assets of $141,789,972 / 15,026,987 shares of
beneficial interest outstanding) $ 9.44
-----
Offering price per share (100/94.25) $10.02
-----
Class B shares:
Net asset value, redemption price, and offering price per
share (net assets of $17,189,176 / 1,841,276 shares
of beneficial interest outstanding) $ 9.34
-----
On sales of $50,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares. See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
------------------------------------------------------------------------------
Year Ended November 30, 1994
------------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 1,507,670
Interest 543,228
Foreign taxes withheld (51,308)
------------
Total investment income $ 1,999,590
------------
Expenses -
Management fee $ 1,141,475
Trustees' compensation 24,490
Shareholder servicing agent fee (Class A) 213,927
Shareholder servicing agent fee (Class B) 19,641
Distribution and service fee (Class A) 467,182
Distribution and service fee (Class B) 89,062
Custodian fee 100,408
Auditing fees 36,907
Printing 30,597
Postage 29,609
Legal fees 23,378
Miscellaneous 126,757
------------
Total expenses $ 2,303,433
Reduction of expenses by distributor (142,911)
------------
Net expenses $ 2,160,522
------------
Net investment loss $ (160,932)
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 12,413,756
Foreign currency transactions (412,885)
------------
Net realized gain on investments $ 12,000,871
------------
Change in unrealized appreciation (depreciation) -
Investments $(10,642,835)
Translation of assets and liabilities in foreign currencies (4,687)
------------
Net unrealized loss on investments $(10,647,522)
------------
Net realized and unrealized gain on investments and
foreign currency $ 1,353,349
------------
Increase in net assets from operations $ 1,192,417
------------
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Statement of Changes in Net Assets
-----------------------------------------------------------------------------------------------
<CAPTION>
Year Ended November 30, 1994 1993
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income (loss) $ (160,932) $ 113,345
Net realized gain on investments and foreign
currency transactions 12,000,871 19,149,565
Net unrealized gain (loss) on investments and foreign
currency transactions (10,647,522) 5,223,370
------------ ------------
Increase in net assets from operations $ 1,192,417 $ 24,486,280
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (344,329) $ --
From net investment income (Class B) (5,242) --
From net realized gain on investments and foreign
currency transactions (Class A) (19,570,480) (14,734,333)
From net realized gain on investments and foreign
currency transactions (Class B) (318,610) --
------------ ------------
Total distributions declared to shareholders $(20,238,661) $(14,734,333)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 72,178,204 $ 19,254,512
Net asset value of shares issued to shareholders in
reinvestment of distributions 19,162,794 14,137,655
Cost of shares reacquired (46,619,111) (22,798,696)
------------ ------------
Increase in net assets from Fund share transactions $ 44,721,887 $ 10,593,471
------------ ------------
Total increase in net assets $ 25,675,643 $ 20,345,418
Net assets:
At beginning of period 133,303,505 112,958,087
------------ ------------
At end of period (including accumulated undistributed
net investment income of $208,440 and $50,522,
respectively) $158,979,148 $133,303,505
------------ ------------
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Financial Highlights
------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Six Months
Ended
Year Ended November 30, November 30, Year Ended May 31,
--------------------------------------------------- ------------ ---------------------
1994 1993 1992 1991 1990 1990 1989
-------------------------------------------------------------------------------------------------------------------------------
Class A
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $10.82 $10.17 $ 8.73 $ 7.46 $ 8.99 $10.52 $ 8.70
------ ------ ------ ------ ------ ------ ------
Income from investment
operations<F2>-
Net investment income
(loss)<F4> $(0.01) $ 0.02 $ -- $ 0.14 $ 0.09 $ 0.33 $ 0.21
Net realized and
unrealized gain (loss)
on investments 0.26 1.96 2.03 1.21 (1.38) 0.17 2.17
------ ------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.25 $ 1.98 $ 2.03 $ 1.35 $(1.29) $ 0.50 $ 2.38
------ ------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders -
From net investment
income $ (0.03) $ -- $(0.07) $(0.08) $(0.11) $ (0.34) $ (0.17)
From net realized
gain on investments (1.60) (1.33) (0.52) -- (0.05) (1.69) (0.39)
From paid-in capital -- -- -- -- (0.08) -- --
------ ------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders $ (1.63) $(1.33) $(0.59) $(0.08) $(0.24) $ (2.03) $ (0.56)
------ ------ ------ ------ ------ ------ ------
Net asset value -
end of period $ 9.44 $10.82 $10.17 $ 8.73 $ 7.46 $ 8.99 $10.52
------ ------ ------ ------ ------ ------ ------
Total return<F2> 1.92% 22.10% 24.60% 18.26% (29.48)%<F1> 5.13% 28.47%
Ratios (to average net assets)/Supplemental data<F4>:
Expenses 1.37% 1.42% 1.53% 1.50% 1.51%<F1> 1.26% 1.41%
Net investment
income (loss) (0.05)% 0.09% 0.00% 1.65% 2.30%<F1> 3.38% 2.29%
Portfolio turnover
91% 95% 111% 132% 36% 88% 80%
Net assets at end
of period (000 omitted) $141,790 $132,207 $112,958 $104,600 $100,398 $125,191 $133,219
<FN>
<F1> Annualized.
<F2> Per share data for the period subsequent to November 30, 1993 is based on
average shares outstanding.
<F3> Total returns for Class A do not include the sales charge (except for
reinvestment dividends prior to October 1, 1989). If the charge had been
included, the results would have been lower.
<F4> The distributor did not impose a portion of its Class A distribution fee
for the periods indicated. If this fee had been incurred by the Fund the
net investment income (loss) per share and the ratios, would have been:
Net investment
income (loss) $ (0.03) $ 0.02 -- -- -- -- --
Ratios (to average net assets):
Expenses 1.47% 1.45% -- -- -- -- --
Net investment
income (loss) (0.15)% 0.07% -- -- -- -- --
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights - continued
--------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended
Year Ended May 31, November 30,
---------------------------------------------- -----------------------
1988 1987 1986 1985 1994 1993<F1>
--------------------------------------------------------------------------------------------------------
Class A Class B
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 9.60 $ 9.81 $ 7.59 $ 6.45 $10.79 $10.61
------ ------ ------ ------ ------ ------
Income from investment
operations<F3>-
Net investment income
(loss) $ 0.10 $ 0.04 $ 0.03 $ 0.12 $(0.09) $(0.01)
Net realized and
unrealized gain (loss)
on investments (0.86) 1.60 2.79 1.16 0.27 0.19
------ ------ ------ ------ ------ ------
Total from investment
operations $(0.76) $ 1.64 $ 2.82 $ 1.28 $ 0.18 $ 0.18
------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders -
From net investment
income $(0.03) $(0.04) $(0.04) $(0.14) $ -- $ --
In excess of net
investment income -- -- -- -- (0.03) --
From net realized gain
on investments (0.11) (1.81) (0.53) -- (1.60) --
From paid-in capital -- -- (0.03) -- -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders $(0.14) $(1.85) $ (0.60) $(0.14) $(1.63) $ --
------ ------ ------ ------ ------ ------
Net asset value - end of
period $ 8.70 $ 9.60 $ 9.81 $ 7.59 $ 9.34 $10.79
------ ------ ------ ------ ------ ------
Total return<F3> (7.63)% 17.95% 37.15% 20.04% 1.15% 1.70%
Ratios (to average net assets)/Supplemental data:
Expenses 1.33% 1.31% 1.39% 1.25% 2.25% 2.46%<F2>
Net investment income
(loss) 1.12% 0.38% 0.44% 1.54% (0.96)% (1.37)%<F2>
Portfolio turnover 99% 135% 156% 125% 91% 95%
Net assets at end of
period (000 omitted) $116,218 $148,227 $128,135 $92,044 $17,189 $1,097
<FN>
<F1> For the period from the commencement of offering of Class B shares,
September 7, 1993 to November 30, 1993.
<F2> Annualized.
<F3> Per share data for the period subsequent to November 30, 1993 is based on
average shares outstanding.
<F4> Total returns for Class A do not include the sales charge (except for
reinvestment dividends prior to October 1, 1989). If the charge had been
included, the results would have been lower.
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Value Fund (the Fund) is a diversified series of MFS Series Trust VII (the
Trust). The Trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company.
(2) Significant Accounting Policies
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed issues
and forward contracts, are valued on the basis of valuations furnished by
dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates value. Futures contracts, options and options on
futures contracts listed on commodities exchanges are valued at closing
settlement prices. Over-the-counter options are valued by brokers through the
use of a pricing model which takes into account closing bond valuations, implied
volatility and short-term repurchase rates. Securities for which there are no
such quotations or valuations are valued at fair value as determined in good
faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments and income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion both realized and unrealized gains and losses on investments that
results from fluctuations in foreign currency exchange rates is not separately
disclosed.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option. In general, written call
options may serve as a partial hedge against decreases in value in the
underlying securities to the extent of the premium received. Written options may
also be used as a part of an income-producing strategy reflecting the view of
the Fund's management on the direction of interest rates.
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continued
Futures Contracts - The Fund may enter into stock index and foreign currency
futures contracts for the delayed delivery of securities, currency, or contracts
based on financial indices at a fixed price on a future date. In entering such
contracts, the Fund is required to deposit either in cash or securities an
amount equal to a certain percentage of the contract amount. Subsequent payments
are made or received by the Fund each day, depending on the daily fluctuations
in the value of the underlying security, and are recorded for financial
statement purposes as unrealized gains or losses by the Fund. The Fund's
investment in futures contracts is designed to hedge against anticipated future
changes in exchange rates or securities prices. The Fund may also invest in
futures contracts for non-hedging purposes. For example, interest rate futures
may be used in modifying the duration of the portfolio without incurring the
additional transaction costs involved in buying and selling the underlying
securities. Should exchange rates or securities prices move unexpectedly, the
Fund may not achieve the anticipated benefits of the futures contracts and may
realize a loss.
Security Loans - The Fund may lend its securities to member banks of the Federal
Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of securities
loaned. As with other extensions of credit, the Fund may bear the risk of delay
in recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending its
securities in the form of fees or from all or a portion of the income from
investment of the collateral. At November 30, 1994, the Fund had no securities
on loan.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to meet
the terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The Fund will enter into forward
contracts for hedging purposes as well as for non-hedging purposes. For hedging
purposes, the Fund may enter into contracts to deliver or receive foreign
currency it will receive from or require for its normal investment activities.
It may also use contracts in a manner intended to protect foreign
currency-denominated securities from declines in value due to unfavorable
exchange rate movements. For non-hedging purposes, the Fund may enter into
contracts with the intent of changing the relative exposure of the Fund's
portfolio of securities to different currencies to take advantage of anticipated
changes. The forward foreign currency exchange contracts are adjusted by the
daily exchange rate of the underlying currency and any gains or losses are
recorded for financial statement purposes as unrealized until the contract
settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for both financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the value
of the security on such date.
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continued
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Fund's tax return, and consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Foreign taxes
have been provided for on interest and dividend income earned on foreign
investments in accordance with the applicable country's tax rates and to the
extent unrecoverable are recorded as a reduction of investment income.
Distributions to shareholders are recorded on the ex- dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended November 30, 1994, $668,421 was reclassified to
accumulated undistributed net investment income from accumulated net realized
gain on investments and paid-in capital ($331,051 and $337,370, respectively),
due to differences between book and tax accounting. This change had no effect on
the net assets or net asset value per share.
Multiple Classes of Shares of Beneficial Interest - The Fund offers both Class A
and Class B shares. The two classes of shares differ in their shareholder
servicing agent, distribution and service fees. Shareholders of each class also
bear certain expenses that pertain only to that particular class. All
shareholders bear the common expenses of the Fund pro rata based on the average
daily net assets of each class, without distinction between share classes.
Dividends are declared separately for each class. No class has preferential
dividend rights; differences in per share dividend rates are generally due to
differences in separate class expenses, including distribution and shareholder
service fees.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services and general office facilities. The
management fee, computed daily and paid monthly at an annual rate of 0.75% of
average daily net assets, amounted to $1,141,475.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Financial Services, Inc. (FSI)
and MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit
plan for all of its independent Trustees. Included in Trustees' compensation is
a net periodic pension expense of $7,159 for the year ended November 30, 1994.
Distributor - FSI, a wholly-owned subsidiary of MFS, as distributor, received
$49,409 as its portion of the sales charge on sales of Class A shares of the
Fund.
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continued
The Trustees have adopted separate distribution plans for Class A and Class B
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Class A Distribution Plan provides that the Fund will pay FSI up to 0.35% of
its average daily net assets attributable to Class A shares annually in order
that FSI may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with FSI of up to 0.25% per annum of
the Fund's average daily net assets attributable to Class A shares which are
attributable to that securities dealer, a distribution fee to FSI of up to 0.10%
per annum of the Fund's average daily net assets attributable to Class A shares,
commissions to dealers and payments to FSI wholesalers for sales at or above a
certain dollar level, and other such distribution-related expenses that are
approved by the Fund. FSI is waiving the 0.10% distribution fees for an
indefinite period, in the amount of $142,911 for the year ended November 30,
1994. Fees incurred under the distribution plan during the year ended November
30, 1994 were 0.23% of average daily net assets attributable to Class A shares
on an annualized basis and amounted to $324,271 net of waiver (of which FSI
retained $77,534).
The Class B Distribution Plan provides that the Fund will pay FSI a monthly
distribution fee, equal to 0.75% per annum, and a quarterly service fee of up to
0.25% per annum of the Fund's average daily net assets attributable to Class B
shares. FSI will pay to each securities dealer that enter into a sales agreement
with FSI, all or a portion of the service fee attributable to Class B shares.
The service fee is intended to be additional consideration for services rendered
by the dealer with respect to Class B shares. Fees incurred under the
distribution plans during the year ended November 30, 1994 were 1.00% of average
daily net assets attributable to Class B shares on an annualized basis and
amounted to $89,062 (of which FSI retained $1,680 for Class B).
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a share
redemption within twelve months following the share purchase. A contingent
deferred sales charge is imposed on shareholder redemptions of Class B shares in
the event of a share redemption within six years of purchase. FSI receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the year ended November 30, 1994 were $135 and $16,318 for Class A shares
and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earned
$213,927 and $19,641 for Class A and Class B shares, respectively, for its
services as shareholder servicing agent. The fee is calculated as a percentage
of the average daily net assets of each class of shares at an effective annual
rate of up to 0.15% and up to 0.22%, attributable to Class A and Class B shares,
respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations aggregated $144,516,227
and $127,268,155, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $ 152,248,758
--------------
Gross unrealized appreciation $ 18,917,916
Gross unrealized depreciation (13,535,450)
--------------
Net unrealized appreciation $ 5,382,466
--------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continued
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
Class A Shares
<CAPTION>
1994 1993
---------------------------------- -----------------------------------
Year Ended November 30, Shares Amount Shares Amount
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 5,051,409 $50,268,216 1,842,726 $18,125,685
Shares issued to shareholders in
reinvestment of distributions 1,944,505 18,861,697 1,567,359 14,137,655
Shares reacquired (4,191,439) (41,654,028) (2,296,513) (22,777,456)
---------- ----------- --------- -----------
Net increase 2,804,475 $27,475,885 1,113,572 $ 9,485,884
---------- ----------- --------- -----------
Class B Shares
1994 1993<F1>
---------------------------------- -----------------------------------
Year Ended November 30, Shares Amount Shares Amount
---------------------------------------------------------------------------------------------------------------------------
Shares sold 2,212,735 $21,909,988 103,617 $ 1,128,827
Shares issued to shareholders in
reinvestment of distributions 31,137 301,097 -- --
Shares reacquired (504,229) (4,965,083) (1,984) (21,240)
--------- ----------- ------- -----------
Net increase 1,739,643 $17,246,002 101,633 $ 1,107,587
--------- ----------- ------- -----------
<FN>
<F1> For the period from the commencement of offering of Class B shares,
September 7, 1993 to November 30, 1993.
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS, or an affiliate of MFS, in an unsecured line of credit
with a bank which permits borrowings up to $300 million, collectively.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended November 30, 1994 was $2,391.
(7) Financial Instruments
The Fund regularly trades financial instruments with off-balance sheet risk in
the normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options, forward foreign currency exchange
contracts and futures contracts.
<PAGE>
The notional or contractual amounts of these instruments represent the
investment the Fund has in particular classes of financial instruments and does
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered. A summary of
obligations under these financial instruments at November 30, 1994, is as
follows:
<TABLE>
<CAPTION>
Forward Foreign Currency Exchange Contracts
Contracts to Contracts Net Unrealized
Settlement Date Deliver/Receive In Exchange for At Value Appreciations
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales 12/20/94 Swedish Krona 16,641,000 $2,262,973 $2,203,882 $59,901
---------- ---------- -------
</TABLE>
At November 30, 1994, the Fund had sufficient cash and/or securities to cover
any commitments under these contracts.
(8) Transactions in Securities of Affiliated Issuers Affiliated issuers, as
defined under the Investment Company Act of 1940, are those in which the Fund's
holdings of an issuer represent 5% or more of the outstanding voting securities
of the issuer. A summary of the Fund's transactions in the securities of these
issuers during the year ended November 30, 1994 is set forth below:
<TABLE>
<CAPTION>
Acquisitions Dispositions Interest
Beginning --------------------- ------------------- Ending Realized and
Share/Par Share/Par Share/Par Share/Par Gain Dividend Ending
Affiliate Amount Amount Cost Amount Cost Amount (Loss) Income Value
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Harvard
Industries,
Inc., "B" -- 360,000 $4,024,543 -- $ -- 360,000 $ -- $ -- $5,985,000
---------- ------- ------ ------- ----------
</TABLE>
(9) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At November 30, 1994,
the Fund owned the following restricted securities (constituting 2.00% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933. The Fund does not have the right to demand that such securities be
registered. The value of these securities is determined by valuations supplied
by a pricing service or brokers or, if not available, in good faith by or at the
direction of the Trustees. Certain of these securities may be offered and sold
to "qualified institutional buyers" under Rule 144A of the 1933 Act.
<TABLE>
<CAPTION>
Description Date of Acquisition Shares Cost Value
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gillett Holdings, Inc. 3/13/92 37,656 $ 357,000 $ 866,088
Takare PLC 9/30/91 - 10/25/93 535,150 1,469,470 1,717,082
Tokheim Corp. 7/09/93 71,200 703,100 596,300
---------- ----------
$2,529,570 $3,179,470
---------- ----------
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust VII and Shareholders of MFS Value Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Value Fund (one of the series constituting
MFS Series Trust VII) as of November 30, 1994, the related statement of
operations for the year then ended, the statement of changes in net assets for
the years ended November 30, 1994 and 1993, and the financial highlights for
each of the years in the eleven-year period ended November 30, 1994. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
November 30, 1994 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Value Fund at
November 30, 1994, the results of its operations, the changes in its net assets,
and its financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 3, 1995
--------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE> 122
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
MFS WORLD GOVERNMENTS FUND
--------------------------
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the nine years in the period ended December 31,
1992, for the period from January 1, 1993 to November
30, 1993 and for the year ended November 30, 1994:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At November 30, 1994:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the year ended November 30, 1994:
Statement of Operations*
For the two years in the period ended November 30,
1994: Statement of Changes in Net Assets*
MFS VALUE FUND
--------------
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the six years in the period ended May 31, 1990,
for the six month period ended November 30, 1990 and
for the four years in the period ended November 30,
1994:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At November 30, 1994:
Portfolio of Investments**
Statement of Assets and Liabilities**
For the year ended November 30, 1994:
Statement of Operations**
For the two years in the period ended November 30, 1994:
Statement of Changes in Net Assets**
_____________________________
* Incorporated herein by reference to MFS World Governments Fund's Annual
Report to Shareholders dated November 30, 1994 filed with the SEC on January
29, 1995.
** Incorporated herein by reference to MFS Value Fund's Annual Report to
Shareholders dated November 30, 1994 filed with the SEC on January 28, 1995.
<PAGE> 123
(b) EXHIBITS:
1 Declaration of Trust, dated November 7,
1980, Amended and Restated, January 18,
1995; filed herewith.
2 By-Laws of Registrant dated November 10,
1980, Amended and Restated, January 6,
1995; filed herewith.
3 Not Applicable.
4 (a) Form of Share Certificate. (4)
(b) Form of Share Certificate for Class A
Shares of MFS World Governments Fund. (9)
(c) Form of Share Certificate for Class B
Shares of MFS World Governments Fund. (9)
(d) Form of Share Certificate for Class C
Shares of MFS World Governments Fund. (9)
(e) Form of Share Certificate for Class A
Shares of MFS Value Fund. (10)
(f) Form of Share Certificate for Class B
Shares of MFS Value Fund. (10)
5 (a) Investment Advisory Agreement dated May 20,
1982, by and between the Registrant and
Massachusetts Financial Services Company.
(5)
(b) Investment Advisory Agreement for MFS Value
Fund, dated September 1, 1993. (10)
6 (a) Distribution Agreement dated January 1,
1995; filed herewith.
(b) Form of Dealer Agreement between MFS Fund
Distributors, Inc. ("MFD") and a dealer,
dated December 28, 1994 and form of Mutual
Fund Agreement between MFD and a bank or
NASD affiliate, dated December 28, 1994.
(12)
7 Retirement Plan for Non-Interested Person
Trustees, dated January 1, 1991. (7)
8 (a) Custodian Contract between Registrant and
State Street Bank and Trust Company, dated
February 20, 1981. (1)
(b) Amendment to Custodian Contract between
Registrant and State Street Bank and Trust
Company dated February 12, 1986. (2)
<PAGE> 124
(c) Amendments to Custodian Contract between
Registrant and State Street Bank and Trust
Company dated October 1, 1989 and June 28,
1988. (3)
(d) Amendment to Custodian Contract between
Registrant and State Street Bank and Trust
Company dated September 17, 1991. (6)
9 (a) Shareholder Servicing Agent Agreement
between Registrant and Massachusetts
Financial Service Center, dated August 7,
1985. (4)
(b) Amendment to Shareholder Servicing Agent
Agreement dated December 31, 1992. (8)
(c) Amendment to Shareholder Servicing Agent
Agreement dated September 7, 1993. (10)
(d) Amendment to Shareholder Servicing Agent
Agreement dated December 28, 1993; filed
herewith.
(e) Exchange Privilege Agreement, dated
September 1, 1993. (10)
(f) Loan Agreement by and among MFS Borrowers
and The First National Bank of Boston,
dated February 21, 1995. (11)
(g) Dividend Disbursing Agency Agreement dated
February 1, 1986. (6)
10 Opinion and Consent of Counsel filed with
the Registrant's Rule 24f-2 Notice for the
fiscal year ended November 30, 1994 on
January 30, 1995.
11 (a) Consent of Ernst & Young LLP - MFS World
Governments Fund dated March 28, 1995;
filed herewith.
(b) Consent of Deloitte & Touche LLP - MFS
Value Fund dated March 27, 1995; filed
herewith.
12 Not Applicable.
13 Investment Representation Letter dated
February 18, 1991. (5)
14 (a) Forms for Individual Retirement Account
Disclosure Statement as currently in
effect. (5)
(b) Forms for MFS 403(b) Custodial Account
Agreement as currently in effect. (5)
<PAGE> 125
(c) Forms for MFS Prototype Paired Defined
Contribution Plans and Trust Agreement as
currently in effect. (5)
15 (a) Amended and Restated Distribution Plan
dated December 19, 1990.(6)
(b) Amended and Restated Distribution Plan for
Class A shares of MFS World Governments
Fund, dated December 21, 1994; filed
herewith.
(c) Distribution Plan for Class A shares of MFS
Value Fund, dated December 21, 1994; filed
herewith.
(d) Distribution Plan for Class B shares of MFS
World Governments Fund, dated December 21,
1994; filed herewith.
(e) Distribution Plan for Class B shares of MFS
Value Fund, dated December 21, 1994; filed
herewith.
(f) Distribution Plan for Class C shares of MFS
World Governments Fund dated December 21,
1994; filed herewith.
16 Schedule for Computation of Performance
Quotations - Aggregate and Average Annual
Total Rate of Return and Yield
Calculations; filed herewith.
17 Financial Data Schedules for each class of
each series.
Power-of-Attorney dated September 21, 1994; filed
herewith.
--------------------------------
(1) Incorporated by reference to Registrant's Post-Effective Amendment No. 3
filed with the SEC on December, 1980.
(2) Incorporated by reference to Registrant's Post-Effective Amendment No. 8
filed with the SEC on February 27, 1987.
(3) Incorporated by reference to Registrant's Post-Effective Amendment No. 11
filed with the SEC on February 26, 1990.
(4) Incorporated by reference to Registrant's Post-Effective Amendment No. 7
filed with the SEC on February 28, 1986.
(5) Incorporated by reference to Registrant's Post-Effective Amendment No. 12
filed with the SEC on April 29, 1991.
(6) Incorporated by reference to Registrant's Post-Effective Amendment No. 13
filed with the SEC on April 29, 1992.
(7) Incorporated by reference to Registrant's Post-Effective Amendment No. 14
filed with the SEC on April 30, 1993.
(8) Incorporated by reference to Registrant's Post-Effective Amendment No. 15
filed with the SEC on June 18, 1993.
(9) Incorporated by reference to Registrant's Post-Effective Amendment No. 17
filed with the SEC on October 29, 1993.
(10) Incorporated by reference to Registrant's Post-Effective Amendment No.
18 filed with the SEC on January 28, 1994.
(11) Incorporated by reference to Amendment No. 8 on Form N-2 for MFS
Municipal Income Trust (File No. 811-4841) filed with the SEC on February
28, 1995.
(12) Incorporated by reference to MFS Municipal Series Trust (File Nos.
2-92915 and 811-4096) Post-Effective Amendment No. 26 filed with the SEC on
February 22, 1995.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
<PAGE> 126
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
FOR MFS WORLD GOVERNMENTS FUND
<TABLE>
<CAPTION>
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Class A Shares of Beneficial Interest 20,164
(without part value) (as at February 28, 1995)
Class B Shares of Beneficial Interest 5,757
(without part value) (as at February 28, 1995)
Class C Shares of Beneficial Interest 330
(without part value) (as at February 28, 1995)
</TABLE>
FOR MFS VALUE FUND
<TABLE>
<CAPTION>
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Class A Shares of Beneficial Interest 14,181
(without part value) (as at February 28, 1995)
Class B Shares of Beneficial Interest 2,693
(without part value) (as at February 28, 1995)
</TABLE>
ITEM 27. INDEMNIFICATION
Reference is hereby made to (a) Article V of Registrant's
Declaration of Trust, filed herewith; and (b) Section 4 of the Distribution
Agreement between Registrant and MFS Fund Distributors, Inc., as amended and
restated, filed herewith.
The Trustees and officers of the Registrant and the personnel
of the Registrant's Investment adviser 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
Massachusetts Financial Services Company ("MFS") serves as
investment adviser to the following open-end funds comprising the MFS Family of
Funds: Massachusetts Investors Trust, Massachusetts Investors Growth Stock
Fund, MFS Growth Opportunities Fund, MFS Government Securities Fund, MFS
Government Mortgage Fund, MFS Government Limited Maturity Fund, MFS Series
Trust I (which has three series: MFS Managed Sectors Fund, MFS Cash Reserve
Fund and MFS World Asset Allocation Fund), MFS Series Trust II (which has four
series: MFS Emerging Growth Fund, MFS Capital Growth Fund, MFS Intermediate
Income Fund and MFS Gold & Natural Resources Fund), MFS Series Trust III (which
has two series: MFS High Income Fund and MFS Municipal High Income Fund), MFS
Series Trust IV (which
<PAGE> 127
has four series: MFS Money Market Fund, MFS Government Money Market Fund, MFS
Municipal Bond Fund and MFS OTC Fund), MFS Series Trust V (which has two
series: MFS Total Return Fund and MFS Research Fund), MFS Series Trust VI
(which has three series: MFS World Total Return Fund, MFS Utilities Fund and
MFS World Equity Fund), MFS Series Trust VII (which has two series: MFS World
Governments Fund and MFS Value Fund), MFS Series Trust VIII (which has two
series: MFS Strategic Income Fund and MFS World Growth Fund), MFS Municipal
Series Trust (which has 19 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 Louisiana 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
Texas Municipal Bond Fund, MFS Virginia Municipal Bond Fund, MFS Washington
Municipal Bond Fund, MFS West Virginia Municipal Bond Fund and MFS Municipal
Income Fund) and MFS Series Trust IX (which has three series: MFS Bond Fund,
MFS Limited Maturity Fund and MFS Municipal Limited Maturity Fund) (the "MFS
Funds"). The principal business address of each of the aforementioned funds is
500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following
no-load, open-end funds: MFS Institutional Trust ("MFSIT") (which has two
series), MFS Variable Insurance Trust ("MVI") (which has twelve series) and MFS
Union Standard Trust ("UST") (which has two 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 aforementioned funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life
Series Trust ("MFS/SL"), Sun Growth Variable Annuity Fund, Inc. ("SGVAF"),
Money Market Variable Account, High Yield Variable Account, Capital
Appreciation Variable Account, Government Securities Variable Account, World
Governments Variable Account, Total Return Variable Account and Managed Sectors
Variable Account. The principal business address of each is One Sun Life
Executive Park, Wellesley Hills, Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company
organized under the laws of the Republic of Ireland and a subsidiary of MFS,
whose principal business address is 41-45 St. Stephen's Green, Dublin 2,
Ireland, serves as investment adviser to and distributor for MFS International
Funds (which has four portfolios: MFS International Funds-U.S. Equity Fund, MFS
International Funds-U.S. Emerging Growth Fund, MFS International
Funds-International Governments Fund and MFS International Fund- Charter Income
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.
<PAGE> 128
MIL also serves as investment adviser to and distributor for
MFS Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund and MFS Meridian U.S. Equity
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 Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary
of MFS, serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned
subsidiary of MFS, serves as distributor for certain life insurance and annuity
contracts issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary
of MFS, serves as shareholder servicing agent to the MFS Funds, the MFS
Closed-End Funds, MFS Institutional Trust, MFS Variable Insurance Trust and MFS
Union Standard Trust.
MFS Asset Management, Inc. ("AMI"), a wholly owned subsidiary
of MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned
subsidiary of MFS, markets MFS products to retirement plans and provides
administrative and record keeping services for retirement plans.
MFS
---
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames,
Arnold D. Scott, John R. Gardner and John D. McNeil. Mr. Brodkin is the
Chairman, Mr. Shames is the President, Mr. Scott is a Senior Executive Vice
President and Secretary, James E. Russell is a Senior Vice President and the
Treasurer, Stephen E. Cavan is a Senior Vice President, General Counsel and an
Assistant Secretary, and Robert T. Burns is a Vice President and an Assistant
Secretary of MFS.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS GOVERNMENT MORTGAGE FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS GOVERNMENT LIMITED MATURITY FUND
MFS SERIES TRUST VI
A. Keith Brodkin is the Chairman and President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice
President of MFS, is
<PAGE> 129
Assistant Treasurer, James R. Bordewick, Jr., Vice President and Associate
General Counsel of MFS, is Assistant Secretary.
MFS SERIES TRUST II
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg, Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost is Assistant
Treasurer, and James R. Bordewick, Jr., is Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
A. Keith Brodkin is the Chairman and President, Patricia A.
Zlotin, Executive Vice President of MFS and Leslie J. Nanberg, Senior Vice
President of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost is Assistant Treasurer, and James
R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST III
A. Keith Brodkin is the Chairman and President, James T.
Swanson, Robert J. Manning, Cynthia M. Brown and Joan S. Batchelder, Senior
Vice Presidents of MFS, Bernard Scozzafava, Vice President of MFS, and Matthew
Fontaine, Assistant Vice President of MFS, are Vice Presidents, Sheila
Burns-Magnan and Daniel E. McManus, Assistant Vice Presidents of MFS, are
Assistant Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London
is the Treasurer, James O. Yost is Assistant Treasurer, and James R.
Bordewick, Jr., is Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
A. Keith Brodkin is the Chairman and President, Robert A.
Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is Assistant Treasurer and James R. Bordewick, Jr., is
Assistant Secretary.
MFS SERIES TRUST VII
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg and Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is Assistant Treasurer and James R. Bordewick, Jr., is
Assistant Secretary.
MFS SERIES TRUST VIII
A. Keith Brodkin is the Chairman and President, Jeffrey L.
Shames, Leslie J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D.
Laupheimer, Jr., Vice President of MFS, are Vice Presidents, Stephen E. Cavan
is the Secretary, W. Thomas London is the
<PAGE> 130
Treasurer, James O. Yost is Assistant Treasurer and James R. Bordewick, Jr., is
Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M.
Brown and Robert A. Dennis are Vice Presidents, David B. Smith, Geoffrey L.
Schechter and David R. King, Vice Presidents of MFS, are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is Assistant Treasurer and James R. Bordewick, Jr., is Assistant
Secretary.
MFS VARIABLE INSURANCE TRUST
MFS INSTITUTIONAL TRUST
A. Keith Brodkin is the Chairman and President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS UNION STANDARD TRUST
A. Keith Brodkin is the Chairman and President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost and
Karen C. Jordan are Assistant Treasurers and James R. Bordewick, Jr., is the
Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M.
Brown and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, is Assistant
Treasurer and James R. Bordewick, Jr., is Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
A. Keith Brodkin is the Chairman and President, Patricia A.
Zlotin, Leslie J. Nanberg and James T. Swanson are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice
President of MFS, is Assistant Treasurer and James R. Bordewick, Jr., is
Assistant Secretary.
MFS SPECIAL VALUE TRUST
A. Keith Brodkin is the Chairman and President, Jeffrey L.
Shames, Patricia A. Zlotin and Robert J. Manning are Vice Presidents, Stephen
E. Cavan is the Secretary, W. Thomas London is the Treasurer, and James O.
Yost, is Assistant Treasurer and James R. Bordewick, Jr., is Assistant
Secretary.
SGVAF
W. Thomas London is the Treasurer.
<PAGE> 131
MIL
A. Keith Brodkin is a Director and the President, Arnold D.
Scott, Jeffrey L. Shames are Directors, Ziad Malek, Senior Vice President of
MFS, is a Senior Vice President and Managing Director, Thomas J. Cashman, Jr.,
a Vice President of MFS, is a Senior Vice President, Stanley T. Kwok is a Vice
President, Anthony F. Clarizio is an Assistant Vice President, Stephen E. Cavan
is a Director, Senior Vice President and the Clerk, James R. Bordewick, Jr. is
a Director, Senior Vice President and an Assistant Clerk, Robert T. Burns is an
Assistant Clerk and James E. Russell is the Treasurer.
MIL FUNDS
A. Keith Brodkin is the Chairman, President and a Director,
Arnold D. Scott and Jeffrey L. Shames are Directors, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary, and Ziad
Malek is a Senior Vice President.
MFS MERIDIAN FUNDS
A. Keith Brodkin is the Chairman, President and a Director,
Arnold D. Scott and Jeffrey L. Shames are Directors, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James R. Bordewick, Jr., is the
Assistant Secretary and Ziad Malek is a Senior Vice President.
MFD
A. Keith Brodkin is the Chairman, 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, and James E. Russell is the Treasurer.
CIAI
A. Keith Brodkin is the Chairman, Arnold D. Scott and Jeffrey
L. Shames are Directors, Cynthia Orcott is President, Bruce C. Avery, Executive
Vice President of MFS, is the Vice President, James E. Russell is the
Treasurer, Stephen E. Cavan is the Secretary, and Robert T. Burns is the
Assistant Secretary.
MFSC
A. Keith Brodkin is the Chairman, Arnold D. Scott and Jeffrey
L. Shames are Directors, Joseph A. Recomendes, Senior Vice President of MFS, is
the President, James E. Russell is the Treasurer, Stephen E. Cavan is the
Secretary, and Robert T. Burns is the Assistant Secretary.
<PAGE> 132
AMI
A. Keith Brodkin is the Chairman and a Director, Jeffrey L.
Shames, Leslie J. Nanberg and Arnold D. Scott are Directors, Thomas J. Cashman
is the President and a Director, James E. Russell is the Treasurer and Robert
T. Burns is the Secretary.
RSI
William W. Scott, Jr., Joseph A. Recomendes and Bruce C. Avery
are Directors, Arnold D. Scott is the Chairman, Douglas C. Grip, a Senior Vice
President of MFS, is the President, James E. Russell is the Treasurer, Stephen
E. Cavan is the Secretary, Robert T. Burns is the Assistant Secretary and Henry
A. Shea is an Executive Vice President.
In addition, the following persons, Directors or officers of
MFS, have the affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance Company of
Canada (U.S.), One Sun Life Executive
Park, Wellesley Hills, Massachusetts
Director, Sun Life Insurance and Annuity
Company of New York, 67 Broad Street,
New York, New York
John R. Gardner President and a Director, Sun Life
Assurance Company of Canada, Sun Life Centre,
150 King Street West, Toronto, Ontario, Canada
(Mr. Gardner 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)
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above.
(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
<PAGE> 133
office of the Registrant and the following locations:
NAME ADDRESS
---- -------
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, Mass. 02116
MFS Fund Distributor, Inc. 500 Boylston Street
(principal underwriter) Boston, Mass. 02116
State Street Bank and Trust State Street South
Company (custodian) 5 - West
North Quincy, Mass. 02171
MFS Service Center, Inc. 500 Boylston Stree
(transfer agent) Boston, Mass. 02116
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS
(a) Not Applicable.
(b) Not Applicable
(c) The registrant undertakes to furnish each person to whom
a prospectus is delivered with a copy of the Registrant's latest annual report
to shareholders upon request and without charge.
<PAGE> 134
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 28th day of March, 1995.
MFS SERIES TRUST VII
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 the 28th day of March,
1995.
SIGNATURE TITLE
--------- -----
A. KEITH BRODKIN* Chairman, President (Principal
--------------------------- Executive Officer) and Trustee
A. Keith Brodkin
W. THOMAS LONDON* Treasurer (Principal Financial Officer
--------------------------- and Principal Accounting Officer)
W. Thomas London
RICHARD B. BAILEY* Trustee
---------------------------
Richard B. Bailey
PETER G. HARWOOD* Trustee
---------------------------
Peter G. Harwood
J. ATWOOD IVES* Trustee
---------------------------
J. Atwood Ives
LAWRENCE T. PERERA, ESQ* Trustee
---------------------------
Lawrence T. Perera, Esq.
<PAGE> 135
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
* ByJAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr.
on behalf of those indicated pursuant
to a Power of Attorney dated
September 21, 1994, 1994; filed
herewith.
<PAGE> 136
POWER OF ATTORNEY
-----------------
MFS SERIES TRUST II
The undersigned, Trustees and officers of MFS Series Trust II (the
"Registrant"), hereby severally constitute and appoint A. Keith Brodkin, W.
Thomas London, Stephen E. Cavan and James R. Bordewick, Jr., and each of them
singly, as true and lawful attorneys, with full power to them and each of them
to sign for each of the undersigned, in the names of, and in the capacities
indicated below, any Registration Statement and any and all amendments thereto
and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission for the
purpose of registering the Registrant as a management investment company under
the Investment Company Act of 1940 and/or the shares issued by the Registrant
under the Securities Act of 1933 granting unto our said attorneys, and each of
them, acting alone, full power and authority to do and perform each and every
act and thing requisite or necessary or desirable to be done in the premises,
as fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys or any of them may
lawfully do or cause to be done by virtue thereof.
In WITNESS WHEREOF, the undersigned have hereunto set their hand on
this 11th day of August, 1994.
Signatures Title(s)
---------- --------
A. KEITH BRODKIN Chairman of the Board; Trustee; and
------------------------------ Principal Executive Officer
A. Keith Brodkin
RICHARD B. BAILEY Trustee
------------------------------
Richard B. Bailey
MARSHALL N. COHAN Trustee
------------------------------
Marshall N. Cohan
LAWRENCE H. COHN Trustee
------------------------------
Lawrence H. Cohn
SIR J. DAVID GIBBONS Trustee
------------------------------
Sir J. David Gibbons
<PAGE> 137
JEFFREY L. SHAMES Trustee
------------------------------
Jeffrey L. Shames
ABBY M. O'NEILL Trustee
------------------------------
Abby M. O'Neill
WALTER E. ROBB, III Trustee
------------------------------
Walter E. Robb, III
J. DALE SHERATT Trustee
------------------------------
J. Dale Sheratt
WARD SMITH Trustee
------------------------------
Ward Smith
ARNOLD D. SCOTT Trustee
------------------------------
Arnold D. Scott
W. THOMAS LONDON Principal Financial and
------------------------------ Accounting Officer
W. Thomas London
<PAGE> 138
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
----------- ---------------------- --------
<S> <C>
1 Amended and Restated Declaration of Trust dated January 18, 1995.
2 Amended and Restated By-Laws dated January 6, 1995.
6 (a) Distribution Agreement dated January 1, 1995.
9 (d) Amendment to Shareholder Servicing Agent Agreement dated
December 28, 1993.
11 (a) Consent of Ernst & Young LLP - MFS World Governments Fund dated
March 28, 1995.
(b) Consent of Deloitte & Touche LLP - MFS Value Fund dated March
27, 1995.
15 (b) Amended and Restated Distribution Plan for Class A shares of MFS
World Governments Fund, dated December 21, 1994.
(c) Distribution Plan for Class A shares of MFS Value Fund, dated
December 21, 1994.
(d) Distribution Plan for Class B shares of MFS World Governments
Fund, dated December 21, 1994.
(e) Distribution Plan for Class B shares of MFS Value Fund, dated
December 21, 1994.
(f) Distribution Plan for Class C shares of MFS World Governments
Fund dated December 21, 1994.
16 Schedule for Computation of Performance Quotations - Aggregate
and Average Annual Total Rate of Return and Yield Calculations.
27 Financial Data Schedules.
</TABLE>
<PAGE> 1
--------------------------------------------------------------------------------
EXHIBIT NO. 1
MFS SERIES TRUST VII
________________________
AMENDED AND RESTATED
DECLARATION OF TRUST
JANUARY 18, 1995
--------------------------------------------------------------------------------
<PAGE> 2
<TABLE>
TABLE OF CONTENTS
-----------------
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I -- NAME AND DEFINITIONS:
--------------------
Section 1.1 Name 1
Section 1.2 Definitions 2
ARTICLE II -- TRUSTEES:
--------
Section 2.1 Number of Trustees 3
Section 2.2 Election and Term 3
Section 2.3 Resignation and Removal 3
Section 2.4 Vacancies 4
Section 2.5 Delegation of Power to Other Trustees 4
ARTICLE III -- POWERS OF TRUSTEES:
------------------
Section 3.1 General 5
Section 3.2 Investments 5
Section 3.3 Legal Title 6
Section 3.4 Issuance and Repurchase of Securities 6
Section 3.5 Borrowing Money; Lending Trust Assets 7
Section 3.6 Delegation; Committees 7
Section 3.7 Collection and Payment 7
Section 3.8 Expenses 7
Section 3.9 Manner of Acting; By-Laws 7
Section 3.10 Miscellaneous Powers 7
Section 3.11 Principal Transactions 8
Section 3.12 Trustees and Officers as Shareholders 9
ARTICLE IV -- INVESTMENT ADVISER, DISTRIBUTOR AND TRANSFER AGENT:
--------------------------------------------------
Section 4.1 Investment Adviser 9
Section 4.2 Distributor 10
Section 4.3 Transfer Agent 10
Section 4.4 Parties to Contract 10
</TABLE>
I
<PAGE> 3
<TABLE>
TABLE OF CONTENTS (CONTINUED)
-----------------------------
<CAPTION>
PAGE
----
<S> <C>
ARTICLE V -- LIMITATIONS OF LIABILITY OF SHAREHOLDERS, TRUSTEES AND OTHERS:
-------------------------------------------------------------
Section 5.1 No Personal Liability of Shareholders, Trustees, etc. 11
Section 5.2 Non-Liability of Trustees, etc. 11
Section 5.3 Mandatory Indemnification 11
Section 5.4 No Bond Required of Trustees 13
Section 5.5 No Duty of Investigation; Notice in Trust Instruments, etc. 13
Section 5.6 Reliance on Experts, etc. 14
ARTICLE VI -- SHARES OF BENEFICIAL INTEREST:
-----------------------------
Section 6.1 Beneficial Interest 14
Section 6.2 Rights of Shareholders 14
Section 6.3 Trust Only 15
Section 6.4 Issuance of Shares 15
Section 6.5 Register of Shares 15
Section 6.6 Transfer of Shares 16
Section 6.7 Notices 16
Section 6.8 Voting Powers 16
Section 6.9 Series Designation 17
Section 6.10 Class Designation 19
ARTICLE VII -- REDEMPTIONS:
-----------
Section 7.1 Redemptions 19
Section 7.2 Suspension of Right of Redemption 20
Section 7.3 Redemption of Shares; Disclosure of Holding 20
Section 7.4 Redemption in Kind 21
ARTICLE VIII -- DETERMINATION OF NET ASSET VALUE, NET INCOME AND DISTRIBUTIONS: 21
--------------------------------------------------------------
ARTICLE IX -- DURATION; TERMINATION OF TRUST; AMENDMENT; MERGERS, ETC.:
--------------------------------------------------------
Section 9.1 Duration 22
Section 9.2 Termination of Trust 22
Section 9.3 Amendment Procedure 23
Section 9.4 Merger, Consolidation and Sale of Assets 24
Section 9.5 Incorporation and Reorganization 24
</TABLE>
II
<PAGE> 4
<TABLE>
TABLE OF CONTENTS (CONTINUED)
-----------------------------
<CAPTION>
PAGE
----
<S> <C>
ARTICLE X -- REPORTS TO SHAREHOLDERS 25
-----------------------
ARTICLE XI -- MISCELLANEOUS:
-------------
Section 11.1 Filing 25
Section 11.2 Governing Law 25
Section 11.3 Counterparts 25
Section 11.4 Reliance By Third Parties 26
Section 11.5 Provisions in Conflict with Law or Regulations 26
ANNEX A 27
ANNEX B 28
SIGNATURE PAGE 30
</TABLE>
III
<PAGE> 5
AMENDED AND RESTATED
DECLARATION OF TRUST
OF
MFS SERIES TRUST VII
500 BOYLSTON
STREET BOSTON, MASSACHUSETTS 02116
AMENDED AND RESTATED DECLARATION OF TRUST made as of this 18th day of
January, 1995 by the Trustees hereunder.
WHEREAS, the Trust was established pursuant to a Declaration of Trust
dated August 22, 1980 for the investment and reinvestment of funds contributed
thereto; and
WHEREAS, the Trustees desire that the beneficial interest in the trust
assets continue to be divided into transferable Shares of Beneficial Interest
(without par value) issued in one or more series, as hereinafter provided; and
WHEREAS, the Declaration of Trust has been, from time to time, amended
in accordance with the provisions of the Declaration; and
WHEREAS, the Trustees now desire further to amend and to restate the
Declaration of Trust and hereby certify, as provided in Section 11.1 of the
Declaration, that this Amended and Restated Declaration of Trust has been
further amended and restated in accordance with the provisions of the
Declaration;
NOW THEREFORE, the Trustees hereby confirm that all money and property
contributed to the trust established hereunder shall be held and managed in
trust for the benefit of holders, from time to time, of the Shares of
Beneficial Interest (without par value) issued hereunder and subject to the
provisions hereof.
ARTICLE I
NAME AND DEFINITIONS
--------------------
SECTION 1.1 - NAME. The name of the trust created hereby is the MFS
Series Trust VII, the current address of which is 500 Boylston Street, Boston,
Massachusetts 02116.
<PAGE> 6
SECTION 1.2 - DEFINITIONS. Wherever they are used herein, the
following terms have the following respective meanings:
(a) "BY-LAWS" means the By-Laws referred to in Section 3.9 here33of,
as from time to time amended.
(b) the terms "COMMISSION," "INTERESTED PERSON," and "MAJORITY
SHAREHOLDER VOTE" (the 67% or 50% requirement of the third sentence of Section
2(a)(42) of the 1940 Act, whichever may be applicable) have the meanings given
them in the 1940 Act, except to the extent that the Trustees have otherwise
defined "Majority Shareholder Vote" in conjunction with the establishment of
any series of Shares.
(c) "DECLARATION" means this Declaration of Trust as amended from
time to time. Reference in this Declaration of Trust to "DECLARATION,"
"HEREOF," "HEREIN" and "HEREUNDER" shall be deemed to refer to this Declaration
rather than the article or section in which such words appear.
(d) "DISTRIBUTOR" means the party, other than the Trust, to the
contract described in Section 4.2 hereof.
(e) "INVESTMENT ADVISER" means a party furnishing services to the
Trust, pursuant to any contract described in Section 4.1 hereof.
(f) "1940 ACT" means the Investment Company Act of 1940 and the Rules
and Regulations thereunder, as amended from time to time.
(g) "PERSON" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities, whether
or not legal entities, and governments and agencies and political sub-divisions
thereof, whether domestic or foreign.
(h) "SHAREHOLDER" means a record owner of outstanding Shares.
(i) "SHARES" means the units of interest into which the beneficial
interest in the Trust shall be divided from time to time, including the Shares
of any and all series which may be established by the Trustees, and includes
fractions of Shares as well as whole Shares.
2
<PAGE> 7
(j) "TRANSFER AGENT" means the party, other than the Trust, to the
contract described in Section 4.3 hereof.
(k) "TRUST" means the MFS Series Trust VII.
(l) "TRUST PROPERTY" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of the
Trust or the Trustees.
(m) "TRUSTEES" means the persons who have signed the Declaration, so
long as they shall continue in office in accordance with the terms hereof, and
all other persons who may from time to time be duly elected, qualified and
serving as Trustees in accordance with the provisions hereof, and reference
herein to a Trustee or the Trustees shall refer to such person or persons in
their capacity as trustees hereunder.
ARTICLE II
TRUSTEES
--------
SECTION 2.1 - NUMBER OF TRUSTEES. The number of Trustees shall be
such number as shall be fixed from time to time by a written instrument signed
by a majority of the Trustees, provided, however, that the number of Trustees
shall in no event be less than three (3) nor more than fifteen (15).
SECTION 2.2 - ELECTION AND TERM. Except for the Trustees named herein
or appointed to fill vacancies pursuant to Section 2.4 hereof, the Trustees
shall be elected by the Shareholders at the annual meeting of the Shareholders.
Commencing in 1981 there shall be an annual meeting of the Shareholders to be
held at such time and place and in such manner as the By-Laws shall provide.
Except in the event of resignations or removals pursuant to Section 2.3 hereof,
each Trustee shall hold office until the next annual meeting of Shareholders
and until his successor is elected and qualified to serve as Trustee.
SECTION 2.3 - RESIGNATION AND REMOVAL. Any Trustee may resign his
trust (without need for prior or subsequent accounting) by an instrument in
writing signed by him and delivered to the other Trustees and such resignation
shall be effective upon such delivery, or at a later date according to the
terms of the instrument. Any of the Trustees may be removed (provided the
aggregate number of Trustees after such removal shall not be less than the
number required by Section 2.1. hereof) with cause, by the action of two-thirds
of the remaining Trustees. Upon the
3
<PAGE> 8
resignation or removal of a Trustee, or his otherwise ceasing to be a Trustee,
he shall execute and deliver such documents as the remaining Trustees shall
require for the purpose of conveying to the Trust or the remaining Trustees any
Trust Property held in the name of the resigning or removed Trustee. Upon the
incapacity or death of any Trustee, his legal representative shall execute and
deliver on his behalf such documents as the remaining Trustees shall require as
provided in the preceding sentence.
SECTION 2.4 - VACANCIES. The term of office of a Trustee shall
terminate and a vacancy shall occur in the event of the death, resignation,
removal, bankruptcy, adjudicated incompetence or other incapacity to perform
the duties of the office of a Trustee. No such vacancy shall operate to annul
the Declaration or to revoke any existing agency created pursuant to the terms
of the Declaration. In the case of an existing vacancy, including a vacancy
existing by reason of an increase in the number of Trustees, subject to the
provisions of Section 16(a) of the 1940 Act, the remaining Trustees shall fill
such vacancy by the appointment of such other person as they in their
discretion shall see fit, made by a written instrument signed by a majority of
the Trustees. Any such appointment shall not become effective, however, until
the person named in the written instrument of appointment shall have accepted
in writing such appointment and agreed in writing to be bound by the terms of
the Declaration. An appointment of a Trustee may be made in anticipation of a
vacancy to occur at a later date by reason of retirement, resignation or
increase in the number of Trustees, provided that such appointment shall not
become effective prior to such retirement, resignation or increase in the
number of Trustees. Whenever a vacancy in the number of Trustees shall occur,
until such vacancy is filled as provided in this Section 2.4, the Trustees in
office, regardless of their number, shall have all the powers granted to the
Trustees and shall discharge all the duties imposed upon the Trustees by the
Declaration. A written instrument certifying the existence of such vacancy
signed by a majority of the Trustees shall be conclusive evidence of the
existence of such vacancy.
SECTION 2.5 - DELEGATION OF POWER TO OTHER TRUSTEES. Any Trustee may,
by power of attorney, delegate his power for a period not exceeding six (6)
months at any one time to any other Trustee or Trustees; provided that in no
case shall less than two (2) Trustees personally exercise the powers granted to
the Trustees under the Declaration except as herein otherwise expressly
provided.
4
<PAGE> 9
ARTICLE III
POWERS OF TRUSTEES
------------------
SECTION 3.1 - GENERAL. The Trustees shall have exclusive and absolute
control over the Trust Property and over the business of the Trust to the same
extent as if the Trustees were the sole owners of the Trust Property and
business in their own right, but with such powers of delegation as may be
permitted by the Declaration. The Trustees shall have power to conduct the
business of the Trust and carry on its operations in any and all of its
branches and maintain offices both within and without The Commonwealth of
Massachusetts, in any and all states of the United States of America, in the
District of Columbia, and in any and all commonwealths, territories,
dependencies, colonies, possessions, agencies or instrumentalities of the
United States of America and of foreign governments, and to do all such other
things and execute all such instruments as the Trustees deem necessary, proper
or desirable in order to promote the interests of the Trust although such
things are not herein specifically mentioned. Any determination as to what is
in the interests of the Trust made by the Trustees in good faith shall be
conclusive. In construing the provisions of the Declaration, the presumption
shall be in favor of a grant of power to the Trustees.
The enumeration of any specific power herein shall not be construed as
limiting the aforesaid power. Such powers of the Trustees may be exercised
without order of or resort to any court.
SECTION 3.2 - INVESTMENTS. The Trustees shall have the power to:
(a) conduct, operate and carry on the business of an investment
company;
(b) subscribe for, invest in, reinvest in, purchase or otherwise
acquire, own, hold, pledge, sell, assign, transfer, exchange, distribute, lend
or otherwise deal in or dispose of United States and foreign currencies, any
form of gold and other precious metals, and securities of every nature and
kind, including, without limitation, all types of bonds, debentures, stocks,
negotiable or non-negotiable instruments, obligations, evidences of
indebtedness, certificates of deposit or indebtedness, commercial paper,
repurchase agreements, bankers' acceptances, and other securities of any kind,
issued, created, guaranteed or sponsored by any and all Persons, including,
without limitation, states, territories and possessions of the United States
and the District of Columbia and any of the political subdivisions, agencies or
instrumentalities thereof, and by the United States Government, any foreign
government, political subdivisions thereof or their
5
<PAGE> 10
agencies or instrumentalities, or international instrumentalities, or by any
bank or savings institution, or by any corporation or organization organized
under the laws of the United States or of any state, territory or possession
thereof, or by any corporation or organization organized under any foreign law,
or in "when issued" contracts for any such securities, or retain Trust assets
in cash and from time to time change the investments of the assets of the
Trust; and to exercise any and all rights, powers and privileges of ownership
or interest in respect of any and all such investments of every kind and
description, including, without limitation, the right to consent and otherwise
act with respect thereto, with power to designate one or more persons, firms,
associations or corporations to exercise any of said rights, powers and
privileges in respect of any of said instruments.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be limited
by any law limiting the investments which may be made by fiduciaries.
SECTION 3.3 - LEGAL TITLE. Legal title to all the Trust Property shall
be vested in the Trustees as joint tenants except that the Trustees shall have
power to cause legal title to any Trust Property to be held by or in the name
of one or more of the Trustees, or in the name of the Trust, or in the name of
any other Person as nominee, on such terms as the Trustees may determine. The
right, title and interest of the Trustees in the Trust Property shall vest
automatically in each Person who may hereafter become a Trustee. Upon the
resignation, removal or death of a Trustee he shall automatically cease to have
any right, title or interest in any of the Trust Property, and the right, title
and interest of such Trustee in the Trust Property shall vest automatically in
the remaining Trustees. Such vesting and cessation of title shall be effective
whether or not conveyancing documents have been executed and delivered.
SECTION 3.4 - ISSUANCE AND REPURCHASE OF SECURITIES. The Trustees
shall have the power to issue, sell, repurchase, redeem, retire, cancel,
acquire, hold, resell, reissue, dispose of, transfer, and otherwise deal in
Shares and, subject to the provisions set forth in Articles VII, VIII and IX
and Section 6.9 hereof, to apply to any such repurchase, redemption,
retirement, cancellation or acquisition of Shares any funds or property of the
Trust whether capital or surplus or otherwise, to the full extent now or
hereafter permitted by the laws of The Commonwealth of Massachusetts governing
business corporations.
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SECTION 3.5 - BORROWING MONEY; LENDING TRUST ASSETS. The Trustees
shall have power to borrow money or otherwise obtain credit and to secure the
same by mortgaging, pledging or otherwise subjecting as security the assets of
the Trust, to endorse, guarantee, or undertake the performance of any
obligation, contract or engagement of any other Person and to lend Trust
assets.
SECTION 3.6 - DELEGATION; COMMITTEE. The Trustees shall have power to
delegate from time to time to such of their number or to officers, employees or
agents of the Trust the doing of such things and the execution of such
instruments either in the name of the Trust or the names of the Trustees or
otherwise as the Trustees may deem expedient.
SECTION 3.7 - COLLECTION AND PAYMENT. The Trustees shall have power
to collect all property due to the Trust; to pay all claims, including taxes,
against the Trust Property; to prosecute, defend, compromise or abandon any
claims relating to the Trust Property; to foreclose any security interest
securing any obligations, by virtue of which any property is owed to the Trust;
and to enter into releases, agreements and other instruments
SECTION 3.8 - EXPENSES. The Trustees shall have the power to incur
and pay any expenses which in the opinion of the Trustees are necessary or
incidental to carry out any of the purposes of the Declaration, and to pay
reasonable compensation from the funds of the Trust to themselves as Trustees.
The Trustees shall fix the compensation of all officers, employees and
Trustees.
SECTION 3.9 - MANNER OF ACTING; BY-LAWS. Except as otherwise provided
herein or in the By-Laws, any action to be taken by the Trustees may be taken
by a majority of the Trustees present at a meeting of Trustees (a quorum being
present), including any meeting held by means of a conference telephone circuit
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, or by written consents of all the Trustees.
The Trustees may adopt By-Laws not inconsistent with this Declaration to
provide for the conduct of the business of the Trust and may amend or repeal
such By-Laws to the extent such power is not reserved to the Shareholders.
SECTION 3.10 - MISCELLANEOUS POWER. The Trustees shall have the power
to:
(a) employ or contract with such Persons as the Trustees may deem
desirable for the transaction of the business of the Trust;
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(b) enter into joint ventures, partnerships and any other
combinations or associations;
(c) remove Trustees or fill vacancies in or add to their number,
elect and remove such officers and appoint and terminate such agents or
employees as they consider appropriate, and appoint from their own number, and
terminate, any one or more committees which may exercise some or all of the
power and authority of the Trustees as the Trustees may determine;
(d) purchase, and pay for out of Trust Property, insurance policies
insuring the Shareholders, Trustees, officers, employees, agents, investment
advisers, distributors, selected dealers or independent contractors of the
Trust against all claims arising by reason of holding any such position or by
reason of any action taken or omitted by any such Person in such capacity,
whether or not constituting negligence, or whether or not the Trust would have
the power to indemnify such Person against such liability;
(e) establish pension, profit-sharing, share purchase, and other
retirement, incentive and benefit plans for any Trustees, officers, employees
and agents of the Trust;
(f) to the extent permitted by law, indemnify any person with whom
the Trust has dealings, including the Investment Adviser, Distributor, Transfer
Agent and selected dealers, to such extent as the Trustees shall determine;
(g) guarantee indebtedness or contractual obligations of others;
(h) determine and change the fiscal year of the Trust and the method
by which its accounts shall be kept; and
(i) adopt a seal for the Trust but the absence of such seal shall not
impair the validity of any instrument executed on behalf of the Trust.
SECTION 3.11 - PRINCIPAL TRANSACTION. Except in transactions
permitted by the 1940 Act, or any order of exemption issued by the Commission,
the Trustees shall not, on behalf of the Trust, buy any securities (other than
Shares) from or sell any securities (other than Shares) to, or lend any assets
of the Trust to, any Trustee or officer of the Trust or any firm of which any
such Trustee or officer is a member acting as principal, or have any such
dealings with the Investment Adviser, Distributor or Transfer Agent or with any
Interested Person of such Person; but the
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Trust may employ any such Person, or firm or company in which such Person is an
Interested Person, as broker, legal counsel, registrar, transfer agent,
dividend disbursing agent or custodian upon customary terms.
SECTION 3.12 - TRUSTEES AND OFFICERS AS SHAREHOLDER. Except as
hereinafter provided, no officer, Trustee or member of the Advisory Board of
the Trust, and no member, partner, officer, director or trustee of the
Investment Adviser or of the Distributor, and no Investment Adviser or
Distributor of the Trust, shall take long or short positions in the securities
issued by the Trust. The foregoing provision shall not prevent:
(a) The Distributor from purchasing from the Trust Shares if such
purchases are limited (except for reasonable allowances for clerical errors,
delays and errors of transmission and cancellation of orders) to purchases for
the purpose of filling orders for Shares received by the Distributor and
provided that orders to purchase from the Trust are entered with the Trust or
the Custodian promptly upon receipt by the Distributor of purchase orders for
Shares, unless the Distributor is otherwise instructed by its customer;
(b) The distributor from purchasing Shares as agent for the account
of the Trust;
(c) The purchase from the Trust or from the Distributor of Shares by
any officer, Trustee or member of the Advisory Board of the Trust or by any
member, partner, officer, director or trustee of the Investment Adviser or of
the Distributor at a price not lower than the net asset value of the Shares at
the moment of such purchase, provided that any such sales are only to be made
pursuant to a uniform offer described in the Trust's current prospectus; or
(d) The Investment Adviser, the Distributor, or any of their
officers, partners, directors or trustees from purchasing Shares prior to the
effective date of the Registration Statement relating to the Shares under the
Securities Act of 1933, as amended.
ARTICLE IV
INVESTMENT ADVISER, DISTRIBUTOR AND TRANSFER AGENT
--------------------------------------------------
SECTION 4.1 - INVESTMENT ADVISE. Subject to a Majority Shareholder
Vote, the Trustees may in their discretion from time to time enter into one or
more investment advisory or management contracts whereby a party to such
contract shall undertake to furnish the Trust such management, investment
advisory, statistical and research facilities and services, promotional
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activities, and such other facilities and services, if any, as the Trustees
shall from time to time consider desirable and all upon such terms and
conditions as the Trustees may in their discretion determine. Notwithstanding
any provisions of the Declaration, the Trustees may delegate to the Investment
Adviser authority (subject to such general or specific instructions as the
Trustees may from time to time adopt) to effect purchases, sales, loans or
exchanges of assets of the Trust on behalf of the Trustees or may authorize any
officer, employee or Trustee to effect such purchases, sales, loans or
exchanges pursuant to recommendations of the Investment Adviser (and all
without further action by the Trustees). Any such purchases, sales, loans and
exchanges shall be deemed to have been authorized by all of the Trustees.
SECTION 4.2 - DISTRIBUTOR. The Trustees may in their discretion from
time to time enter into a contract, providing for the sale of Shares whereby
the Trust may either agree to sell the Shares to the other party to the
contract or appoint such other party its sales agent for such Shares. In
either case, the contract shall be on such terms and conditions as the Trustees
may in their discretion determine not inconsistent with the provisions of this
Article IV or the By-Laws; and such contract may also provide for the
repurchase or sale of Shares by such other party as principal or as agent of
the Trust and may provide that such other party may enter into selected dealer
agreements with registered securities dealers to further the purpose of the
distribution or repurchase of the Shares.
SECTION 4.3 - TRANSFER AGENT. The Trustees may in their discretion
from time to time enter into a transfer agency and shareholder service contract
whereby the other party to such contract shall undertake to furnish transfer
agency and shareholder services to the Trust. The contract shall have such
terms and conditions as the Trustees may in their discretion determine not
inconsistent with the Declaration or the By-Laws. Such services may be
provided by one or more persons.
SECTION 4.4 - PARTIES TO CONTRACT. Any contract of the character
described in Sections 4.1, 4.2, or 4.3 of this Article IV or any Custodian
contract, as described in the By-Laws, may be entered into with any Person,
although one or more of the Trustees or officers of the Trust may be an
officer, partner, director, trustee, shareholder, or member of such other party
to the contract, and no such contract shall be invalidated or rendered voidable
by reason of the existence of any such relationship; nor shall any Person
holding such relationship be liable merely by reason of such relationship for
any loss or expense to the Trust under or by reason of said contract or
accountable for any profit realized directly or indirectly therefrom, provided
that the contract when entered into was not inconsistent with the provisions of
this Article IV or the
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By-Laws. The same Person may be the other party to contracts entered into
pursuant to Sections 4.1, 4.2 and 4.3 above or Custodian contracts, and any
individual may be financially interested or otherwise affiliated with Persons
who are parties to any or all of the contracts mentioned in this Section 4.4.
ARTICLE V
LIMITATIONS OF LIABILITY OF SHAREHOLDERS, TRUSTEES AND OTHERS
-------------------------------------------------------------
SECTION 5.1 - NO PERSONAL LIABILITY OF SHAREHOLDERS, TRUSTEES, ETC.
No Shareholder shall be subject to any personal liability whatsoever to any
Person in connection with Trust Property or the acts, obligations or affairs of
the Trust. No Trustee, officer, employee or agent of the Trust shall be
subject to any personal liability whatsoever to any Person, other than the
Trust or its Shareholders, in connection with Trust Property or the affairs of
the Trust, save only that arising from bad faith, willful misfeasance, gross
negligence or reckless disregard for his duty to such Person; and all such
Persons shall look solely to the Trust Property for satisfaction of claims of
any nature arising in connection with the affairs of the Trust. If any
Shareholder, Trustee, officer, employee, or agent, as such, of the Trust, is
made a party to any suit or proceeding to enforce any such liability, he shall
not, on account thereof, be held to any personal liability. The Trust shall
indemnify and hold each Shareholder harmless from and against all claims and
liabilities, to which such Shareholder may become subject by reason of his
being or having been a Shareholder, and shall reimburse such Shareholder for
all legal and other expenses reasonably incurred by him in connection with any
such claim or liability. The rights accruing to a Shareholder under this
Section 5.1 shall not exclude any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained restrict the right of
the Trust to indemnify or reimburse a Shareholder in any appropriate situation
even though not specifically provided herein.
SECTION 5.2 - NON-LIABILITY OF TRUSTEES, ETC. No Trustee, officer,
employee or agent of the Trust shall be liable to the Trust, its Shareholders,
or to any Shareholder, Trustee, officer, employee, or agent thereof for any
action or failure to act (including without limitation the failure to compel in
any way any former or acting Trustee to redress any breach of trust) except for
his own bad faith, willful misfeasance, gross negligence or reckless disregard
of his duties.
SECTION 5.3 - MANDATORY INDEMNIFICATION.
(a) Subject to the exceptions and limitations contained in paragraph
(b) below:
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(i) every person who is or has been a Trustee or officer of the
Trust shall be indemnified by the Trust against all liability and against all
expenses reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or otherwise
by virtue of his being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal, or other,
including appeals), actual or threatened; and the words "liability and
"expenses" shall include, without limitation, attorneys' fees, costs,
judgments, amounts paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
(i) against any liability to the Trust or the Shareholders by
reason of a final adjudication by the court or other body before which the
proceeding was brought that he engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office;
(ii) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the reasonable belief
that his action was in the best interest of the Trust;
(iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in paragraph (b)(i) or (b)(ii)
resulting in a payment by a Trustee or officer, unless there has been either a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office by the court or other body approving the
settlement or other disposition or a reasonable determination, based upon a
review of readily available facts (as opposed to a full trial-type inquiry)
that he did not engage in such conduct:
(A) by vote of a majority of the Disinterested Trustees
acting on the matter (provided that a majority of the
Disinterested Trustees then in office act on the matter); or
(B) by written opinion of independent legal counsel.
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(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not
affect any other rights to which any Trustee or officer may now or hereafter be
entitled, shall continue as to a Person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs, executors and
administrators of such Person. Nothing contained herein shall affect any
rights to indemnification to which personnel other than Trustees and officers
may be entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any
claim, action, suit, or proceeding of the character described in paragraph (a)
of this Section 5.3 shall be advanced by the Trust prior to final disposition
thereof upon receipt of an undertaking by or on behalf of the recipient to
repay such amount if it is ultimately determined that he is not entitled to
indemnification under this Section 5.3, provided that either:
(i) such undertaking is secured by a surety bond or some other
appropriate security or the Trust shall be insured against losses arising out
of any such advances; or
(ii) a majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested Trustees then in office
act on the matter) or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Section 5.3, a "Disinterested Trustee" is one (i) who
is not an "Interested Person" of the Trust (including anyone who has been
exempted from being an "Interested Person" by any rule, regulation or order of
the Commission), and (ii) against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or had been pending.
SECTION 5.4 - NO BOND REQUIRED OF TRUSTEES. No Trustee shall be
obligated to give any bond or other security for the performance of any of his
duties hereunder.
SECTION 5.5 - NO DUTY OF INVESTIGATION: NOTICE IN TRUST INSTRUMENT;
ETC. No purchaser, lender, transfer agent or other Person dealing with the
Trustees or any officer, employee or agent of the Trust shall be bound to make
any inquiry concerning the validity of any transaction purporting to be made by
the Trustees or by said officer, employee or agent or be liable for the
application of money or property paid, loaned, or delivered to or on the order
of the Trustees or
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of said officer, employee or agent. Every obligation, contract, instrument,
certificate, Share, other security of the Trust or undertaking, and every other
act or thing whatsoever executed in connection with the Trust shall be
conclusively presumed to have been executed or done by the executors thereof
only in their capacity as Trustees under the Declaration or in their capacity
as officers, employees or agents of the Trust. Every written obligation,
contract, instrument, certificate, Share, other security of the Trust or
undertaking made or issued by the Trustees shall recite that the same is
executed or made by them not individually, but as Trustees under the
Declaration, and that the obligations of any such instrument are not binding
upon any of the Trustees or Shareholders, individually, but bind only the trust
estate, and may contain any further recital which they or he may deem
appropriate, but the omission of such recital shall not operate to bind the
Trustees individually. The Trustees shall at all times maintain insurance for
the protection of the Trust Property, its Shareholders, Trustees, officers,
employees and agents in such amount as the Trustees shall deem adequate to
cover possible tort liability, and such other insurance as the Trustees in
their sole judgment shall deem advisable.
SECTION 5.6 - RELIANCE ON EXPERTS, ETC. Each Trustee and officer or
employee of the Trust shall, in the performance of his duties, be fully and
completely justified and protected with regard to any act or any failure to act
resulting from reliance in good faith upon the books of account or other
records of the Trust, upon an opinion of counsel, or upon reports made to the
Trust by any of its officers or employees or by the Investment Adviser, the
Distributor, Transfer Agent, selected dealers, accountants, appraisers or other
experts or consultants selected with reasonable care by the Trustees, officers
or employees of the Trust, regardless of whether such counsel or expert may
also be a Trustee.
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
-----------------------------
SECTION 6.1 - BENEFICIAL INTEREST. The interest of the beneficiaries
hereunder shall be divided into transferable Shares of Beneficial Interest,
without par value. The number of Shares authorized hereunder is unlimited. All
Shares issued hereunder including, without limitation, Shares issued in
connection with a dividend in Shares or a split of Shares, shall be fully paid
and non-assessable.
SECTION 6.2 - RIGHTS OF SHAREHOLDERS. The ownership of the Trust
Property of every description and the right to conduct any business
hereinbefore described are vested exclusively in the Trustees, and the
Shareholders shall have no interest therein other than the beneficial interest
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conferred by their Shares, and they shall have no right to call for any
partition or division of any property, profits, rights or interests of the
Trust nor can they be called upon to assume any losses of the Trust or suffer
an assessment of any kind by virtue of their ownership of Shares. The Shares
shall be personal property giving only the rights in the Declaration
specifically set forth. The Shares shall not entitle the holder to preference,
preemptive, appraisal, conversion or exchange rights, except as the Trustees
may determine with respect to any series or class of Shares.
SECTION 6.3 - TRUST ONLY. It is the intention of the Trustees to
create only the relationship of Trustee and beneficiary between the Trustees
and each Shareholder from time to time. It is not the intention of the
Trustees to create a general partnership, limited partnership, joint stock
association, corporation, bailment or any form of legal relationship other than
a trust. Nothing in the Declaration shall be construed to make the
Shareholders, either by themselves or with the Trustees, partners or members of
a joint stock association.
SECTION 6.4 - ISSUANCE OF SHARES. The Trustees, in their discretion
may, from time to time without vote of the Shareholders, issue Shares, in
addition to the then issued and outstanding Shares and Shares held in the
treasury, to such party or parties and for such amount and type of
consideration, including cash or property, at such time or times, and on such
terms as the Trustees may deem best, and may in such manner acquire other
assets (including the acquisition of assets subject to, and in connection with
the assumption of liabilities) and businesses. In connection with any issuance
of Shares, the Trustees may issue fractional Shares. The Trustees may from
time to time divide or combine the Shares into a greater or lesser number
without thereby changing the proportionate beneficial interests in the Trust.
Contributions to the Trust may be accepted for, and Shares shall be redeemed
as, whole Shares and/or l/l,000ths of a Share or integral multiples thereof.
SECTION 6.5 - REGISTER OF SHARES. A register shall be kept at the
principal office of the Trust or at an office of the Transfer Agent which shall
contain the names and addresses of the Shareholders and the number of Shares
held by them respectively and a record of all transfers thereof. Such register
shall be conclusive as to who are the holders of the Shares and who shall be
entitled to receive dividends or distributions or otherwise to exercise or
enjoy the rights of Shareholders. No Shareholder shall be entitled to receive
payment of any dividend or distribution, nor to have notice given to him as
herein or in the By-Laws provided, until he has
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given his address to the Transfer Agent or such other officer or agent of the
Trustees as shall keep the said register for entry thereon. The Trustees, in
their discretion, may authorize the issuance of Share certificates and
promulgate appropriate rules and regulations as to their use.
SECTION 6.6 - TRANSFER OF SHARES. Shares shall be transferable on the
records of the Trust only by the record holder thereof or by his agent
thereunto duly authorized in writing, upon delivery to the Trustee or the
Transfer Agent of a duly executed instrument of transfer, together with any
certificate or certificates (if issued) for such Shares and such evidence of
the genuineness of each such execution and authorization and of other matters
as may reasonably be required. Upon such delivery the transfer shall be
recorded on the register of the Trust. Until such record is made, the
Shareholder of record shall be deemed to be the holder of such Shares for all
purposes hereunder and neither the Trustees nor any Transfer Agent or registrar
nor any officer, employee or agent of the Trust shall be affected by any notice
of the proposed transfer.
Any person becoming entitled to any Shares in consequence of the
death, bankruptcy, or incompetence of any Shareholder, or otherwise by
operation of law, shall be recorded on the register of Shares as the holder of
such Shares upon production of the proper evidence thereof to the Trustees or
the Transfer Agent; but until such record is made, the Shareholder of record
shall be deemed to be the holder of such Shares for all purposes hereunder and
neither the Trustees nor any Transfer Agent or registrar nor any officer or
agent of the Trust shall be affected by any notice of such death, bankruptcy or
incompetence, or other operation of law.
SECTION 6.7 - NOTICES. Any and all notices to which any Shareholder
may be entitled and any and all communications shall be deemed duly served or
given if mailed, postage prepaid, addressed to any Shareholder of record at his
last known address as recorded on the register of the Trust.
SECTION 6.8 - VOTING POWERS. The Shareholders shall have power to
vote only (i) for the election of Trustees as provided in Section 2.2 hereof,
(ii) with respect to any investment advisory or management contract as provided
in Section 4.l, (iii) with respect to termination of the Trust as provided in
Section 9.2, (iv) with respect to any amendment of the Declaration to the
extent and as provided in Section 9.3, (v) with respect to any merger,
consolidation or sale of assets as provided in Section 9.4, (vi) with respect
to incorporation of the Trust to the extent and as provided in Section 9.5,
(vii) to the same extent as the stockholders of a Massachusetts business
corporation as to whether or not a court action, proceeding or claim should or
should not be brought or maintained derivatively or as a class action on behalf
of the Trust or the
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Shareholders, and (viii) with respect to such additional matters relating to
the Trust as may be required by the Declaration, the By-Laws or any
registration of the Trust with the Commission (or any successor agency) or any
state, or as the Trustees may consider necessary or desirable. Each whole
Share shall be entitled to one vote as to any matter on which it is entitled to
vote and each fractional Share shall be entitled to a proportionate fractional
vote, except that Shares held in the treasury of the Trust shall not be voted
and that the Trustees may, in conjunction with the establishment of any series
of Shares, establish conditions under which the several series shall have
separate voting rights or no voting rights. There shall be no cumulative
voting in the election of Trustees. Until Shares are issued, the Trustees may
exercise all rights of Shareholders and may take any action required by law,
the Declaration or the By-Laws to be taken by Shareholders. The By-Laws may
include further provisions for Shareholders' votes and meetings and related
matters.
SECTION 6.9 - SERIES DESIGNATION. The Trustees, in their discretion,
may authorize the division of Shares into two or more series, and the different
series shall be established and designated, and the variations in the relative
rights and preferences as between the different series shall be fixed and
determined by the Trustees; provided, that all Shares shall be identical except
that there may be variations so fixed and determined between different series
as to purchase price, right of redemption and the price, terms and manner of
redemption, special and relative rights as to dividends and on liquidation,
conversion rights, and conditions under which the several series shall have
separate voting rights. All references to Shares in this Declaration shall be
deemed to be shares of any or all series as the context may require.
If the Trustees shall divide the Shares of the Trust into two or more
series, the following provisions shall be applicable:
(a) The number of authorized Shares and the number of Shares of each
series that may be issued shall be unlimited. The Trustees may classify or
reclassify any unissued Shares or any shares previously issued and reacquired
of any series into one or more series that may be established and designated
from time to time. The Trustees may hold as treasury shares (of the same or
some other series), reissue for such consideration and on such terms as they
may determine, or cancel any Shares of any series reacquired by the Trust at
their discretion from time to time.
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(b) The power of the Trustees to invest and reinvest the trust
property shall be governed by Section 3.2 of this Declaration with respect to
any one or more series which represents the interests in the assets of the
Trust immediately prior to the establishment of two or more series and the
power of the Trustees to invest and reinvest assets applicable to any other
series shall be as set forth in the instrument of the Trustees establishing
such series which is hereinafter described.
(c) All consideration received by the Trust for the issue or sale of
Shares of a particular series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that series for all purposes, subject only to the rights
of creditors, and shall be so recorded upon the books of account of the Trust.
In the event that there are any assets, income, earnings, profits, and proceeds
thereof, funds, or payments which are not readily identifiable as belonging to
any particular series, the Trustees shall allocate them among any one or more
of the series established and designated from time to time in such manner and
on such basis, as they, in their sole discretion, deem fair and equitable.
Each such allocation by the Trustees shall be conclusive and binding upon the
Shareholders of all series for all purposes.
(d) The assets belonging to each particular series shall be charged
with the liabilities of the Trust in respect of that series and all expenses,
costs, charges and reserves attributable to that series, and any general
liabilities, expenses, costs, charges or reserves of the Trust which are not
readily identifiable as belonging to any particular series shall be allocated
and charged by the Trustees to and among any one or more of the series
established and designated from time to time in such manner and on such basis
as the Trustees in their sole discretion deem fair and equitable. Each
allocation of liabilities, expenses, costs, charges and reserves by the
Trustees shall be conclusive and binding upon the holders of all series for all
purposes. The Trustees shall have full discretion, to the extent not
inconsistent with the 1940 Act, to determine which items shall be treated as
income and which items as capital; and each such determination and allocation
shall be conclusive and binding upon the Shareholders.
(e) The power of the Trustees to pay dividends and make distributions
shall be governed by Section 8.2 of this Trust with respect to any one or more
series which represents the interests in the assets of the Trust immediately
prior to the establishment of two or more series. With
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respect to any other series, dividends and distributions on Shares of a
particular series may be paid with such frequency as the Trustees may
determine, which may be daily or otherwise, pursuant to a standing resolution
or resolutions adopted only once or with such frequency as the Trustees may
determine, to the holders of Shares of that series, from such of the income and
capital gains, accrued or realized, from the assets belonging to that series,
as the Trustees may determine, after providing for actual and accrued
liabilities belonging to that series. All dividends and distributions on
Shares of a particular series shall be distributed pro rata to the holders of
that series in proportion to the number of Shares of that series held by such
holders at the date and time of record established for the payment of such
dividends or distributions.
The establishment and designation of any series of Shares shall be
effective upon the execution by a majority of the then Trustees of an
instrument setting forth such establishment and designation and the relative
rights and preferences of such series, or as otherwise provided in such
instrument. At any time that there are no Shares outstanding of an particular
series previously established and designated, the Trustees may by an instrument
executed by a majority of their number abolish that series and the
establishment and designation thereof. Each instrument referred to in this
paragraph shall have the status of an amendment to this Declaration.
The series of Shares established and designated pursuant to this
Section 6.9 and existing as of the date hereof are set forth in Annex A hereto.
SECTION 6.10 - CLASS DESIGNATION. The Trustees may, in their
discretion, authorize the division of Shares of the Trust (or any series of the
Trust) into one or more classes. All Shares of a class shall be identical with
each other and with the Shares of each other class of the Trust or the same
series of the Trust (as applicable), except for such variations between classes
as may be approved by the Board of Trustees and permitted by the 1940 Act or
pursuant to any exemptive order issued by the Securities and Exchange
Commission. The classes of Shares established pursuant to this Section 6.10
and existing as of the date hereof are set forth in Annex B hereto.
ARTICLE VII
REDEMPTIONS
-----------
SECTION 7.1 - REDEMPTIONS. In case any Shareholder at any time
desires to dispose of his Shares, he may deposit his certificate or
certificates therefor, duly endorsed in blank or accompanied by an instrument
of transfer executed in blank, or if the Shares are not represented by any
certificates, a written request or other such form of request as the Trustees
may from time
19
<PAGE> 24
to time authorize, at the office of the Transfer Agent or at the office of any
bank or trust company, either in or outside of Massachusetts, which is a member
of the Federal Reserve System and which the said Transfer Agent has designated
in writing for that purpose, together with an irrevocable offer in writing in a
form acceptable to the Trustees to sell the Shares represented thereby to the
Trust at the net asset value thereof per Share, determined as provided in the
By-Laws, next after such deposit. Payment for said Shares shall be made to the
Shareholder within seven (7) days after the date on which the deposit is made,
unless (i) the date of payment is postponed pursuant to Section 7.2 hereof, or
(ii) the receipt, or verification of receipt, of the purchase price for the
Shares to be redeemed is delayed, in either of which event payment may be
delayed beyond seven (7) days.
SECTION 7.2 - SUSPENSION OF RIGHT OF REDEMPTION. The Trust may
declare a suspension of the right of redemption or postpone the date of payment
or redemption for the whole or any part of any period (i) during which the New
York Stock Exchange is closed other than customary week-end and holiday
closings, (ii) during which trading on the New York Stock Exchange is
restricted, (iii) during which an emergency exists as a result of which
disposal by the Trust of securities owned by it is not reasonably practicable
or it is not reasonably practicable for the Trust fairly to determine the value
of its net assets, or (iv) during any other period when the Commission may for
the protection of security holders of the Trust by order permit suspension of
the right of redemption or postponement of the date of payment or redemption;
provided that applicable rules and regulations of the Commission shall govern
as to whether the conditions prescribed in (ii), (iii) or (iv) exist. Such
suspension shall take effect at such time as the Trust shall specify but not
later than the close of business on the business day next following the
declaration of suspension, and thereafter there shall be no right of redemption
or payment on redemption until the Trust shall declare the suspension at an
end, except that the suspension shall terminate in any event on the first day
on which said stock exchange shall have reopened or the period specified in
(ii) or (iii) shall have expired (as to which, in the absence of an official
ruling by the Commission, the determination of the Trust shall be conclusive).
In the case of a suspension of the right of redemption a Shareholder may either
withdraw his request for redemption or receive payment based on the net asset
value existing after the termination of the suspension.
SECTION 7.3 - REDEMPTION OF SHARES; DISCLOSURE OF HOLDING. If the
Trustees shall, at any time and in good faith, be of the opinion that direct or
indirect ownership of Shares or other securities of the Trust has or may become
concentrated in any Person to an extent which would
20
<PAGE> 25
disqualify the Trust as a regulated investment company under the Internal
Revenue Code, then the Trustees shall have the power by lot or other means
deemed equitable by them (i) to call for redemption by any such Person a
number, or principal amount, of Shares or other securities of the Trust
sufficient to maintain or bring the direct or indirect ownership of Shares or
other securities of the Trust into conformity with the requirements for such
qualification and (ii) to refuse to transfer or issue Shares or other
securities of the Trust to any Person whose acquisition of the Shares or other
securities of the Trust in question would result in such disqualification. The
redemption shall be effected at the redemption price and in the manner provided
in Section 7.l.
The holders of Shares or other securities of the Trust shall upon
demand disclose to the Trustees in writing such information with respect to
direct and indirect ownership of Shares or other securities of the Trust as the
Trustees deem necessary to comply with the provisions of the Internal Revenue
Code, or to comply with the requirements of any other authority.
SECTION 7.4 - REDEMPTION IN KIND. Payment for Shares deposited
pursuant to Section 7.1 may, at the option of the Trustees, or such officer or
officers as they may duly authorize for the purpose, in their complete
discretion be made in cash, or in kind, or partially in cash and partially in
kind. In case of payment in kind, the Trustees, or their delegate, shall have
absolute discretion as to what security or securities shall be distributed in
kind and the amount of the same, and the securities shall be valued for
purposes of distribution at the figure at which they were appraised in
computing the asset value of the Shares, provided that any Shareholder who
cannot legally acquire securities so distributed in kind by reason of the
prohibitions of the 1940 Act shall receive cash.
ARTICLE VIII
DETERMINATION OF NET ASSET VALUE, NET INCOME AND DISTRIBUTIONS
--------------------------------------------------------------
The Trustees, in their absolute discretion, may prescribe and shall
set forth in the By-Laws or in a duly adopted vote of the Trustees such bases
and times for determining the per Share net asset value of the Shares or net
income, or the declaration and payment of dividends and distributions, as they
may deem necessary or desirable.
21
<PAGE> 26
ARTICLE IX
DURATION; TERMINATION OF TRUST; AMENDMENT; MERGERS; ETC.
--------------------------------------------------------
SECTION 9.1 - DURATION. The Trust shall continue without limitation
of time but subject to the provisions of this Article IX.
SECTION 9.2 - TERMINATION OF TRUST.
(a) The Trust may be terminated (i) by the affirmative vote of the
holders of not less than two-thirds of the Shares outstanding and entitled to
vote at any meeting of Shareholders, or (ii) by an instrument in writing,
without a meeting, signed by a majority of the Trustees and consented to by the
holders of not less than two-thirds of such Shares, or by such other vote as
may be established by the Trustees with respect to any series of Shares, or
(iii) by the Trustees by written notice to the Shareholders. Upon the
termination of the Trust:
(i) The Trust shall carry on no business except for the purpose
of winding up its affairs;
(ii) The Trustees shall proceed to wind up the affairs of the
Trust and all of the powers of the Trustees under this Declaration shall
continue until the affairs of the Trust shall have been wound up, including the
power to fulfill or discharge the contracts of the Trust, collect its assets,
sell, convey, assign, exchange, transfer or otherwise dispose of all or any
part of the remaining Trust Property to one or more persons at public or
private sale for consideration which may consist in whole or in part of cash,
securities or other property of any kind, discharge or pay its liabilities, and
to do all other acts appropriate to liquidate its business provided, that any
sale, conveyance, assignment, exchange, transfer or other disposition of all or
substantially all the Trust Property shall require Shareholder approval in
accordance with Section 9.4 hereof; and
(iii) After paying or adequately providing for the payment of
all liabilities, and upon receipt of such releases, indemnities and refunding
agreements as they deem necessary for their protection, the Trustees may
distribute the remaining Trust Property, in cash or in kind or partly in cash
and partly in kind, among the Shareholders according to their respective
rights.
(b) After termination of the Trust and distribution to the
Shareholders as herein provided, a majority of the Trustees shall execute and
lodge among the records of the Trust an
22
<PAGE> 27
instrument in writing setting forth the fact of such termination, and the
Trustees shall thereupon be discharged from all further liabilities and duties
hereunder, and the rights and interests of all Shareholders shall thereupon
cease.
SECTION 9.3 - AMENDMENT PROCEDURE.
(a) This Declaration may be amended by a Majority Shareholder Vote or
by any instrument in writing, without a meeting, signed by a majority of the
Trustees and consented to by the holders of not less than a majority of the
Shares outstanding and entitled to vote. The Trustees may also amend this
Declaration without the vote or consent of Shareholders to change the name of
the Trust, to supply any omission, to cure, correct or supplement any
ambiguous, defective or inconsistent provision hereof, or if they deem it
necessary to conform this Declaration to the requirements of applicable federal
laws or regulations or the requirements of the regulated investment company
provisions of the Internal Revenue Code, but the Trustees shall not be liable
for failing so to do.
(b) No amendment may be made under this Section 9.3 which would
change any rights with respect to any Shares by reducing the amount payable
thereon upon liquidation of the Trust or by diminishing or eliminating any
voting rights pertaining thereto, except with the vote or consent of the
holders of two-thirds of the Shares outstanding and entitled to vote, or by
such other vote as may be established by the Trustees with respect to any
series of Shares. Nothing contained in this Declaration shall permit the
amendment of this Declaration to impair the exemption from personal liability
of the Shareholders, Trustees, officers, employees and agents of the Trust or
to permit assessments upon Shareholders
(c) A certificate signed by a majority of the Trustees setting forth
an amendment and reciting that it was duly adopted by the Shareholders or by
the Trustees as aforesaid or a copy of the Declaration, as amended, and
executed by a majority of the Trustees, shall be conclusive evidence of such
amendment when lodged among the records of the Trust.
Notwithstanding any other provision hereof, until such time as a
Registration Statement under the Securities Act of 1933, as amended, covering
the first public offering of securities of the Trust shall have become
effective, this Declaration may be terminated or amended in any respect by the
affirmative vote of a majority of the Trustees or by an instrument signed by a
majority of the Trustees.
23
<PAGE> 28
SECTION 9.4 - MERGER, CONSOLIDATION AND SALE OF ASSETS. The Trust may
merge or consolidate with any other corporation, association, trust or other
organization or may sell, lease or exchange all or substantially all of the
Trust Property, including its good will, upon such terms and conditions and for
such consideration when and as authorized at any meeting of Shareholders called
for the purpose by the affirmative vote of the holders of not less than
two-thirds of the Shares outstanding and entitled to vote, or by an instrument
or instruments in writing without a meeting, consented to by the holders of not
less than two-thirds of such Shares, or by such other vote as may be
established by the Trustees with respect to any series of Shares; provided,
however, that if such merger, consolidation, sale, lease or exchange is
recommended by the Trustees, the vote or written consent of the holders of a
majority of Shares outstanding and entitled to vote, or such other vote or
written consent as may be established by the Trustees with respect to any
series of Shares, shall be sufficient authorization; and any such merger,
consolidation, sale, lease or exchange shall be deemed for all purposes to have
been accomplished under and pursuant to the statutes of The Commonwealth of
Massachusetts.
SECTION 9.5 - INCORPORATION. With the approval of the holders of a
majority of the Shares outstanding and entitled to vote, or by such other vote
as may be established by the Trustees with respect to any series of Shares, the
Trustees may cause to be organized or assist in organizing a corporation or
corporations under the laws of any jurisdiction, or any other trust,
partnership, association or other organization to take over all of the Trust
Property or to carry on any business in which the Trust shall directly or
indirectly have any interest, and to sell, convey and transfer the Trust
Property to any such corporation, trust association or organization in exchange
for the shares or securities thereof or otherwise and to lend money to,
subscribe for the Shares or securities of, and enter into any contracts with
any such corporation, trust, partnership, association or organization in which
the Trust holds or is about to acquire shares or any other interest. The
Trustees may also cause a merger or consolidation between the Trust or any
successor thereto and any such corporation, trust, partnership, association or
other organization if and to the extent permitted by law, as provided under the
law then in effect. Nothing contained herein shall be construed as requiring
approval of Shareholders for the Trustees to organize or assist in organizing
one or more corporations, trusts, partnerships, associations or other
organizations and selling, conveying or transferring a portion of the Trust
Property to such organization or entities.
24
<PAGE> 29
ARTICLE X
REPORTS TO SHAREHOLDERS
-----------------------
The Trustees shall at least semi-annually submit to the Shareholders a
written financial report of the transactions of the Trust, including financial
statements which shall at least annually be certified by independent public
accountants.
ARTICLE XI
MISCELLANEOUS
-------------
SECTION 11.1 - FILING. This Declaration and any amendment hereto
shall be filed in the office of the Secretary of The Commonwealth of
Massachusetts and in such other places as may be required under the laws of
Massachusetts and may also be filed or recorded in such other places as the
Trustees deem appropriate. Each amendment so filed shall be accompanied by a
certificate signed and acknowledged by a Trustee stating that such action was
duly taken in a manner provided herein, and unless such amendment or such
certificate sets forth some later time for the effectiveness of such amendment,
such amendment shall be effective upon its filing. A restated Declaration,
integrating into a single instrument all of the provisions of the Declaration
which are then in effect and operative, may be executed from time to time by a
majority of the Trustees and shall, upon filing with the Secretary of The
Commonwealth of Massachusetts be conclusive evidence of all amendments
contained therein and may thereafter be referred to in lieu of the original
Declaration and the various amendments thereto.
SECTION 11.2 - GOVERNING LAW. This Declaration is executed by the
Trustees and delivered in The Commonwealth of Massachusetts and with reference
to the laws thereof, and the rights of all parties and the validity and
construction of every provision hereof shall be subject to and construed
according to the laws of said State.
SECTION 11.3 - COUNTERPARTS. This Declaration may be simultaneously
executed in several counterparts, each of which shall be deemed to be an
original, and such counterparts, together, shall constitute one and the same
instrument which shall be sufficiently evidenced by any such original
counterpart.
25
<PAGE> 30
SECTION 11.4 - RELIANCE BY THIRD PARTIES. Any certificate executed by
an individual who, according to the records of the Trust appears to be a
Trustee hereunder, certifying to:
(a) the number or identity of Trustees or Shareholders;
(b) the due authorization of the execution of any instrument or
writing;
(c) the form of any vote passed at a meeting of Trustees or
Shareholders;
(d) the fact that the number of Trustees or Shareholders present at
any meeting or executing any written instrument satisfies the requirements of
this Declaration;
(e) the form of any By-Laws adopted by or the identity of any
officers elected by the Trustees; or,
(f) the existence of any fact or facts which in any manner relate to
the affairs of the Trust, shall be conclusive evidence as to the matters so
certified in favor of any Person dealing with the Trustees and their
successors.
SECTION 11.5 - PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS.
(a) The provisions of the Declaration are severable, and if the
Trustees shall determine, with the advice of counsel, that any of such
provisions is in conflict with the 1940 Act, the regulated investment company
provisions of the Internal Revenue Code or with other applicable laws and
regulations the conflicting provision shall be deemed never to have constituted
a part of the Declaration; provided, however, that such determination shall not
affect any of the remaining provisions of the Declaration or render invalid or
improper any action taken or omitted prior to such determination.
(b) If any provision of the Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of the
Declaration in any jurisdiction.
26
<PAGE> 31
ANNEX A
Pursuant to Section 6.9 of the Declaration, the Trustees of the Trust
have established and designated two series of Shares (as defined in the
Declaration), such series to have the following special and relative rights:
1. The series are designated:
- MFS World Governments Fund
- MFS Value Fund
2. The series shall be authorized to invest in cash,
securities, instruments and other property as from time to
time described in the Trust's then currently effective
registration statement under the Securities Act of 1933 to
the extent pertaining to the offering of Shares of such
series. Each Share of the series shall be redeemable,
shall be entitled to one vote or fraction thereof in
respect of a fractional share on matters on which Shares of
the series shall be entitled to vote, shall represent a pro
rata beneficial interest in the assets allocated or
belonging to the series, and shall be entitled to receive
its pro rata share of the net assets of the series upon
liquidation of the series, all as provided in Section 6.9
of the Declaration.
3. Shareholders of the series shall vote separately as a class
on any matter to the extent required by, and any matter
shall be deemed to have been effectively acted upon with
respect to the series as provided in Rule 18f-2, as from
time to time in effect, under the Investment Company Act of
1940, as amended, or any successor rule, and by the
Declaration.
4. The assets and liabilities of the Trust shall be allocated
among the previously established and existing series of the
Trust and this series as set forth in Section 6.9 of the
Declaration.
5. Subject to the provisions of Section 6.9 and Article IX of
the Declaration, the Trustees (including any successor
Trustees) shall have the right at any time and from time to
time to reallocate assets and expenses or to change the
designation of any series now or hereafter created, or to
otherwise change the special and relative rights of any
such series.
27
<PAGE> 32
ANNEX B
Pursuant to Section 6.10 of the Declaration of Trust, the Trustees
have divided the shares of MFS Value Fund, series of the Trust, to create two
classes of shares, within the meaning of Section 6.10, as follows:
1. The two classes of shares are designated "Class A Shares" and
"Class B Shares;"
2. Class A Shares and Class B Shares shall be entitled to all the
rights and preferences accorded to shares under the Declaration;
3. The purchase price of Class A Shares and Class B Shares, the
method of determination of the net asset value of Class A Shares
and Class B Shares, the price, terms and manner of redemption of
Class A Shares and Class B Shares, any conversion feature of the
Class B Shares, and the relative dividend rights of holders of
Class A Shares and Class B Shares shall be established by the
Trustees of the Trust in accordance with the Declaration and shall
be set forth in the current prospectus and statement of additional
information of the Trust or any series thereof, as amended from
time to time, contained in the Trust's registration statement
under the Securities Act of 1933, as amended.
4. Class A Shares and Class B Shares shall vote together as a single
class except that shares of a class may vote separately on matters
affecting only that class and shares of a class not affected by a
matter will not vote on that matter.
5. A class of shares of any series of the Trust may be terminated by
the Trustees by written notice to the Shareholders of the class.
Pursuant to Section 6.10 of the Declaration of the Trust, the Trustees
have divided the shares of the MFS World Governments Fund, a series of the
Trust, to create three classes of shares, within the meaning of Section 6.10,
as follows:
1. The three classes of shares are designated "Class A Shares,"
"Class B Shares" and "Class C Shares;"
28
<PAGE> 33
2. Class A Shares, Class B Shares and Class C Shares shall be
entitled to all the rights and preferences accorded to shares
under the Declaration of Trust;
3. The purchase price of Class A Shares, Class B Shares and Class C
Shares, the method of determination of the net asset value of
Class A Shares, Class B Shares and Class C Shares, the price,
terms and manner of redemption of Class A Shares, Class B Shares
and Class C Shares, any conversion feature of Class B Shares, and
the relative dividend rights of holders of Class A Shares, Class B
Shares and Class C Shares shall be established by the Trustees of
the Trust in accordance with the Declaration of Trust and shall be
set forth in the current prospectus and statement of additional
information of the Trust or any series thereof, as amended from
time to time, contained in the Trust's registration statement
under the Securities Act of 1933, as amended;
4. Class A Shares, Class B Shares and Class C Shares shall vote
together as a single class except that Shares of a class may vote
separately on matters affecting only that class and Shares of a
class not affected by a matter will not vote on that matter; and
5. A class of Shares of any series of the Trust may be terminated by
the Trustees by written notice to the Shareholder of the class.
29
<PAGE> 34
IN WITNESS WHEREOF, the undersigned have executed this instrument this
18th day of January, 1995.
<TABLE>
<S> <C>
------------------------------------------- -------------------------------------------
A. Keith Brodkin Charles W. Schmidt
76 Farm Road 63 Claypit Hill Road
Sherborn, MA 01770 Wayland, MA 01778
------------------------------------------- -------------------------------------------
Richard B. Bailey Arnold D. Scott
63 Atlantic Avenue 20 Rowes Wharf
Boston, MA 02110 Boston, MA 02110
------------------------------------------- -------------------------------------------
Peter G. Harwood Jeffrey L. Shames
211 Lindsay Pond Road 60 Brookside Road
Concord, MA 01742 Needham, MA 02192
------------------------------------------- -------------------------------------------
J. Atwood Ives Elaine R. Smith
1 Bennington Road 75 Scotch Pine Road
Lexington, MA 02173 Weston, MA 02193
------------------------------------------- -------------------------------------------
Lawrence T. Perera David B. Stone
18 Marlborough Street 50 Delano Road
Boston, MA 02116 Marion, MA 02736
-------------------------------------------
William J. Poorvu
975 Memorial Drive
Cambridge, MA 02138
</TABLE>
30
<PAGE> 1
EXHIBIT NO. 2
AMENDED AND RESTATED
BY-LAWS
OF
MFS SERIES TRUST VII
DECEMBER 21, 1994
<PAGE> 2
AMENDED AND RESTATED
BY-LAWS
OF
MFS SERIES TRUST VII
ARTICLE I
DEFINITIONS
The terms "COMMISSION", "DECLARATION", "DISTRIBUTOR", "INVESTMENT
ADVISER", "MAJORITY SHAREHOLDER VOTE", "1940 ACT", "SHAREHOLDER", "SHARES",
"TRANSFER AGENT", "TRUST", "TRUST PROPERTY" and "TRUSTEES" have the respective
meanings given them in the Declaration of Trust of MFS Series Trust VII, dated
November 10, 1980, as amended from time to time.
ARTICLE II
OFFICES
SECTION 1. PRINCIPAL OFFICE. Until changed by the Trustees, the
principal office of the Trust in The Commonwealth of Massachusetts shall be in
the City of Boston, County of Suffolk.
SECTION 2. OTHER OFFICES. The Trust may have offices in such other
places without as well as within the Commonwealth as the Trustees may from time
to time determine.
Page 2
<PAGE> 3
ARTICLE III
SHAREHOLDERS
SECTION 1. MEETINGS. Meetings of the Shareholders may be called at
any time by a majority of the Trustees and shall be called by any Trustee upon
written request of Shareholders holding in the aggregate not less than ten
percent (10%) of the outstanding Shares of the Trust having voting rights, if
shareholders of all series are required under the Declaration to vote in the
aggregate and not by individual series at such meeting, or of any series or
class if shareholders of such series or class are entitled under the
Declaration to vote by individual series or class, such request specifying the
purpose or purposes for which such meeting is to be called. Any such meeting
shall be held within or without The Commonwealth of Massachusetts on such day
and at such time as the Trustees shall designate.
SECTION 2. NOTICE OF MEETINGS. Notice of all meetings of
Shareholders, stating the time, place and purposes of the meeting, shall be
given by the Trustees by mail to each Shareholder entitled to vote at such
meeting at his address as recorded on the register of the Trust, mailed at
least (ten) 10 days and not more than (sixty) 60 days before the meeting. Only
the business stated in the notice of the meeting shall be considered at such
meeting. Any adjourned meeting may be held as adjourned without further
notice. No notice need be given to any Shareholder who shall have failed to
inform the Trust of his current address or if a written waiver of notice,
executed before or after the meeting by the Shareholder or his attorney
thereunto authorized, is filed with the records of the meeting.
SECTION 3. RECORD DATE FOR MEETINGS. For the purpose of determining
the Shareholders who are entitled to notice of and to vote at any meeting, or
to participate in any distribution, or for the purpose of any other action, the
Trustees may from time to time close the transfer books for such period, not
exceeding thirty (30) days, as the Trustees may determine; or without closing
the transfer books the Trustees may fix a date not more than sixty (60) days
prior to the date of any meeting of Shareholders or distribution or other
action as a record date for the determination of the persons to be treated as
Shareholders of record for such purpose.
SECTION 4. PROXIES. At any meeting of Shareholders, any holder of
Shares entitled to vote thereat may vote by proxy, provided that no proxy shall
be voted at any meeting unless it shall have been placed on file with the
Clerk, or with such other officer or agent of the Trust as the Clerk may
direct, for verification prior to the time at which
Page 3
<PAGE> 4
such vote shall be taken. Pursuant to a vote of a majority of the Trustees,
proxies may be solicited in the name of one or more Trustees or one or more of
the officers of the Trust. When any Share is held jointly by several persons,
any one of them may vote at any meeting in person or by proxy in respect of
such Share, but if more than one of them shall be present at such meeting in
person or by proxy, and such joint owners or their proxies so present disagree
as to any vote to be cast, such vote shall not be received in respect of such
Share. A proxy purporting to be executed by or on behalf of a Shareholder
shall be deemed valid unless challenged at or prior to its exercise, and the
burden of proving invalidity shall rest on the challenger. The placing of a
Shareholder's name on a proxy pursuant to telephonic or electronically
transmitted instructions obtained pursuant to procedures reasonably designed to
verify that such instructions have been authorized by such Shareholder shall
constitute execution of such proxy by or on behalf of such Shareholder. If the
holder of any such Share is a minor or a person of unsound mind, and subject to
guardianship or to the legal control of any other person as regards the charge
or management of such Share, he may vote by his guardian or such other person
appointed or having such control, and such vote may be given in person or by
proxy. Any copy, facsimile telecommunication or other reliable reproduction of
a proxy may be substituted for or used in lieu of the original proxy for any
and all purposes for which the original proxy could be used, provided that such
copy, facsimile telecommunication or other reproduction shall be a complete
reproduction of the entire original proxy or the portion thereof to be returned
by the Shareholder.
SECTION 5. QUORUM, ADJOURNMENT AND REQUIRED VOTE. A majority of
outstanding Shares entitled to vote shall constitute a quorum at any meeting of
Shareholders, except that where any provision of law, the Declaration or these
By-laws permits or requires that holders of any series or class shall vote as a
series or class, then a majority of the aggregate number of Shares of that
series or class entitled to vote shall be necessary to constitute a quorum for
the transaction of business by that series or class. In the absence of a
quorum, a majority of outstanding Shares entitled to vote present in person or
by proxy, or, where any provision of law, the Declaration or these By-laws
permits or requires that holders of any series or class shall vote as a series
or class, a majority of outstanding Shares of that series or class entitled to
vote present in person or by proxy, may adjourn the meeting from time to time
until a quorum shall be present. Only Shareholders of record shall be entitled
to vote on any matter. Each full Share shall be entitled to one vote and
fractional Shares shall be entitled to a vote of such fraction. Except as
otherwise provided any provision of law, the Declaration or these By-laws,
Shares representing a majority of the votes cast shall decide any matter (i.e.,
abstentions and broker non-votes shall not be counted) and a
Page 4
<PAGE> 5
plurality shall elect a Trustee, provided that where any provision of law, the
Declaration or these By-Laws permits or requires that holders of any series or
class shall vote as a series or class, then a majority of the Shares of that
series or class cast on the matter shall decide the matter (i.e., abstentions
and broker non-votes shall not be counted) insofar as that series or class is
concerned.
SECTION 6. INSPECTION OF RECORDS. The records of the Trust shall be
open to inspection by Shareholders to the same extent as is permitted
shareholders of a Massachusetts business corporation.
SECTION 7. ACTION WITHOUT MEETING. Any action which may be taken by
Shareholders may be taken without a meeting if a majority of Shareholders
entitled to vote on the matter (or such larger proportion thereof as shall be
required by law, the Declaration or these By-Laws for approval of such matter)
consent to the action in writing and the written consents are filed with the
records of the meetings of Shareholders. Such consent shall be treated for all
purposes as a vote taken at a meeting of Shareholders.
ARTICLE IV
TRUSTEES
SECTION 1. MEETINGS OF THE TRUSTEES. The Trustees may in their
discretion provide for regular or stated meetings of the Trustees. Notice of
regular or stated meetings need not be given. Meetings of the Trustees other
than regular or stated meetings shall be held whenever called by the Chairman
or by any one of the Trustees at the time being in office. Notice of the time
and place of each meeting other than regular or stated meetings shall be given
by the Secretary or an Assistant Secretary, or the Clerk or an Assistant Clerk
or by the officer or Trustee calling the meeting and shall be mailed to each
Trustee at least two days before the meeting, or shall be telegraphed, cabled,
or wirelessed or sent by facsimile or other electronic means to each Trustee at
his business address, or personally delivered to him at least one day before
the meeting. Such notice may, however, be waived by any Trustee. Notice of a
meeting need not be given to any Trustee if a written waiver of notice,
executed by him before or after the meeting, is filed with the records of the
meeting, or to any Trustee who attends the meeting without protesting prior
thereto or at its commencement the lack of notice to him. A notice or waiver
of notice need not specify the purpose of any meeting. Except as provided by
law the Trustees may meet by
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means of a telephone conference circuit or similar communications equipment by
means of which all persons participating in the meeting can hear each other,
which telephone conference meeting shall be deemed to have been held at a place
designated by the Trustees at the meeting. Participation in a telephone
conference meeting shall constitute presence in person at such meeting. Any
action required or permitted to be taken at any meeting of the Trustees may be
taken by the Trustees without a meeting if all the Trustees consent to the
action in writing and the written consents are filed with the records of the
Trustees' meetings. Such consents shall be treated as a vote for all purposes.
SECTION 2. QUORUM AND MANNER OF ACTING. A majority of the Trustees
shall be present at any regular or special meeting of the Trustees in order to
constitute a quorum for the transaction of business at such meeting and (except
as otherwise required by law, the Declaration or these By-Laws) the act of a
majority of the Trustees present at any such meeting, at which a quorum is
present, shall be the act of the Trustees. In the absence of a quorum, a
majority of the Trustees present may adjourn the meeting from time to time
until a quorum shall be present. Notice of an adjourned meeting need not be
given.
ARTICLE V
COMMITTEES AND ADVISORY BOARD
SECTION 1. EXECUTIVE AND OTHER COMMITTEES. The Trustees by vote of a
majority of all the Trustees may elect from their own number an Executive
Committee to consist of not less than three (3) Trustees to hold office at the
pleasure of the Trustees which shall have the power to conduct the current and
ordinary business of the Trust while the Trustees are not in session, including
the purchase and sale of securities and the designation of securities to be
delivered upon redemption of Shares of the Trust, and such other powers of the
Trustees as the Trustees may, from time to time, delegate to the Executive
Committee except those powers which by law, the Declaration or these By-Laws
they are prohibited from delegating. The Trustees may also elect from their
own number other Committees from time to time, the number composing such
Committees, the powers conferred upon the same (subject to the same limitations
as with respect to the Executive Committee) and the term of membership on such
Committees to be determined by the Trustees. The Trustees may designate a
chairman of any such Committee. In the absence of such designation a Committee
may elect its own Chairman.
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SECTION 2. MEETING, QUORUM AND MANNER OF ACTING. The Trustees may:
(i) provide for stated meetings of any Committee,
(ii) specify the manner of calling and notice required for
special meetings of any Committee,
(iii) specify the number of members of a Committee required
to constitute a quorum and the number of members of a
Committee required to exercise specified powers
delegated to such Committee,
(iv) authorize the making of decisions to exercise
specified powers by written assent of the requisite
number of members of a Committee without a meeting,
and
(v) authorize the members of a Committee to meet by means
of a telephone conference circuit.
Each Committee shall keep regular minutes of its meetings and records
of decisions taken without a meeting and cause them to be recorded in a book
designated for that purpose and kept in the office of the Trust.
SECTION 3. ADVISORY BOARD. The Trustees may appoint an Advisory
Board to consist in the first instance of not less than three (3) members.
Members of such Advisory Board shall not be Trustees or officers and need not
be Shareholders. A member of such Advisory Board shall hold office for such
period as the Trustees may by resolution provide. Any member of such board may
resign therefrom by a written instrument signed by him which shall take effect
upon delivery to the Trustees. The Advisory Board shall have no legal powers
and shall not perform the functions of Trustees in any manner, such Advisory
Board being intended merely to act in an advisory capacity. Such Advisory
Board shall meet at such times and upon such notice as the Trustees may by
resolution provide.
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ARTICLE VI
OFFICERS
SECTION 1. GENERAL PROVISIONS. The officers of the Trust shall be a
Chairman, a President, a Treasurer and a Clerk, who shall be elected by the
Trustees. The Trustees may elect or appoint such other officers or agents as
the business of the Trust may require, including one or more Vice Presidents, a
Secretary and one or more Assistant Secretaries, one or more Assistant
Treasurers, and one or more Assistant Clerks. The Trustees may delegate to any
officer or Committee the power to appoint any subordinate officers or agents.
SECTION 2. TERM OF OFFICE AND QUALIFICATION. Except as otherwise
provided by law, the Declaration or these By-Laws, the Chairman, the President,
the Treasurer and the Clerk shall hold office until his resignation has been
accepted by the Trustees or until his respective successor shall have been duly
elected and qualified, and all other officers shall hold office at the pleasure
of the Trustees. Any two or more offices may be held by the same person. Any
officer may be, but none need be, a Trustee or Shareholder.
SECTION 3. REMOVAL. The Trustees, at any regular or special meeting
of the Trustees, may remove any officer with or without cause by a vote of a
majority of the Trustees. Any officer or agent appointed by any officer or
Committee may be removed with or without cause by such appointing officer or
Committee.
SECTION 4. POWERS AND DUTIES OF THE CHAIRMAN. The Chairman may call
meetings of the Trustees and of any Committee thereof when he deems it
necessary and shall preside at all meetings of the Shareholders. Subject to
the control of the Trustees and any Committees of the Trustees, the Chairman
shall at all times exercise a general supervision and direction over the
affairs of the Trust. The Chairman shall have the power to employ attorneys
and counsel for the Trust and to employ such subordinate officers, agents,
clerks and employees as he may find necessary to transact the business of the
Trust. The Chairman shall also have the power to grant, issue, execute or sign
such powers of attorney, proxies or other documents as may be deemed advisable
or necessary in furtherance of the interests of the Trust. The Chairman shall
have such other powers and duties as, from time to time, may be conferred upon
or assigned to him by the Trustees.
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SECTION 5. POWERS AND DUTIES OF THE PRESIDENT. In the absence or
disability of the Chairman, the President shall perform all the duties and may
exercise any of the powers of the Chairman, subject to the control of the
Trustees. The President shall perform such other duties as may be assigned to
him from time to time by the Trustees or the Chairman.
SECTION 6. POWERS AND DUTIES OF VICE PRESIDENTS. In the absence or
disability of the President, the Vice President or, if there be more than one
Vice President, any Vice President designated by the Trustees shall perform all
the duties and may exercise any of the powers of the President, subject to the
control of the Trustees. Each Vice President shall perform such other duties
as may be assigned to him from time to time by the Trustees or the President.
SECTION 7. POWERS AND DUTIES OF THE TREASURER. The Treasurer shall
be the principal financial and accounting officer of the Trust. The Treasurer
shall deliver all funds of the Trust which may come into his hands to such
custodian as the Trustees may employ pursuant to Article X hereof. The
Treasurer shall render a statement of condition of the finances of the Trust to
the Trustees as often as they shall require the same and shall in general
perform all the duties incident to the office of Treasurer and such other
duties as from time to time may be assigned to him by the Trustees. The
Treasurer shall give a bond for the faithful discharge of his duties, if
required to do so by the Trustees, in such sum and with such surety or sureties
as the Trustees shall require.
SECTION 8. POWERS AND DUTIES OF THE CLERK. The Clerk shall keep the
minutes of all meetings of the Shareholders in proper books provided for that
purpose; he shall have custody of the seal of the Trust; he shall have charge
of the Share transfer books, lists and records unless the same are in the
charge of the Transfer Agent. He or the Secretary shall attend to the giving
and serving of all notices by the Trust in accordance with the provisions of
these By-Laws and as required by law; and subject to these By-Laws, he shall
in general perform all duties incident to the office of Clerk and such other
duties as from time to time may be assigned to him by the Trustees.
SECTION 9. POWERS AND DUTIES OF THE SECRETARY. The Secretary, if
any, shall keep the minutes of all meetings of the Trustees. He shall perform
such other duties and have such other powers in addition to those specified in
these By-Laws as the Trustees shall from time to time designate. If there be
no Secretary or Assistant Secretary, the Clerk shall perform the duties of
Secretary.
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SECTION 10. POWERS AND DUTIES OF ASSISTANT TREASURERS. In the
absence or disability of the Treasurer, any Assistant Treasurer designated by
the Trustees shall perform all the duties, and may exercise any of the powers,
of the Treasurer. Each Assistant Treasurer shall perform such other duties as
from time to time may be assigned to him by the Trustees. Each Assistant
Treasurer shall give a bond for the faithful discharge of his duties, if
required to do so by the Trustees, in such sum and with such surety or sureties
as the Trustees shall require.
SECTION 11. POWERS AND DUTIES OF ASSISTANT CLERKS. In the absence or
disability of the Clerk, any Assistant Clerk designated by the Trustees shall
perform all the duties, and may exercise any of the powers, of the Clerk. The
Assistant Clerks shall perform such other duties as from time to time may be
assigned to them by the Trustees.
SECTION 12. POWERS AND DUTIES OF ASSISTANT SECRETARIES. In the
absence or disability of the Secretary, any Assistant Secretary designated by
the Trustees shall perform all of the duties, and may exercise any of the
powers, of the Secretary. The Assistant Secretaries shall perform such other
duties as from time to time may be assigned to them by the Trustees.
SECTION 13. COMPENSATION OF OFFICERS AND TRUSTEES AND MEMBERS OF THE
ADVISORY BOARD. Subject to any applicable law or provision of the Declaration,
the compensation of the officers and Trustees and members of the Advisory Board
shall be fixed from time to time by the Trustees or, in the case of officers,
by any Committee or officer upon whom such power may be conferred by the
Trustees. No officer shall be prevented from receiving such compensation as
such officer by reason of the fact that he is also a Trustee.
ARTICLE VII
FISCAL YEAR
The fiscal year of the Trust shall begin on the first day of December
in each year and shall end on the last day of November in that year, provided,
however, that the Trustees may from time to time change the fiscal year.
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ARTICLE VIII
SEAL
The Trustees shall adopt a seal which shall be in such form and shall
have such inscription thereon as the Trustees may from time to time prescribe.
ARTICLE IX
WAIVERS OF NOTICE
Whenever any notice is required to be given by law, the Declaration or
these By-Laws, a waiver thereof in writing, signed by the person or persons
entitled to such notice, whether before or after the time stated therein, shall
be deemed equivalent thereto. A notice shall be deemed to have been
telegraphed, cabled or wirelessed or sent by facsimile or other electronic
means for the purposes of these By-Laws when it has been delivered to a
representative of any telegraph, cable or wireless company with instruction
that it be telegraphed, cabled or wirelessed or when a confirmation of such
facsimile having been sent, or a confirmation that such electronic means has
sent the notice being transmitted, is generated. Any notice shall be deemed to
be given at the time when the same shall be mailed, telegraphed, cabled or
wirelessed or when sent by facsimile or other electronic means.
ARTICLE X
CUSTODIAN
SECTION 1. APPOINTMENT AND DUTIES. The Trustees shall at all times
employ a bank or trust company having a capital, surplus and undivided profits
of at least five million dollars ($5,000,000) as custodian with authority as
its agent, but subject to such restrictions, limitations and other
requirements, if any, as may be contained in the Declaration, these By-Laws and
the 1940 Act:
(1) to hold the securities owned by the Trust and deliver
the same upon written order;
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(2) to receive and receipt for any monies due to the
Trust and deposit the same in its own banking
department or elsewhere as the Trustees may direct;
(3) to disburse such funds upon orders or vouchers;
(4) if authorized by the Trustees, to keep the books and
accounts of the Trust and furnish clerical and
accounting services; and
(5) if authorized to do so by the Trustees, to compute the
net income of the Trust;
all upon such basis of compensation as may be agreed upon between the Trustees
and the custodian. If so directed by a Majority Shareholder Vote, the
custodian shall deliver and pay over all property of the Trust held by it as
specified in such vote.
The Trustees may also authorize the custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services of
the custodian and upon such terms and conditions, as may be agreed upon between
the custodian and such sub-custodian and approved by the Trustees, provided
that in every case such sub-custodian shall be a bank or trust company
organized under the laws of the United States or one of the states thereof and
having capital, surplus and undivided profits of at least five million dollars
($5,000,000).
SECTION 2. CENTRAL CERTIFICATE SYSTEM. Subject to such rules,
regulations and orders as the Commission may adopt, the Trustees may direct the
custodian to deposit all or any part of the securities owned by the Trust in a
system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, or such other person as
may be permitted by the Commission, or otherwise in accordance with the 1940
Act, pursuant to which system all securities of any particular class or series
of any issuer deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical delivery of such
securities, provided that all such deposits shall be subject to withdrawal only
upon the order of the Trust or its custodian.
SECTION 3. ACCEPTANCE OF RECEIPTS IN LIEU OF CERTIFICATE. Subject to
such rules, regulations and orders as the Commission may adopt, the Trustees
may direct the custodian to accept written receipts or other written evidences
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indicating purchases of securities held in book-entry form in the Federal
Reserve System in accordance with regulations promulgated by the Board of
Governors of the Federal Reserve System and the local Federal Reserve Banks in
lieu of receipt of certificates representing such securities.
SECTION 4. PROVISIONS OF CUSTODIAN CONTRACT. The following
provisions shall apply to the employment of a custodian pursuant to this
Article X and to any contract entered into with the custodian so employed:
(a) The Trustees shall cause to be delivered to the
custodian all securities owned by the Trust or to
which it may become entitled, and shall order the
same to be delivered by the custodian only upon
completion of a sale, exchange, transfer, pledge, or
other disposition thereof, and upon receipt by the
custodian of the consideration therefor or a
certificate of deposit or a receipt of an issuer or
of its Transfer Agent, all as the Trustees may
generally or from time to time require or approve, or
to a successor custodian; and the Trustees shall
cause all funds owned by the Trust or to which it may
become entitled to be paid to the custodian, and
shall order the same disbursed only for investment
against delivery of the securities acquired, or in
payment of expenses, including management
compensation, and liabilities of the Trust, including
distributions to Shareholders, or to a successor
custodian; provided, however, that nothing herein
shall prevent delivery of securities for examination
to the broker selling the same in accord with the
"street delivery" custom whereby such securities are
delivered to such broker in exchange for a delivery
receipt exchanged on the same day for an uncertified
check of such broker to be presented on the same day
for certification.
(b) In case of the resignation, removal or inability to
serve of any such custodian, the Trust shall promptly
appoint another bank or trust company meeting the
requirements of this Article X as successor
custodian. The agreement with the custodian shall
provide that the retiring custodian shall, upon
receipt of notice of such appointment, deliver the
funds and property of the Trust in its possession to
and only to such successor, and that pending
appointment of a successor custodian, or a vote of
the Shareholders to function without a custodian, the
custodian shall not deliver funds and
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property of the Trust to the Trust, but may deliver
them to a bank or trust company doing business in
Boston, Massachusetts, of its own selection, having
an aggregate capital, surplus and undivided profits
(as shown in its last published report) of at least
$5,000,000, as the property of the Trust to be held
under terms similar to those on which they were held
by the retiring custodian.
ARTICLE XI
SALE OF SHARES OF THE TRUST
The Trustees may from time to time issue and sell or cause to be
issued and sold Shares for cash or other property, which shall in every case be
paid or delivered to the Custodian as agent of the Trust before the delivery of
any certificate for such shares. The Shares, including additional Shares which
may have been repurchased by the Trust (herein sometimes referred to as
"treasury shares"), may not be sold at a price less than the net asset value
thereof (as defined in Article XII hereof) determined by or on behalf of the
Trustees next after the sale is made or at some later time after such sale.
No Shares need be offered to existing Shareholders before being
offered to others. No Shares shall be sold by the Trust (although Shares
previously contracted to be sold may be issued upon payment therefor) during
any period when the determination of net asset value is suspended by
declaration of the Trustees pursuant to the provisions of Article XII hereof.
In connection with the acquisition by merger or otherwise of all or
substantially all the assets of an investment company (whether a regulated or
private investment company or a personal holding company), the Trustees may
issue or cause to be issued Shares and accept in payment therefor such assets
valued at not more than market value thereof in lieu of cash, notwithstanding
that the federal income tax basis to the Trust of any assets so acquired may be
less than the market value, provided that such assets are of the character in
which the Trustees are permitted to invest the funds of the Trust.
The Trustees, in their sole discretion, may cause the Trust to redeem
all of the Shares of the Trust held by any Shareholder if the value of such
Shares is less than a minimum amount established from time to time by the
Trustees.
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ARTICLE XII
NET ASSET VALUE OF SHARES
The term "net asset value" per Share of any class or series of Shares
shall mean: (i) the value of all assets of that series or class; (ii) less
total liabilities of such series or class; (iii) divided by the number of
Shares of such series or class outstanding, in each case at the time of such
determination, all as determine by or under the direction of the Trustees.
Such value shall be determined on such days and at such time as the Trustees
may determine. Such determination shall be made with respect to securities for
which market quotations are readily available, at the market value of such
securities; and with respect to other securities and assets, at the fair value
as determined in good faith by or pursuant to the direction of the Trustees,
provided, however, that the Trustees, without shareholder approval, may alter
the method of appraising portfolio securities insofar as permitted under the
1940 Act, and the rules, regulations and interpretations thereof promulgated or
issued by the Securities and Exchange Commission or insofar as permitted by any
order of the Securities and Exchange commission. The Trustees may delegate any
powers and duties under this Article XII with respect to appraisal of assets
and liabilities. At any time the Trustees may cause the value per share last
determined to be determined again in a similar manner and may fix the time when
such predetermined value shall become effective.
ARTICLE XIII
DIVIDENDS AND DISTRIBUTIONS
SECTION 1. LIMITATIONS ON DISTRIBUTIONS. The total of distributions
to Shareholders of a particular series or class paid in respect of any one
fiscal year, subject to the exceptions noted below, shall, when and as declared
by the Trustees, be approximately equal to the sum of:
(i) the net income, exclusive of the profits or losses
realized upon the sale of securities or other
property, of such series or class for such fiscal
year, determined in accordance with generally
accepted accounting principles (which, if the
Trustees so determine, may be adjusted for net
amounts included as such accrued net income in the
price of Shares of such series or class issued or
repurchased), but if the net income of such series or
class exceeds the amount
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distributed by less than one cent per share
outstanding at the record date for the final
dividend, the excess shall be treated as
distributable income of such series or class for the
following fiscal year; and
(ii) in the discretion of the Trustees, an additional
amount which shall not substantially exceed the
excess of profits over losses on sales of securities
or other property allocated or belonging to such
series or class for such fiscal year.
The decision of the Trustees as to what, in accordance with generally accepted
accounting principles, is income and what is principal shall be final, and
except as specifically provided herein the decision of the Trustees as to what
expenses and charges of the Trust shall be charged against principal and what
against income shall be final, all subject to any applicable provisions of the
1940 Act and rules, regulations and orders of the Commission promulgated
thereunder. For the purposes of the limitation imposed by this Section 1,
Shares issued pursuant to Section 2 of this Article XIII shall be valued at the
amount of cash which the Shareholders would have received if they had elected
to receive cash in lieu of such Shares.
Inasmuch as the computation of net income and gains for federal income
tax purposes may vary from the computation thereof on the books, the above
provisions shall be interpreted to give to the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust to avoid or reduce liability for taxes. Any payment made to
Shareholders pursuant to clause (ii) of this Section 1 shall be accompanied by
a written statement showing the source or sources of such payment, and the
basis of computation thereof.
SECTION 2. DISTRIBUTIONS PAYABLE IN CASH OR SHARES. The Trustees
shall have power, to the fullest extent permitted by the laws of The
Commonwealth of Massachusetts but subject to the limitation as to cash
distributions imposed by Section 1 of this Article XIII, at any time or from
time to time to declare and cause to be paid distributions payable at the
election of any Shareholder of any series or class (whether exercised before or
after the declaration of the distribution) either in cash or in Shares of such
series, provided that the sum of:
(i) the cash distribution actually paid to any Shareholder, and
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(ii) the net asset value of the Shares which that
Shareholder elects to receive, in effect at such time
at or after the election as the Trustees may specify,
shall not exceed the full amount of cash to which
that Shareholder would be entitled if he elected to
receive only cash.
In the case of a distribution payable in cash or Shares at the election of a
Shareholder, the Trustees may prescribe whether a Shareholder, failing to
express his election before a given time shall be deemed to have elected to
take Shares rather than cash, or to take cash rather then Shares, or to take
Shares with cash adjustment of fractions.
The Trustees, in their sole discretion, may cause the Trust to require
that all distributions payable to a shareholder in amounts less than such
amount or amounts determined from time to time by the Trustees be reinvested in
additional shares of the Trust rather than paid in cash, unless a shareholder
who, after notification that his distributions will be reinvested in additional
shares in accordance with the preceding phrase, elects to receive such
distributions in cash. Where a shareholder has elected to receive
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, the Trustees, in their
sole discretion, may cause the Trust to require that such Shareholder's
distribution option will be converted to having all distributions reinvested in
additional shares.
SECTION 3. STOCK DIVIDENDS. Anything in these By-Laws to the contrary
notwithstanding, the Trustees may at any time declare and distribute pro rata
among the Shareholders of any series or class a "stock dividend" out of either
authorized but unissued Shares of such series or class or treasury Shares of
such series or class or both.
ARTICLE XIV
DERIVATIVE CLAIMS
No Shareholder shall have the right to bring or maintain any court
action, proceeding or claim on behalf of the Trust or any series or class
thereof without first making demand on the Trustees requesting the Trustees to
bring or maintain such action, proceeding or claim. Such demand shall be
excused only when the plaintiff makes a specific showing that irreparable
injury to the Trust or any series or class thereof would otherwise result.
Such demand shall be mailed to the Clerk of the Trust
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at the Trust's principal office and shall set forth in reasonable detail the
nature of the proposed court action, proceeding or claim and the essential
facts relied upon by the Shareholder to support the allegations made in the
demand. The Trustees shall consider such demand within 45 days of its receipt
by the Trust. In their sole discretion, the Trustees may submit the matter to
a vote of Shareholders of the Trust or any series or class thereof, as
appropriate. Any decision by the Trustees to bring, maintain or settle (or not
to bring, maintain or settle) such court action, proceeding or claim, or to
submit the matter to a vote of Shareholders, shall be made by the Trustees in
their business judgment and shall be binding upon the Shareholders. Any
decision by the Trustees to bring or maintain a court action, proceeding or
suit on behalf of the Trust or any series or class thereof shall be subject to
the right of the Shareholders under Article VI, Section 6.8 of the Declaration
to vote on whether or not such court action, proceeding or suit should or
should not be brought or maintained.
ARTICLE XV
AMENDMENTS
These By-Laws, or any of them, may be altered, amended or repealed, or
new By-Laws may be adopted
(a) by Majority Shareholder Vote, or
(b) by the Trustees,
provided, however, that no By-Law may be amended, adopted or repealed by the
Trustees if such amendment, adoption or repeal requires, pursuant to law, the
Declaration or these By-Laws, a vote of the Shareholders or if such amendment,
adoption or repeal changes or affects the provisions of Sections 1 and 4 of
Article X or the provisions of this Article XV.
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EXHIBIT NO. 6(a)
DISTRIBUTION AGREEMENT
----------------------
DISTRIBUTION AGREEMENT, made this first day of January, 1995, by and
between MFS SERIES TRUST VII, a Massachusetts business trust (the "Trust"), on
behalf of each series from time to time of the Trust (referred to individually
as a "Fund" and collectively as the "Funds") and MFS FUND DISTRIBUTORS, INC., a
Delaware corporation (the "Distributor");
NOW, THEREFORE, in consideration of the mutual promises and
undertakings herein contained, the parties hereto agree as follows:
1. The Trust grants to the Distributor the right, as agent of the
Trust, to sell Shares of Beneficial Interest, without par value, of the Funds
(the "Shares") upon the terms herein below set forth during the term of this
Agreement. While this Agreement is in force, the Distributor agrees to use its
best efforts to find purchasers for Shares.
The Distributor shall have the right, as agent of the Trust, to
order from the Trust the Shares needed, but not more than the Shares needed
(except for clerical errors and errors of transmission) to fill unconditional
orders for Shares placed with the Distributor by dealers, banks or other
financial institutions or investors as set forth in the current Prospectus and
Statement of Additional Information (collectively, the "Prospectus") relating
to the Shares. The price which shall be paid to the Trust for the Shares so
purchased shall be the net asset value used in determining the public offering
price on which such orders were based. The Distributor shall notify the
Custodian of the Trust, at the end of each business day, or as soon thereafter
as the orders placed with it have been compiled, of the number of Shares and
the prices thereof which have been ordered through the Distributor since the
end of the previous day.
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The right granted to the Distributor to place orders for Shares with
the Trust shall be exclusive, except that said exclusive right shall not apply
to Shares issued in the event that an investment company (whether a regulated
or private investment company or a personal holding company) is merged or
consolidated with the Trust (or a Fund) or in the event that the Trust (or a
Fund) acquires by purchase or otherwise, all (or substantially all) the assets
or the outstanding shares of any such company; nor shall it apply to Shares
issued by the Trust (or a Fund) as a stock dividend or a stock split. The
exclusive right to place orders for Shares granted to the Distributor may be
waived by the Distributor by notice to the Trust in writing, either
unconditionally or subject to such conditions and limitations as may be set
forth in the notice to the Trust. The Trust hereby acknowledges that the
Distributor may render distribution and other services to other parties,
including other investment companies. In connection with its duties hereunder,
the Distributor shall also arrange for computation of performance statistics
with respect to the Trust and arrange for publication of current price
information in newspapers and other publications.
2. The Shares may be sold through the Distributor to dealers, banks
and other financial institutions having sales agreements with the Distributor,
upon the following terms and conditions:
The public offering price, I.E., the price per Share at which the
Distributor or dealers, banks or other financial institutions purchasing Shares
through the Distributor may sell Shares to the public, shall be the public
offering price as set forth in the current Prospectus relating to the Shares,
including a sales charge (where applicable) not to exceed the amount permitted
by Article III, Section 26 of the National Association of Securities Dealers,
Inc.'s Rule of Fair Practice, as amended from time to time. The Distributor
shall retain the sales charge (where applicable) less any applicable dealer or
comparable discount. If the resulting public offering price does not come out
to an even cent, the public offering price shall be adjusted to the nearer
- 2 -
<PAGE> 3
cent. In addition, the Trust agrees that the Distributor may impose certain
contingent deferred sales charges (where applicable) in connection with the
redemption of Shares, not to exceed 6% of the net asset value of Shares, and
the Distributor shall retain (or receive from the Trust, as the case may be)
all such contingent deferred sales charges.
The Distributor may place orders for Shares at the net asset value for
such Shares (as established pursuant to paragraph l above) on behalf of such
purchasers and under such circumstances as the Prospectus describes, provided
that such sales comply with Rule 22d-1 under the Investment Company Act of 1940
or any exemptive order granted by the Securities and Exchange Commission. The
Distributor may also place orders for Shares at net asset value on behalf of
persons reinvesting the proceeds of the redemption or resale of Shares or
shares of other investment companies for which the Distributor acts as
Distributor or as otherwise provided in the current Prospectus.
The net asset value of Shares shall be determined by the Trust or by an
agent of the Trust, as of the close of regular trading of the New York Stock
Exchange on each business day on which said Exchange is open, in accordance
with the method set forth in the governing instruments (as hereinafter defined)
of the Trust. The Trust may also cause the net asset value to be determined in
substantially the same manner or estimated in such manner and as of such other
hour or hours as may from time to time be agreed upon in writing by the Trust
and Distributor. The Trust shall have the right to suspend the sale of Shares
if, because of some extraordinary condition, the New York Stock Exchange shall
be closed, or if conditions obtaining during the hours when the Exchange is
open render such action advisable, or for any other reasons deemed adequate by
the Trust.
- 3 -
<PAGE> 4
3. The Trust agrees that it will, from time to time, take all
necessary action to register the offering and sale of Shares under the
Securities Act of l933, as amended (the "Act"), and applicable state securities
laws.
The Distributor shall be an independent contractor and neither the
Distributor nor any of its directors, officers or employees as such, is or
shall be an employee of the Trust. It is understood that Trustees, officers
and shareholders of the Trust are or may become interested in the Distributor,
as Directors, officers and employees, or otherwise and that Directors, officers
and employees of the Distributor are or may become similarly interested in the
Trust and that the Distributor may be or become interested in the Trust as a
shareholder or otherwise. The Distributor is responsible for its own conduct
and the employment, control and conduct of its agents and employees and for
injury to such agents or employees or to others through its agents or
employees. The Distributor assumes full responsibility for its agents and
employees under applicable statutes and agrees to pay all employer taxes
thereunder.
4. The Distributor covenants and agrees that, in selling Shares, it
will use its best efforts in all respects duly to conform with the requirements
of all state and federal laws and the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (the "NASD") relating to the sale of
Shares, and will indemnify and hold harmless the Trust and each of its Trustees
and officers and each person, if any, who controls the Trust within the meaning
of Section 15 of the Act, against any loss, liability, damages, claim or
expense (including the reasonable cost of investigating or defending any
alleged loss, liability, damages, claim or expense and reasonable counsel fees
incurred in connection therewith), arising by reason of any person's acquiring
any Shares, which may be based upon the Act or any other statute or common law,
on account of any wrongful act of the Distributor or any of its employees
(including any failure to conform with any requirement of any state or federal
law or the Rules of Fair Practice of the NASD relating to the sale of Shares)
or on the ground that the registration statement or Prospectus as from time to
time amended and supplemented, includes an untrue statement of a
- 4 -
<PAGE> 5
material fact or omits to state a material fact required to be stated therein
or necessary in order to make the statements therein not misleading, unless any
such act, statement or omission was made in reliance upon information furnished
to the Distributor by or on behalf of the Trust, provided, however, that in no
case (i) is the indemnity of the Distributor in favor of any person indemnified
to be deemed to protect the Trust or any such person against any liability to
which the Trust or any such person would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of its or
his duties or by reason of its or his reckless disregard of its obligations and
duties under this Agreement, or (ii) is the Distributor to be liable under its
indemnity agreement contained in this paragraph with respect to any claim made
against the Trust or any person indemnified unless the Trust or such person, as
the case may be, shall have notified the Distributor in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon the Trust or
upon such person (or after the Trust or such person shall have received notice
of such service on any designated agent), but failure to notify the Distributor
of any such claim shall not relieve it from any liability which it may have to
the Trust or any person against whom such action is brought otherwise than on
account of its indemnity agreement contained in this paragraph. The
Distributor shall be entitled to participate, at its own expense, in the
defense, or, if it so elects, to assume the defense of any suit brought to
enforce any such liability, but, if the Distributor elects to assume the
defense, such defense shall be conducted by counsel chosen by it and
satisfactory to the Trust, or to its officers or Trustees, or to any
controlling person or persons, defendant or defendants in the suit. In the
event that the Distributor elects to assume the defense of any such suit and
retain such counsel, the Trust or such officers or Trustees or controlling
person or persons, defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them, but, in case the
Distributor does not elect to assume the defense of any such suit, it shall
reimburse the Trust and such officers and Trustees or controlling person or
persons, defendant or defendants in such suit, for the reasonable fees and
expenses of any counsel retained by them. The Distributor agrees promptly to
notify the Trust of the
- 5 -
<PAGE> 6
commencement of any litigation or proceedings against it in connection with the
issue and sale of any Shares.
Neither the Distributor nor any other person is authorized to give any
information or to make any representation on behalf of the Trust, other than
those contained in the registration statement or Prospectus filed with the
Securities and Exchange Commission under the Act (as said registration
statement or Prospectus may be amended or supplemented from time to time),
covering the Shares or other than those contained in periodic reports to
shareholders of the Trust.
5. The Trust will pay, or cause to be paid -
(i) all costs and expenses of the Trust, including fees and
disbursements of its counsel, in connection with the preparation and filing of
any required registration statement or Prospectus under the Act covering Shares
and all amendments and supplements thereto and any notices regarding the
registration of shares, and preparing and mailing to shareholders Prospectuses,
statements and confirmations and periodic reports (including the expense of
setting up in type any such registration statement, Prospectus or periodic
report);
(ii) the expenses (including auditing expenses) of
qualification of the Shares for sale, and, if necessary or advisable in
connection therewith, of qualifying the Trust as a dealer or broker, in such
states as shall be selected by the Distributor and the fees payable to each
such state with respect to shares sold and for continuing the qualification
therein until the Distributor notifies the Trust that it does not wish such
qualification continued;
(iii) the cost of preparing temporary or permanent
certificates for Shares;
(iv) all fees and disbursements of the transfer agent of the
Trust;
- 6 -
<PAGE> 7
(v) the cost and expenses of delivering to the Distributor
at its office in Boston, Massachusetts, all Shares sold through it as
Distributor hereunder; and
(vi) all the federal and state issue and/or transfer taxes
payable upon the issue by or (in the case of treasury Shares) transfer from the
Trust of any and all Shares purchased through the Distributor hereunder.
The Distributor agrees that, after the Prospectus and periodic reports
have been set up in type, it will bear the expense (other than the cost of
mailing to shareholders of the Trust of printing and distributing any copies
thereof which are to be used in connection with the offering of Shares to
dealers, banks or other financial institutions or investors. The Distributor
further agrees that it will bear the expenses of preparing, printing and
distributing any other literature used by the Distributor or furnished by it
for use by dealers, banks or other financial institutions in connection with
the offering of the Shares for sale to the public and expenses of advertising
in connection with such offering. The Distributor will also bear the expense
of sending confirmations and statements to dealers, banks and other financial
institutions having sales agreements with the Distributor. Nothing in this
paragraph 5 shall be deemed to prohibit or conflict with any payment by the
Trust or any Fund to the Distributor pursuant to any Distribution Plan adopted
as in effect pursuant to Rule 12b-1 under the Investment Company Act of 1940.
6. The Trust hereby authorizes the Distributor to repurchase, upon
the terms and conditions set forth in written instructions given by the Trust
to the Distributor from time to time, as agent of the Trust and for its
account, such Shares as may be offered for sale to the Trust from time to time;
provided the Distributor shall have the right, as stated above in paragraph 2
of this Agreement, to retain (or to receive from the Trust, as the case may be)
a deferred sales charge not to exceed 6% of the net asset value of the Shares
so repurchased.
- 7 -
<PAGE> 8
(a) The Distributor shall notify in writing the
Custodian of the Trust, at the end of each business day, or as soon thereafter
as the repurchases have been compiled, of the number of Shares repurchased for
the account of the Trust since the last previous report, together with the
prices at which such repurchases were made, and upon the request of any Officer
or Trustee of the Trust shall furnish similar information with respect to all
repurchases made up to the time of the request on any day.
(b) The Trust reserves the right to suspend or revoke
the foregoing authorization at any time. Unless otherwise stated, any such
suspension or revocation shall be effective forthwith upon receipt of notice
thereof by an officer of the Distributor, by telegraph or by written notice
from the Trust. In the event that the authorization of the Distributor is, by
the terms of such notice, suspended for more than twenty-four hours or until
further notice, the authorization given by this paragraph 6 shall not be
revived except by action of a majority of the members of the Board of Trustees
of the Trust.
(c) The Distributor shall have the right to terminate
the operation of this paragraph 6 upon giving to the Trust thirty days' written
notice thereof.
(d) The Trust agrees to authorize and direct the
Custodian to pay, for the account of the Trust, the purchase price of any
Shares so repurchased against delivery of the certificates, if any, in proper
form for transfer to the Trust or for cancellation by the Trust.
(e) The Distributor shall receive no commission in
respect of any repurchase of Shares under the foregoing authorization and
appointment as agent, except in connection with contingent deferred sales
charge as provided in the current Prospectus relating to the Shares.
- 8 -
<PAGE> 9
(f) The Trust agrees to reimburse the Distributor, from
time to time upon demand, for any reasonable expenses incurred in connection
with the repurchase of Shares pursuant to this paragraph 6.
7. If, at any time during the existence of this Agreement, the Trust
shall deem it necessary or advisable in the best interests of the Trust that
any amendment of this Agreement be made in order to comply with the
recommendations or requirements of the Securities and Exchange Commission or
other governmental authority or to obtain any advantage under Massachusetts,
any state or federal tax laws, it shall notify the Distributor of the form of
amendment which it deems necessary or advisable and the reasons therefore. If
the Distributor declines to assent to such amendment, the Trust may terminate
this Agreement forthwith by written notice to the Distributor without payment
of any penalty. If, at any time during the existence of this Agreement, upon
request by the Distributor, the Trust fails (after a reasonable time) to make
any changes in its governing instruments or in its methods of doing business
which are necessary in order to comply with any requirements of federal or
state laws or regulations, laws or regulations of the Securities and Exchange
Commission or of a national securities association of which the Distributor is
or may be a member, relating to the sale of Shares, the Distributor may
terminate this Agreement forthwith by written notice to the Trust without
payment of any penalty.
8. The Distributor agrees that it will not take any long or short
positions in the Shares except as permitted by paragraphs l and 6 hereof.
Whenever used in this Agreement, the term "governing instruments" shall mean
the Declaration of Trust and the By-Laws of the Trust, as from time to time
amended.
9. This Agreement shall become effective on January 1, 1995 and
shall continue in force until August 1,
- 9 -
<PAGE> 10
1996 on which date it will terminate unless its continuance after August 1,
1996, is specifically approved at least annually (i) by the vote of a majority
of the Board of Trustees of the Trust who are not interested persons of the
Trust or of the Distributor at a meeting specifically called for the purpose of
voting on such approval, and (ii) by the Board of Trustees of the Trust or by
vote of a majority of the outstanding voting securities of that Fund. The
aforesaid requirement that continuance of this Agreement be "specifically
approved at least annually" shall be construed in a manner consistent with the
Investment Company Act of l940 and the Rules and Regulations thereunder.
This Agreement may be terminated as to any Fund at any time by either
party without payment of any penalty on not more than sixty days' or less than
thirty days' written notice to the other party.
10. This Agreement shall automatically terminate in the event of its
assignment.
11. The terms "vote of a majority of the outstanding voting
securities", "interested person" and "assignment" shall have the respective
meanings specified in the Investment Company Act of l940 and the Rules and
Regulations thereunder, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under said Act.
12. This Agreement shall be governed by the laws of The Commonwealth
of Massachusetts.
13. A copy of the Declaration of Trust of the Trust is on file with
the Secretary of State of The Commonwealth of Massachusetts. The Distributor
acknowledges that the obligations of or arising out of this instrument are not
binding upon any of the Trust's trustees, officers, employees, agents or
shareholders individually, but are binding solely upon the assets and property
of the Trust. If this instrument is executed by the Trust on behalf of one or
more series
- 10 -
<PAGE> 11
of the Trust, the Distributor further acknowledges that the assets and
liabilities of each series of the Trust are separate and distinct and that the
obligations of or arising out of this instrument are binding solely upon the
assets or property of the series on whose behalf the Trust has executed this
instrument. If the Trust has executed this instrument on behalf of more than
one series of the Trust, the Distributor also agrees that the obligations of
each series hereunder shall be several and not joint, in accordance with its
proportionate interest hereunder, and the Distributor agrees not to proceed
against any series for the obligations of another series.
- 11 -
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above.
MFS SERIES TRUST VII
On behalf of: MFS World Governments Fund
MFS Value Fund
By: W. THOMAS LONDON
W. Thomas London as officer
and not individually
MFS FUND DISTRIBUTORS, INC.
By: WILLIAM W. SCOTT, JR.
William W. Scott, Jr.
President
- 12 -
<PAGE> 1
EXHIBIT 9(d)
MFS SERIES TRUST VII
500 BOYLSTON STREET - BOSTON - MASSACHUSETTS 02116-3741
(617) - 954-5000
December 28, 1993
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Dear Sir/Madam:
This will confirm our understanding that Exhibit B to the Shareholder
Servicing Agent Agreement between us, dated August 1, 1985, as amended, is
hereby amended, effective immediately, to read in its entirety as set forth on
Attachment 1 hereto.
Please indicate your acceptance of the foregoing by signing below.
Sincerely,
MFS Series Trust VII
By: W. THOMAS LONDON
-----------------
W. Thomas London
Treasurer
Accepted and Agreed:
MFS SERVICE CENTER, INC.
By: JAMES E. RUSSELL
James E. Russell
Treasurer
<PAGE> 2
ATTACHMENT 1
December 28, 1993
EXHIBIT B TO THE SHAREHOLDER
SERVICING AGENT AGREEMENT BETWEEN
MFS SERVICE CENTER, INC. ("MFSC")
AND MFS SERIES TRUST VII (THE "FUND")
1. The fees to be paid by the Fund on behalf of its series with respect to
Class A shares of each series of the Fund to MFSC, for MFSC's services
as shareholder servicing agent, shall be:
0.15% of the first $500 million of the assets of the series
attributable to such class; 0.12% of the second $500 million of the
assets of the series attributable to such class; 0.09% over $1 billion
of the assets of the series attributable to such class.
2. The fees to be paid by the Fund on behalf of its series with respect to
Class B shares of each series of the Fund to MFSC, for MFSC's services
as shareholder servicing agent, shall be:
0.22% of the first $500 million of the assets of the series
attributable to such class; 0.18% of the second $500 million of the
assets of the series attributable to such class; 0.13% over $1 billion
of the assets of the series attributable to such class.
3. The fees to be paid by the Fund on behalf of its series with respect to
Class C shares of each series of the Fund to MFSC, for MFSC's services
as shareholder servicing agent, shall be:
0.15% of the first $500 million of the assets of the series
attributable to such class; 0.12% of the second $500 million of the
assets of the series attributable to such class; 0.09% over $1 billion
of the assets of the series attributable to such class.
<PAGE> 1
EXHIBIT 11(a)
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. 19 to
Registration No. 2-68918 on Form N-1A of our report dated January 9, 1995, on
the financial statements and financial highlights of MFS World Governments
Fund, a series portfolio of MFS Series Trust VII, included in the November 30,
1994 Annual Report to Shareholders.
ERNST & YOUNG LLP
Boston, Massachusetts
March 28, 1995
<PAGE> 1
EXHIBIT 11(b)
CONSENT OF DELOITTE & TOUCHE LLP INDEPENDENT AUDITORS'
We consent to the incorporation by reference in this Post-Effective
Amendment No. 19 to Registration No. 2-68918 of MFS Series Trust VII of our
reports dated January 3, 1995, appearing in the annual report to shareholders
for the year ended November 30, 1994, of MFS Value Fund, and to the references
to us under the headings "Condensed Financial Information" in the Prospectus
and "Independent Accountants and Financial Statements" in the Statement of
Additional Information, which are part of such Registration Statement.
Deloitte & Touche LLP
Boston, Massachusetts
March 28, 1995
<PAGE> 1
EXHIBIT NO. 15(b)
MFS SERIES TRUST VII
MFS WORLD GOVERNMENTS FUND
AMENDED AND RESTATED DISTRIBUTION PLAN
--------------------------------------
AMENDED AND RESTATED DISTRIBUTION PLAN with respect to the shares of beneficial
interest to be designated "CLASS A" of the MFS WORLD GOVERNMENTS FUND (the
"Fund"), a series of MFS Series Trust VII (the "Trust"), a business trust
organized and existing under the laws of The Commonwealth of Massachusetts,
dated the 17th day of May, 1989, amended and restated the 19th day of December,
1990, amended and restated the 17th day of August, 1993 and amended this 21st
day of December, 1994.
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end management investment
company and is registered under the Investment Company Act of 1940 (the "Act");
and
WHEREAS, a plan of distribution pursuant to Rule 12b-1 of the Act was
previously adopted and approved by the Trustees of the Trust, including the
Qualifying Trustees (as defined below), and by the shareholders of the Fund;
and
WHEREAS, the Trust intends to continue to distribute the Shares of Beneficial
Interest (without par value) of the Fund designated Class A Shares (the
"Shares") in part in accordance with Rule 12b-1 under the Act ("Rule 12b-1"),
and desires to adopt this amended and restated Distribution Plan (the "Plan")
as a plan of distribution pursuant to such Rule; and
WHEREAS, the Trust has entered into a distribution agreement (the "Distribution
Agreement") in a form approved by the Board of Trustees of the Trust (the
"Board of Trustees") in the manner specified in Rule 12b-1, with MFS Fund
Distributors, Inc., a Delaware corporation, as distributor (the "Distributor"),
whereby the Distributor provides facilities and personnel and renders services
to the Fund in connection with the offering and distribution of the Shares; and
WHEREAS, the Trust recognizes and agrees that the Distributor will enter into
agreements ("Dealer Agreements") with various securities dealers and other
financial intermediaries ("Dealers") pursuant to which the Dealers will act as
dealers of the Shares in connection with the offering of Shares; and
WHEREAS, the Distribution Agreement provides that a sales charge may be paid by
investors who purchase Shares and that the Distributor and Dealers will receive
such sales charge as partial compensation for their services in connection with
sale of Shares; and
WHEREAS, the Board of Trustees, in considering whether the Fund should adopt
and implement this Plan, has evaluated such information as it deemed necessary
to an informed determination as to whether this Plan should be adopted and
implemented and has considered such pertinent factors as it deemed necessary to
form the basis for a decision to use assets of the Fund for such purposes, and
has determined that there is a reasonable likelihood that the adoption and
implementation of this Plan will benefit the Fund and its Class A shareholders;
-1-
<PAGE> 2
NOW, THEREFORE, the Board of Trustees hereby adopts this Plan for the Fund as a
plan of distribution relating to the Shares in accordance with Rule 12b-1 under
the Act, on the following terms and conditions:
1. As specified in the Distribution Agreement, the Distributor
shall provide facilities, personnel and a program with respect to the offering
and sale of Shares. Among other things, the Distributor shall be responsible
for all expenses of printing (excluding typesetting) and distributing
prospectuses to prospective shareholders and providing such other related
services as are reasonably necessary in connection therewith.
2. The Distributor shall bear all distribution-related expenses to
the extent specified in the Distribution Agreement in providing the Services
described in Section 1, including without limitation, the compensation of
personnel necessary to provide such services and all costs of travel, office
expenses (including rent and overhead), equipment, printing, delivery and
mailing costs.
3. As partial consideration for the services performed and
expenses incurred in the performance of its obligations under the Distribution
Agreement, the Fund shall pay the Distributor a distribution fee periodically
at a rate of 0.10% per annum of the average daily net assets of the Fund
attributable to the Shares. Such payments shall commence following shareholder
approval of the Plan but only upon notification by the Distributor to the Fund
of the commencement of the Plan (the "Commencement Date").
4. As partial consideration for the personal services and/or
account maintenance services performed by each Dealer in the performance of its
obligations under its Dealer Agreement, the Fund shall on or after the
Commencement Date pay each Dealer a service fee periodically at a rate not to
exceed 0.25% per annum of the portion of the average daily net assets of the
Fund that is represented by Shares that are owned by investors for whom such
Dealer is the holder or dealer of record. The Distributor may from time to
time reduce the amount of the service fee paid to a Dealer for Shares sold
prior to certain date.
5. In addition to fees payable pursuant to Sections 3 and 4
hereof, the expenses permitted to be paid by the Fund pursuant to this Plan on
or after the Commencement Date shall include other distribution related
expenses. These other distribution related expenses may include, but are not
limited to, a dealer commission and a payment to wholesalers employed by the
Distributor on net asset value purchases at or above a certain dollar level.
The aggregate amount of fees and expenses paid pursuant to Sections 3
and 4 hereof and this Section 5 shall not exceed 0.35% per annum of the average
daily net assets of the Fund attributable to the Shares. No fees shall be paid
pursuant to Section 4 hereof or this Section 5 to any insurance company which
has entered into an agreement with the Trust on behalf of the Fund and the
Distributor that permits such insurance company to purchase Shares from the
Fund at their net asset value in connection with annuity agreements issued in
connection with the insurance company's separate accounts. That portion of the
Fund's average daily net assets on which fees payable under Section 4 hereof
and this Section 5 are calculated may be subject to certain minimum amount
requirements as may be determined, and additional or different dealer or
wholesaler qualification standards that may be established, from time to time
by the Distributor. The Distributor shall be entitled to be paid any fees
payable under Section 4 hereof or this Section 5 with respect to accounts for
which no Dealer of record exists or qualification standards have not been met
as partial consideration for personal services and/or account maintenance
services provided by the Distributor to the Shares. The fees and expenses
payable pursuant to Section 4 and this Section 5 may from time to time be paid
by the Fund to the Distributor and the Distributor will then pay these expenses
on behalf of the Fund.
- 2 -
<PAGE> 3
6. Nothing herein contained shall be deemed to require the Trust
to take any action contrary to its Declaration of Trust or By-Laws or any
applicable statutory or regulatory requirement to which it is subject or by
which it is bound, or to relieve or deprive the Board of Trustees of the
responsibility for and control of the conduct of the affairs of the Fund.
7. This Plan shall become effective upon (a) approval by a vote of
at least a "majority of the outstanding voting securities" of the Shares, and
(b) approval by a vote of the Board of Trustees and vote of a majority of the
Trustees who are not "interested persons" of the Trust and who have no direct
or indirect financial interest in the operation of the Plan or in any of the
agreements related to the Plan (the "Qualified Trustees"), such votes to be
cast in person at a meeting called for the purpose of voting on this Plan.
8. This Plan shall continue in effect indefinitely; PROVIDED,
HOWEVER, that such continuance is subject to annual approval by a vote of the
Board of Trustees and a majority of the Qualified Trustees, such votes to be
cast in person at a meeting called for the purpose of voting on continuance of
this Plan. If such annual approval is not obtained, this Plan shall expire 12
months after the effective date of the last approval.
9. This Plan may be amended at any time by the Board of Trustees;
provided that (a) any amendment to increase materially the amount to be spent
for the services described herein shall be effective only upon approval by a
vote of a "majority of the outstanding voting securities" of the Shares and (b)
any material amendment of this Plan shall be effective only upon approval by a
vote of the Board of Trustees and a majority of the Qualified Trustees, such
votes to be cast in person at a meeting called for the purpose of voting on
such amendment. This Plan may be terminated at any time by vote of a majority
of the Qualified Trustees or by a vote of a "majority of the outstanding voting
securities" of the Shares.
10. The Distributor shall provide the Board of Trustees, and the
Board of Trustees shall review, at least quarterly, a written report of the
amounts expended under the Plan and the purposes for which such expenditures
were made.
11. While this Plan is in effect, the selection and nomination of
Qualified Trustees shall be committed to the discretion of the Trustees who are
not "interested persons" of the Trust.
12. For the purposes of this Plan, the terms "interested person"
and "majority of the outstanding voting securities" are used as defined in the
Act. In addition, for purposes of determining the fees payable to Dealers and
wholesalers, the value of the Share's net assets shall be computed in the
manner specified in the Fund's then current prospectus for computation of the
net asset value of the Shares.
13. The Trust shall preserve copies of this Plan, and each
agreement related hereto and each report referred to in Section 10 hereof
(collectively the "Records") for a period of six years from the end of the
fiscal year in which such Record was made and each such Record shall be kept in
an easily accessible place for the first two years of said record keeping.
14. This Plan shall be construed in accordance with the laws of The
Commonwealth of Massachusetts and the applicable provisions of the Act.
15. 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.
- 3 -
<PAGE> 1
EXHIBIT NO. 15(c)
MFS SERIES TRUST VII
MFS VALUE FUND
DISTRIBUTION PLAN
-----------------
DISTRIBUTION PLAN with respect to the shares of beneficial interest to be
designated "CLASS A" of the MFS VALUE FUND (the "Fund"), a series of MFS Series
Trust VII (the "Trust"), a business trust organized and existing under the laws
of The Commonwealth of Massachusetts, dated the 1st day of September, 1993 and
amended this 21st day of December, 1994.
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end management investment
company and is registered under the Investment Company Act of 1940 (the "Act");
and
WHEREAS, the Trust intends to distribute the Shares of Beneficial Interest
(without par value) of the Fund designated Class A Shares (the "Shares") in
part in accordance with Rule 12b-1 under the Act, ("Rule 12b-1"), and desires
to adopt this Distribution Plan (the "Plan") as a plan of distribution pursuant
to such Rule; and
WHEREAS, the Trust has entered into a distribution agreement (the "Distribution
Agreement") in a form approved by the Board of Trustees of the Trust (the
"Board of Trustees") in the manner specified in Rule 12b-1, with MFS Fund
Distributors, Inc., a Delaware corporation, as distributor (the "Distributor"),
whereby the Distributor provides facilities and personnel and renders services
to the Fund in connection with the offering and distribution of the Shares; and
WHEREAS, the Trust recognizes and agrees that the Distributor will enter into
agreements ("Dealer Agreements") with various securities dealers and other
financial intermediaries ("Dealers") pursuant to which the Dealers will act as
dealers of the Shares in connection with the offering of Shares; and
WHEREAS, the Distribution Agreement provides that a sales charge may be paid by
investors who purchase Shares and that the Distributor and Dealers will receive
such sales charge as partial compensation for their services in connection with
sale of Shares; and
WHEREAS, the Board of Trustees, in considering whether the Fund should adopt
and implement this Plan, has evaluated such information as it deemed necessary
to an informed determination as to whether this Plan should be adopted and
implemented and has considered such pertinent factors as it deemed necessary to
form the basis for a decision to use assets of the Fund for such purposes, and
has determined that there is a reasonable likelihood that the adoption and
implementation of this Plan will benefit the Fund and its Class A shareholders;
NOW, THEREFORE, the Board of Trustees hereby adopts this Plan for the Fund as a
plan of distribution relating to the Shares in accordance with Rule 12b-1 under
the Act, on the following terms and conditions:
-1-
<PAGE> 2
1. As specified in the Distribution Agreement, the Distributor
shall provide facilities, personnel and a program with respect to the offering
and sale of Shares. Among other things, the Distributor shall be responsible
for all expenses of printing (excluding typesetting) and distributing
prospectuses to prospective shareholders and providing such other related
services as are reasonably necessary in connection therewith.
2. The Distributor shall bear all distribution-related expenses
described in Section 1, including without limitation, the compensation of
personnel necessary to provide such services and all costs of travel, office
expenses (including rent and overhead), equipment, printing, delivery and
mailing costs.
3. As partial consideration for the services performed and
expenses to the extent specified in the Distribution Agreement in providing the
services incurred in the performance of its obligations under the Distribution
Agreement, the Fund shall pay the Distributor a distribution fee periodically
at a rate of 0.10% per annum of the average daily net assets of the Fund
attributable to the Shares. Such payments shall commence following shareholder
approval of the Plan but only upon notification by the Distributor to the Fund
of the commencement of the Plan (the "Commencement Date").
4. As partial consideration for the personal services and/or
account maintenance services performed by each Dealer in the performance of its
obligations under its Dealer Agreement, the Fund shall on or after the
Commencement Date pay each Dealer a service fee periodically at a rate not to
exceed 0.25% per annum of the portion of the average daily net assets of the
Fund that is represented by Shares that are owned by investors for whom such
Dealer is the holder or dealer of record. The Distributor may from time to
time reduce the amount of the service fee paid to a Dealer for Shares sold
prior to certain date.
5. In addition to fees payable pursuant to Sections 3 and 4
hereof, the expenses permitted to be paid by the Fund pursuant to this Plan on
or after the Commencement Date shall include other distribution related
expenses. These other distribution related expenses may include, but are not
limited to, a dealer commission and a payment to wholesalers employed by the
Distributor on net asset value purchases at or above a certain dollar level.
The aggregate amount of fees and expenses paid pursuant to Sections 3
and 4 hereof and this Section 5 shall not exceed 0.35% per annum of the average
daily net assets of the Fund attributable to the Shares. No fees shall be paid
pursuant to Section 4 hereof or this Section 5 to any insurance company which
has entered into an agreement with the Trust on behalf of the Fund and the
Distributor that permits such insurance company to purchase Shares from the
Fund at their net asset value in connection with annuity agreements issued in
connection with the insurance company's separate accounts. That portion of the
Fund's average daily net assets on which fees payable under Section 4 hereof
and this Section 5 are calculated may be subject to certain minimum amount
requirements as may be determined, and additional or different dealer or
wholesaler qualification standards that may be established, from time to time
by the Distributor. The Distributor shall be entitled to be paid any fees
payable under Section 4 hereof or this Section 5 with respect to accounts for
which no Dealer of record exists or qualification standards have not been met
as partial consideration for personal services and/or account maintenance
services provided by the Distributor to the Shares. The fees and expenses
payable pursuant to Section 4 and this Section 5 may from time to time be paid
by the Fund to the Distributor and the Distributor will then pay these expenses
on behalf of the Fund.
- 2 -
<PAGE> 3
6. Nothing herein contained shall be deemed to require the Trust
to take any action contrary to its Declaration of Trust or By-Laws or any
applicable statutory or regulatory requirement to which it is subject or by
which it is bound, or to relieve or deprive the Board of Trustees of the
responsibility for and control of the conduct of the affairs of the Fund.
7. This Plan shall become effective upon (a) approval by a vote of
at least a "majority of the outstanding voting securities" of the Shares, and
(b) approval by a vote of the Board of Trustees and vote of a majority of the
Trustees who are not "interested persons" of the Trust and who have no direct
or indirect financial interest in the operation of the Plan or in any of the
agreements related to the Plan (the "Qualified Trustees"), such votes to be
cast in person at a meeting called for the purpose of voting on this Plan.
8. This Plan shall continue in effect indefinitely; PROVIDED,
HOWEVER, that such continuance is subject to annual approval by a vote of the
Board of Trustees and a majority of the Qualified Trustees, such votes to be
cast in person at a meeting called for the purpose of voting on continuance of
this Plan. If such annual approval is not obtained, this Plan shall expire 12
months after the effective date of the last approval.
9. This Plan may be amended at any time by the Board of Trustees;
provided that (a) any amendment to increase materially the amount to be spent
for the services described herein shall be effective only upon approval by a
vote of a "majority of the outstanding voting securities" of the Shares and (b)
any material amendment of this Plan shall be effective only upon approval by a
vote of the Board of Trustees and a majority of the Qualified Trustees, such
votes to be cast in person at a meeting called for the purpose of voting on
such amendment. This Plan may be terminated at any time by vote of a majority
of the Qualified Trustees or by a vote of a "majority of the outstanding voting
securities" of the Shares.
10. The Distributor shall provide the Board of Trustees, and the
Board of Trustees shall review, at least quarterly, a written report of the
amounts expended under the Plan and the purposes for which such expenditures
were made.
11. While this Plan is in effect, the selection and nomination of
Qualified Trustees shall be committed to the discretion of the Trustees who are
not "interested persons" of the Trust.
12. For the purposes of this Plan, the terms "interested person"
and "majority of the outstanding voting securities" are used as defined in the
Act. In addition, for purposes of determining the fees payable to Dealers and
wholesalers, the value of the Share's net assets shall be computed in the
manner specified in the Fund's then current prospectus for computation of the
net asset value of the Shares.
13. The Trust shall preserve copies of this Plan, and each
agreement related hereto and each report referred to in Section 10 hereof
(collectively the "Records") for a period of six years from the end of the
fiscal year in which such Record was made and each such Record shall be kept in
an easily accessible place for the first two years of said record keeping.
14. This Plan shall be construed in accordance with the laws of The
Commonwealth of Massachusetts and the applicable provisions of the Act.
15. 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.
- 3 -
<PAGE> 1
EXHIBIT NO. 15(d)
MFS SERIES TRUST VII
MFS WORLD GOVERNMENTS FUND
PLAN OF DISTRIBUTION
--------------------
PLAN OF DISTRIBUTION with respect to the shares of beneficial interest to be
designated "CLASS B" of MFS WORLD GOVERNMENTS FUND (the "Fund"), a series of
MFS Series Trust VII (the "Trust") a Massachusetts business trust, dated
September 1, 1993 and amended this 21st day of December, 1994.
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end management
investment company and is registered under the Investment Company Act of 1940,
as amended (collectively with the rules and regulations promulgated thereunder,
the "1940 Act"); and
WHEREAS, the Trust intends to distribute the shares of beneficial
interest (without par value) of the Fund designated Class B Shares (the
"Shares") in accordance with Rule 12b-1 under the 1940 Act ("Rule 12b-1"), and
desires to adopt this Distribution Plan (the "Plan") as a plan of distribution
pursuant to such Rule; and
WHEREAS, the Trust desires for MFS Fund Distributors, Inc., a Delaware
corporation, to provide certain distribution services for the Fund (the
"Distributor"); and
WHEREAS, the Trust has entered into a distribution agreement (the
"Distribution Agreement") (in a form approved by the Board of Trustees of the
Trust in a manner specified in such Rule 12b-1) with the Distributor, whereby
the Distributor will provide facilities and personnel and render services to
the Fund in connection with the offering and distribution of the Shares; and
WHEREAS, the Trust recognizes and agrees that (a) the Distributor may
retain the services of firms or individuals to act as dealers (the "Dealers")
of the Shares in connection with the offering of Shares, and (b) the
Distributor may make payments for such services to the Dealers out of the fee
paid to the Distributor hereunder, any deferred sales charges imposed by the
Distributor in connection with the repurchase of Shares, its profits or any
other source available to it; and
WHEREAS, the Trust recognizes and agrees that the Distributor may
impose certain deferred sales charges in connection with the repurchase of
Shares by the Fund, and the Distributor may retain (or receive from the Fund,
as the case may be) all such deferred sales charges; and
WHEREAS, the Board of Trustees of the Trust, in considering whether
the Fund should adopt and implement this Plan, has evaluated such information
as it deemed necessary to an informed determination as to whether this Plan
should be adopted and implemented and has considered such pertinent factors as
it deemed necessary to form the basis for a decision to use assets of the Fund
for such purposes, and has determined that there is a reasonable likelihood
that the adoption and implementation of this Plan will benefit the Fund and its
Class B shareholders;
- 1 -
<PAGE> 2
NOW, THEREFORE, the Board of Trustees of the Trust hereby adopts this
Plan for the Fund as a plan for distribution relating to the Shares in
accordance with Rule 12b-1, on the following terms and conditions:
1. As specified in the Distribution Agreement, the Distributor
shall provide facilities, personnel and a program with respect to the offering
and sale of Shares. Among other things, the Distributor shall be responsible
for commissions payable to Dealers, all expenses of printing (excluding
typesetting) and distributing prospectuses to prospective shareholders and
providing such other related services as are reasonably necessary in connection
therewith.
2. The Distributor shall bear all distribution-related expenses to
the extent specified in the Distribution Agreement in providing the services
described in paragraph 1, including without limitation, the compensation of
personnel necessary to provide such services and all costs of travel, office
expenses (including rent and overhead), equipment, printing, delivery and
mailing costs.
3. It is understood that the Distributor may impose certain
deferred sales charges in connection with the repurchase of Shares by the Fund
and the Distributor may retain (or receive from the Fund, as the case may be)
all such deferred sales charges. As additional consideration for all services
performed and expenses incurred in the performance of its obligations under the
Distribution Agreement, the Fund shall pay the Distributor a distribution fee
periodically at a rate of 0.75% per annum of the Fund's average daily net
assets attributable to the Shares.
4. As partial consideration for the personal services and/or
account maintenance services performed by each Dealer in the performance of its
obligations under its dealer agreement with the Distributor, the Fund shall pay
each Dealer a service fee periodically at a rate not to exceed 0.25% per annum
of the portion of the average daily net assets of the Fund that is represented
by Shares that are owned by investors for whom such Dealer is the holder or
dealer of record. That portion of the Fund's average daily net assets on which
the fees payable under this paragraph 4 hereof are calculated may be subject to
certain minimum amount requirements as may be determined, and additional or
different dealer qualification standards that may be established from time to
time, by the Distributor. The Distributor shall be entitled to be paid any
fees payable under this paragraph 4 hereof with respect to Shares for which no
Dealer of record exists or qualification standards have not been met as partial
consideration for personal services and/or account maintenance services
provided by the Distributor to the Shares. The service fee payable pursuant to
this paragraph 4 may from time to time be paid by the Fund to the Distributor
and the Distributor will then pay these fees on behalf of the Fund.
5. The Fund understands that agreements between the Distributor
and the Dealers may provide for payment of commissions to Dealers in connection
with the sales of Shares and may provide for a portion (which may be all or
substantially all) of the fees payable by the Fund to the Distributor under the
Distribution Agreement to be paid by the Distributor to the Dealers in
consideration of the Dealer's services as a dealer of the Shares. Except as
described in paragraph 4, nothing in this Plan shall be construed as requiring
the Fund to make any payment to any Dealer or to have any obligations to any
Dealer in connection with services as a dealer of the Shares. The Distributor
shall agree and undertake that any agreement entered into between the
Distributor and any Dealer shall provide that, except as provided in paragraph
4, such Dealer shall look solely to the Distributor for compensation for its
services thereunder and that in no event shall such Dealer seek any payment
from the Fund.
6. The Fund shall pay all fees and expenses of any independent
auditor, legal counsel, investment adviser, administrator, transfer agent,
custodian, shareholder servicing agent, registrar or dividend disbursing agent
of the Fund; expenses of distributing and redeeming Shares and servicing
shareholder accounts; expenses of preparing, printing and mailing prospectuses,
- 2 -
<PAGE> 3
shareholder reports, notices, proxy statements and reports to governmental
officers and commissions and to shareholders of the Fund, except that the
Distributor shall be responsible for the distribution-related expenses as
provided in paragraphs 1 and 2 hereof.
7. Nothing herein contained shall be deemed to require the Trust
to take any action contrary to its Declaration of Trust or By-Laws or any
applicable statutory or regulatory requirement to which it is subject or by
which it is bound, or to relieve or deprive the Board of Trustees of the
responsibility for and control of the conduct of the affairs of the Fund.
8. This Plan shall become effective upon (a) approval by a vote of
at least a "majority of the outstanding voting securities" of the Shares, and
(b) approval by a vote of the Board of Trustees and a vote of a majority of the
Trustees who are not "interested persons" of the Trust and who have no direct
or indirect financial interest in the operation of the Plan or in any agreement
related to the Plan (the "Qualified Trustees"), such votes to be cast in person
at a meeting called for the purpose of voting on this Plan.
9. This Plan shall continue in effect indefinitely; PROVIDED that
such continuance is "specifically approved at least annually" by a vote of both
a majority of the Trustees of the Trust and a majority of the Qualified
Trustees. If such annual approval is not obtained, this Plan shall expire 12
months after the effective date of the last approval.
10. This Plan may be amended at any time by the Board of Trustees;
PROVIDED that this Plan may not be amended to increase materially the amount of
permitted expenses hereunder without the approval of holders of a "majority of
the outstanding voting securities" of the Shares and may not be materially
amended in any case without a vote of a majority of both the Trustees and the
Qualified Trustees. This Plan may be terminated at any time by a vote of a
majority of the Qualified Trustees or by a vote of the holders of a "majority
of the outstanding voting securities" of the Shares.
11. The Fund and the Distributor shall provide the Board of
Trustees, and the Board of Trustees shall review, at least quarterly, a written
report of the amounts expended under this Plan and the purposes for which such
expenditures were made.
12. While this Plan is in effect, the selection and nomination of
Qualified Trustees shall be committed to the discretion of the Trustees who are
not "interested persons" of the Trust.
13. For the purposes of this Plan, the terms "interested persons",
"majority of the outstanding voting securities" and "specifically approved at
least annually" are used as defined in the 1940 Act. In addition, for purposes
of determining the fees payable to the Distributor hereunder, the value of the
Fund's net assets shall be computed in the manner specified in the Fund's
then-current prospectus and statement of additional information for computation
of the net asset value of the Shares of the Fund.
14. The Trust shall preserve copies of this Plan, and each
agreement related hereto and each report referred to in paragraph 11 hereof
(collectively, the "Records") for a period of six years from the end of the
fiscal year in which such Record was made and each such record shall be kept in
an easily accessible place for the first two years of said record-keeping.
15. This Plan shall be construed in accordance with the laws of The
Commonwealth of Massachusetts and the applicable provisions of the 1940 Act.
16. 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.
- 3 -
<PAGE> 1
EXHIBIT NO. 15(e)
MFS SERIES TRUST VII
MFS VALUE FUND
PLAN OF DISTRIBUTION
--------------------
PLAN OF DISTRIBUTION with respect to the shares of beneficial interest to be
designated "CLASS B" of MFS VALUE FUND (the "Fund"), a series of MFS Series
Trust VII (the "Trust") a Massachusetts business trust, dated September 1, 1993
and amended this 21st day of December, 1994.
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end management
investment company and is registered under the Investment Company Act of 1940,
as amended (collectively with the rules and regulations promulgated thereunder,
the "1940 Act"); and
WHEREAS, the Trust intends to distribute the shares of beneficial
interest (without par value) of the Fund designated Class B Shares (the
"Shares") in accordance with Rule 12b-1 under the 1940 Act ("Rule 12b-1"), and
desires to adopt this Distribution Plan (the "Plan") as a plan of distribution
pursuant to such Rule; and
WHEREAS, the Trust desires for MFS Fund Distributors, Inc., a Delaware
corporation, to provide certain distribution services for the Fund (the
"Distributor"); and
WHEREAS, the Trust has entered into a distribution agreement (the
"Distribution Agreement") (in a form approved by the Board of Trustees of the
Trust in a manner specified in such Rule 12b-1) with the Distributor, whereby
the Distributor will provide facilities and personnel and render services to
the Fund in connection with the offering and distribution of the Shares; and
WHEREAS, the Trust recognizes and agrees that (a) the Distributor may
retain the services of firms or individuals to act as dealers (the "Dealers")
of the Shares in connection with the offering of Shares, and (b) the
Distributor may make payments for such services to the Dealers out of the fee
paid to the Distributor hereunder, any deferred sales charges imposed by the
Distributor in connection with the repurchase of Shares, its profits or any
other source available to it; and
WHEREAS, the Trust recognizes and agrees that the Distributor may
impose certain deferred sales charges in connection with the repurchase of
Shares by the Fund, and the Distributor may retain (or receive from the Fund,
as the case may be) all such deferred sales charges; and
WHEREAS, the Board of Trustees of the Trust, in considering whether
the Fund should adopt and implement this Plan, has evaluated such information
as it deemed necessary to an informed determination as to whether this Plan
should be adopted and implemented and has considered such pertinent factors as
it deemed necessary to form the basis for a decision to use assets of the Fund
for such purposes, and has determined that there is a reasonable likelihood
that the adoption and implementation of this Plan will benefit the Fund and its
Class B shareholders;
-1-
<PAGE> 2
NOW, THEREFORE, the Board of Trustees of the Trust hereby adopts this
Plan for the Fund as a plan for distribution relating to the Shares in
accordance with Rule 12b-1, on the following terms and conditions:
1. As specified in the Distribution Agreement, the Distributor
shall provide facilities, personnel and a program with respect to the offering
and sale of Shares. Among other things, the Distributor shall be responsible
for commissions payable to Dealers, all expenses of printing (excluding
typesetting) and distributing prospectuses to prospective shareholders and
providing such other related services as are reasonably necessary in connection
therewith.
2. The Distributor shall bear all distribution-related expenses
to the extent specified in the Distribution Agreement in providing the services
described in paragraph 1, including without limitation, the compensation of
personnel necessary to provide such services and all costs of travel, office
expenses (including rent and overhead), equipment, printing, delivery and
mailing costs.
3. It is understood that the Distributor may impose certain
deferred sales charges in connection with the repurchase of Shares by the Fund
and the Distributor may retain (or receive from the Fund, as the case may be)
all such deferred sales charges. As additional consideration for all services
performed and expenses incurred in the performance of its obligations under the
Distribution Agreement, the Fund shall pay the Distributor a distribution fee
periodically at a rate of 0.75% per annum of the Fund's average daily net
assets attributable to the Shares.
4. As partial consideration for the personal services and/or
account maintenance services performed by each Dealer in the performance of its
obligations under its dealer agreement with the Distributor, the Fund shall pay
each Dealer a service fee periodically at a rate not to exceed 0.25% per annum
of the portion of the average daily net assets of the Fund that is represented
by Shares that are owned by investors for whom such Dealer is the holder or
dealer of record. That portion of the Fund's average daily net assets on which
the fees payable under this paragraph 4 hereof are calculated may be subject to
certain minimum amount requirements as may be determined, and additional or
different dealer qualification standards that may be established from time to
time, by the Distributor. The Distributor shall be entitled to be paid any
fees payable under this paragraph 4 hereof with respect to Shares for which no
Dealer of record exists or qualification standards have not been met as partial
consideration for personal services and/or account maintenance services
provided by the Distributor to the Shares. The service fee payable pursuant to
this paragraph 4 may from time to time be paid by the Fund to the Distributor
and the Distributor will then pay these fees on behalf of the Fund.
5. The Fund understands that agreements between the Distributor
and the Dealers may provide for payment of commissions to Dealers in connection
with the sales of Shares and may provide for a portion (which may be all or
substantially all) of the fees payable by the Fund to the Distributor under the
Distribution Agreement to be paid by the Distributor to the Dealers in
consideration of the Dealer's services as a dealer of the Shares. Except as
described in paragraph 4, nothing in this Plan shall be construed as requiring
the Fund to make any payment to any Dealer or to have any obligations to any
Dealer in connection with services as a dealer of the Shares. The Distributor
shall agree and undertake that any agreement entered into between the
Distributor and any Dealer shall provide that, except as provided in paragraph
4, such Dealer shall look solely to the Distributor for compensation for its
services thereunder and that in no event shall such Dealer seek any payment
from the Fund.
- 2 -
<PAGE> 3
6. The Fund shall pay all fees and expenses of any independent
auditor, legal counsel, investment adviser, administrator, transfer agent,
custodian, shareholder servicing agent, registrar or dividend disbursing agent
of the Fund; expenses of distributing and redeeming Shares and servicing
shareholder accounts; expenses of preparing, printing and mailing prospectuses,
shareholder reports, notices, proxy statements and reports to governmental
officers and commissions and to shareholders of the Fund, except that the
Distributor shall be responsible for the distribution-related expenses as
provided in paragraphs 1 and 2 hereof.
7. Nothing herein contained shall be deemed to require the Trust
to take any action contrary to its Declaration of Trust or By-Laws or any
applicable statutory or regulatory requirement to which it is subject or by
which it is bound, or to relieve or deprive the Board of Trustees of the
responsibility for and control of the conduct of the affairs of the Fund.
8. This Plan shall become effective upon (a) approval by a vote
of at least a "majority of the outstanding voting securities" of the Shares,
and (b) approval by a vote of the Board of Trustees and a vote of a majority of
the Trustees who are not "interested persons" of the Trust and who have no
direct or indirect financial interest in the operation of the Plan or in any
agreement related to the Plan (the "Qualified Trustees"), such votes to be cast
in person at a meeting called for the purpose of voting on this Plan.
9. This Plan shall continue in effect indefinitely; PROVIDED that
such continuance is "specifically approved at least annually" by a vote of both
a majority of the Trustees of the Trust and a majority of the Qualified
Trustees. If such annual approval is not obtained, this Plan shall expire 12
months after the effective date of the last approval.
10. This Plan may be amended at any time by the Board of Trustees;
PROVIDED that this Plan may not be amended to increase materially the amount of
permitted expenses hereunder without the approval of holders of a "majority of
the outstanding voting securities" of the Shares and may not be materially
amended in any case without a vote of a majority of both the Trustees and the
Qualified Trustees. This Plan may be terminated at any time by a vote of a
majority of the Qualified Trustees or by a vote of the holders of a "majority
of the outstanding voting securities" of the Shares.
11. The Fund and the Distributor shall provide the Board of
Trustees, and the Board of Trustees shall review, at least quarterly, a written
report of the amounts expended under this Plan and the purposes for which such
expenditures were made.
12. While this Plan is in effect, the selection and nomination of
Qualified Trustees shall be committed to the discretion of the Trustees who are
not "interested persons" of the Trust.
13. For the purposes of this Plan, the terms "interested persons",
"majority of the outstanding voting securities" and "specifically approved at
least annually" are used as defined in the 1940 Act. In addition, for purposes
of determining the fees payable to the Distributor hereunder, the value of the
Fund's net assets shall be computed in the manner specified in the Fund's
then-current prospectus and statement of additional information for computation
of the net asset value of the Shares of the Fund.
14. The Trust shall preserve copies of this Plan, and each
agreement related hereto and each report referred to in paragraph 11 hereof
(collectively, the "Records") for a period of six years from the end of the
fiscal year in which such Record was made and each such record shall be kept in
an easily accessible place for the first two years of said record-keeping.
- 3 -
<PAGE> 4
15. This Plan shall be construed in accordance with the laws of
The Commonwealth of Massachusetts and the applicable provisions of the 1940
Act.
16. 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.
- 4 -
<PAGE> 1
EXHIBIT NO. 15(f)
MFS SERIES TRUST VII
MFS WORLD GOVERNMENTS FUND
PLAN OF DISTRIBUTION
--------------------
PLAN OF DISTRIBUTION with respect to the shares of beneficial interest
to be designated "CLASS C" of MFS WORLD GOVERNMENTS FUND (the "Fund"), a series
of MFS Series Trust VII (the "Trust") a Massachusetts business trust, dated
December 28, 1993 and amended this 21st day of December, 1994.
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end management
investment company and is registered under the Investment Company Act of 1940,
as amended (collectively with the rules and regulations promulgated thereunder,
the "1940 Act"); and
WHEREAS, the Trust intends to distribute the shares of beneficial
interest (without par value) of the Fund designated Class C Shares (the
"Shares") in accordance with Rule 12b-1 under the 1940 Act ("Rule 12b-1"), and
desires to adopt this Distribution Plan (the "Plan") as a plan of distribution
pursuant to such Rule; and
WHEREAS, the Trust desires for MFS Fund Distributors, Inc., a Delaware
corporation, to provide certain distribution services for the Fund (the
"Distributor"); and
WHEREAS, the Trust has entered into a distribution agreement (the
"Distribution Agreement") (in a form approved by the Board of Trustees of the
Trust in a manner specified in Rule 12b-1) with the Distributor, whereby the
Distributor will provide facilities and personnel and render services to the
Fund in connection with the offering and distribution of the Shares; and
WHEREAS, the Trust recognizes and agrees that (a) the Distributor may
retain the services of firms or individuals to act as dealers (the "Dealers")
of the Shares in connection with the offering of Shares, and (b) the
Distributor may make payments for such services to the Dealers out of the fee
paid to the Distributor hereunder, any deferred sales charges imposed by the
Distributor in connection with the repurchase of Shares, its profits or any
other source available to it; and
WHEREAS, the Trust recognizes and agrees that the Distributor may (but
is not required to) impose certain deferred sales charges in connection with
the repurchase of Shares by the Fund, and the Distributor may retain (or
receive from the Fund, as the case may be) all such deferred sales charges; and
WHEREAS, the Board of Trustees of the Trust, in considering whether
the Fund should adopt and implement this Plan, has evaluated such information
as it deemed necessary to an informed determination as to whether this Plan
should be adopted and implemented and has considered such pertinent factors as
it deemed necessary to form the basis for a decision to use assets of the Fund
for such purposes, and has determined that there is a reasonable likelihood
that the adoption and implementation of this Plan will benefit the Fund and its
Class C shareholders;
- 1 -
<PAGE> 2
NOW, THEREFORE, the Board of Trustees of the Trust hereby adopts this
Plan for the Fund as a plan for distribution relating to the Shares in
accordance with Rule 12b-1, on the following terms and conditions:
1. As specified in the Distribution Agreement, the Distributor shall
provide facilities, personnel and a program with respect to the offering and
sale of Shares. Among other things, the Distributor shall be responsible for
any commissions payable to Dealers (including any ongoing maintenance
commissions), all expenses of printing (excluding typesetting) and distributing
prospectuses to prospective shareholders and providing such other related
services as are reasonably necessary in connection therewith.
2. The Distributor shall bear all distribution-related expenses to
the extent specified in the Distribution Agreement in providing the services
described in paragraph 1, including without limitation, the compensation of
personnel necessary to provide such services and all costs of travel, office
expenses (including rent and overhead), equipment, printing, delivery and
mailing costs.
3. It is understood that the Distributor may (but is not required
to) impose certain deferred sales charges in connection with the repurchase of
Shares by the Fund and the Distributor may retain (or receive from the Fund, as
the case may be) all such deferred sales charges. As additional consideration
for all services performed and expenses incurred in the performance of its
obligations under the Distribution Agreement, the Fund shall pay the
Distributor a distribution fee periodically at a rate not to exceed 0.75% per
annum of the Fund's average daily net assets attributable to the Shares.
4. As partial consideration for the personal services and/or account
maintenance services performed by each Dealer in the performance of its
obligations under its dealer agreement with the Distributor, the Fund shall pay
each Dealer a service fee periodically at a rate not to exceed 0.25% per annum
of the portion of the average daily net assets of the Fund that is represented
by Shares that are owned by investors for whom such Dealer is the holder or
dealer of record. That portion of the Fund's average daily net assets on which
the fees payable under this paragraph 4 hereof are calculated may be subject to
certain minimum amount requirements as may be determined, and additional or
different dealer qualification standards that may be established, from time to
time by the Distributor. The Distributor shall be entitled to be paid any
fees payable under this paragraph 4 hereof with respect to Shares for which no
Dealer of record exists or qualification standards have not been met as partial
consideration for personal services and/or account maintenance services
provided by the Distributor to the Shares. The service fee payable pursuant to
this paragraph 4 may from time to time be paid by the Fund to the Distributor
and the Distributor will then pay these fees to Dealers on behalf of the Fund
or retain them in accordance with this paragraph.
5. The Fund understands that agreements between the Distributor and
the Dealers may provide for payment of commissions to Dealers in connection
with the sales of Shares and may provide for a portion (which may be all or
substantially all) of the fees payable by the Fund to the Distributor under the
Distribution Agreement to be paid by the Distributor to the Dealers in
consideration of the Dealer's services as a dealer of the Shares. Except as
described in paragraph 4, nothing in this Plan shall be construed as requiring
the Fund to make any payment to any Dealer or to have any obligations to any
Dealer in connection with services as a dealer of the Shares. The Distributor
shall agree and undertake that any agreement entered into between the
Distributor and any Dealer shall provide that, except as provided in paragraph
4, such Dealer shall look solely to the Distributor for compensation for its
services thereunder and that in no event shall such Dealer seek any payment
from the Fund.
- 2 -
<PAGE> 3
6. The Fund shall pay all fees and expenses of any independent
auditor, legal counsel, investment adviser, administrator, transfer agent,
custodian, shareholder servicing agent, registrar or dividend disbursing agent
of the Fund; expenses of distributing and redeeming Shares and servicing
shareholder accounts; expenses of preparing, printing and mailing prospectuses,
shareholder reports, notices, proxy statements and reports to governmental
officers and commissions and to shareholders of the Fund, except that the
Distributor shall be responsible for the distribution-related expenses as
provided in paragraphs 1 and 2 hereof.
7. Nothing herein contained shall be deemed to require the Trust to
take any action contrary to its Declaration of Trust or By-Laws or any
applicable statutory or regulatory requirement to which it is subject or by
which it is bound, or to relieve or deprive the Board of Trustees of the
responsibility for and control of the conduct of the affairs of the Fund.
8. This Plan shall become effective upon (a) approval by a vote of
at least a "majority of the outstanding voting securities" of Class C, and (b)
approval by a vote of the Board of Trustees and a vote of a majority of the
Trustees who are not "interested persons" of the Trust and who have no direct
or indirect financial interest in the operation of the Plan or in any agreement
related to the Plan (the "Qualified Trustees"), such votes to be cast in person
at a meeting called for the purpose of voting on this Plan.
9. This Plan shall continue in effect indefinitely; PROVIDED that
such continuance is "specifically approved at least annually" by a vote of both
a majority of the Trustees of the Trust and a majority of the Qualified
Trustees. If such annual approval is not obtained, this Plan shall expire 12
months after the effective date of the last approval.
10. This Plan may be amended at any time by the Board of Trustees;
PROVIDED that this Plan may not be amended to increase materially the amount of
permitted expenses hereunder without the approval of holders of a "majority of
the outstanding voting securities" of Class C and may not be materially amended
in any case without a vote of a majority of both the Trustees and the Qualified
Trustees. This Plan may be terminated at any time by a vote of a majority of
the Qualified Trustees or by a vote of the holders of a "majority of the
outstanding voting securities" of Class C.
11. The Fund and the Distributor shall provide the Board of Trustees,
and the Board of Trustees shall review, at least quarterly, a written report of
the amounts expended under this Plan and the purposes for which such
expenditures were made.
12. While this Plan is in effect, the selection and nomination of
Qualified Trustees shall be committed to the discretion of the Trustees who are
not "interested persons" of the Trust.
13. For the purposes of this Plan, the terms "interested persons",
"majority of the outstanding voting securities" and "specifically approved at
least annually" are used as defined in the 1940 Act. In addition, for purposes
of determining the fees payable to the Distributor hereunder, the value of the
Fund's net assets shall be computed in the manner specified in the Fund's
then-current prospectus and statement of additional information for computation
of the net asset value of the Shares of the Fund.
14. The Trust shall preserve copies of this Plan, and each agreement
related hereto and each report referred to in paragraph 11 hereof
(collectively, the "Records") for a period of six years from the end of the
fiscal year in which such Record was made and each such record shall be kept in
an easily accessible place for the first two years of said record-keeping.
- 3 -
<PAGE> 4
15. This Plan shall be construed in accordance with the laws of The
Commonwealth of Massachusetts and the applicable provisions of the 1940 Act.
16. 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.
- 4 -
<PAGE> 1
TOTAL RATE OF RETURN CALCULATIONS
---------------------------------
FORMULA
n
P(1 + T) = ERV
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value
FORMULA
1000 (1 + T) = ERV
T = aggregate total return
ERV = ending redeemable value
<PAGE> 2
STANDARDIZED 30-DAY YIELD CALCULATION
6
YIELD = 2 x (((a-b)/(c x d)) + 1) - 1)
INFORMATIONAL:
a = total income for period
b = fund expenses for period
c = average shares outstanding
d = last price during period
<PAGE> 3
DISTRIBUTION RATE
Distribution Rate = a/d or bc/d
where
a = total last 12 months' dividends
b = current dividend per share
c = frequency of dividend payments
d = maximum offering price per share on last
day of period
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL INFORMATION STATEMENTS OF MFS WORLD GOVERNMENTS FUND CLASS A FOR THE
YEAR ENDED NOVEMBER 30, 1994, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> MFS WORLD GOVERNMENT FUND CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 461,147,549
<INVESTMENTS-AT-VALUE> 455,803,413
<RECEIVABLES> 30,781,015
<ASSETS-OTHER> 5,851
<OTHER-ITEMS-ASSETS> 1,090,039
<TOTAL-ASSETS> 487,680,318
<PAYABLE-FOR-SECURITIES> 5,380,015
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 30,044,879
<TOTAL-LIABILITIES> 35,424,894
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 442,322,230
<SHARES-COMMON-STOCK> 32,498,842
<SHARES-COMMON-PRIOR> 33,156,584
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (7,092,064)
<ACCUMULATED-NET-GAINS> 25,643,043
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (8,617,785)
<NET-ASSETS> 452,255,424
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 33,282,124
<OTHER-INCOME> 0
<EXPENSES-NET> 7,864,638
<NET-INVESTMENT-INCOME> 25,417,486
<REALIZED-GAINS-CURRENT> (48,681,897)
<APPREC-INCREASE-CURRENT> (831,027)
<NET-CHANGE-FROM-OPS> (24,095,438)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (38,773,645)
<DISTRIBUTIONS-OF-GAINS> (9,595,121)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,994,122
<NUMBER-OF-SHARES-REDEEMED> (10,416,982)
<SHARES-REINVESTED> 2,765,118
<NET-CHANGE-IN-ASSETS> (15,638,290)
<ACCUMULATED-NII-PRIOR> 25,945,488
<ACCUMULATED-GAINS-PRIOR> 29,808,213
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,278,028
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,271,315
<AVERAGE-NET-ASSETS> 473,971,315
<PER-SHARE-NAV-BEGIN> 13.37
<PER-SHARE-NII> 0.63
<PER-SHARE-GAIN-APPREC> (1.17)
<PER-SHARE-DIVIDEND> (1.15)
<PER-SHARE-DISTRIBUTIONS> (0.29)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.39
<EXPENSE-RATIO> 1.54
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS WORLD GOVERNEMENTS FUND CLASS B FOR THE YEAD ENDED
NOVEMBER 30, 1994, AND IS QUALIFED IN ITS ENTIRETY BE REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> MFS WORLD GOVERNMENT FUND CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 461,147,549
<INVESTMENTS-AT-VALUE> 455,803,413
<RECEIVABLES> 30,781,015
<ASSETS-OTHER> 5,851
<OTHER-ITEMS-ASSETS> 1,090,039
<TOTAL-ASSETS> 487,680,318
<PAYABLE-FOR-SECURITIES> 5,380,015
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 30,044,879
<TOTAL-LIABILITIES> 35,424,894
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 442,322,230
<SHARES-COMMON-STOCK> 6,490,809
<SHARES-COMMON-PRIOR> 1,841,817
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (7,092,064)
<ACCUMULATED-NET-GAINS> 25,643,043
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (8,617,785)
<NET-ASSETS> 452,255,424
<DIVIDEND-INCOME> 03,282,124
<INTEREST-INCOME> 33,282,124
<OTHER-INCOME> 0
<EXPENSES-NET> 7,864,6386
<NET-INVESTMENT-INCOME> 25,417,486
<REALIZED-GAINS-CURRENT> (48,681,897)
<APPREC-INCREASE-CURRENT> (831,027)
<NET-CHANGE-FROM-OPS> (24,095,438)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,332,371)
<DISTRIBUTIONS-OF-GAINS> (754,139)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,078,760
<NUMBER-OF-SHARES-REDEEMED> (2,704,874)
<SHARES-REINVESTED> 275,106
<NET-CHANGE-IN-ASSETS> (15,638,290)
<ACCUMULATED-NII-PRIOR> 25,945,488
<ACCUMULATED-GAINS-PRIOR> 29,808,213
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,278,028
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,271,315
<AVERAGE-NET-ASSETS> 473,971,061
<PER-SHARE-NAV-BEGIN> 13.35
<PER-SHARE-NII> 0.56
<PER-SHARE-GAIN-APPREC> (1.19)
<PER-SHARE-DIVIDEND> (1.11)
<PER-SHARE-DISTRIBUTIONS> (0.29)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.32
<EXPENSE-RATIO> 2.38
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS WORLD GOVERNMENTS FUND CLASS C FOR THE YEAR ENDED
NOVEMBER 30, 1994, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> MFS WORLD GOVERNMENT FUND CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 461,147,549
<INVESTMENTS-AT-VALUE> 455,803,413
<RECEIVABLES> 30,781,015
<ASSETS-OTHER> 5,851
<OTHER-ITEMS-ASSETS> 1,090,039
<TOTAL-ASSETS> 487,680,318
<PAYABLE-FOR-SECURITIES> 5,380,015
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 30,044,879
<TOTAL-LIABILITIES> 35,424,894
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 442,322,230
<SHARES-COMMON-STOCK> 767,791
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (7,092,064)
<ACCUMULATED-NET-GAINS> 25,643,043
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (8,617,785)
<NET-ASSETS> 452,255,424
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 33,282,124
<OTHER-INCOME> 0
<EXPENSES-NET> 7,864,638
<NET-INVESTMENT-INCOME> 25,417,864
<REALIZED-GAINS-CURRENT> (48,681,897)
<APPREC-INCREASE-CURRENT> (831,027)
<NET-CHANGE-FROM-OPS> (24,095,438)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (99,440)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,159,179
<NUMBER-OF-SHARES-REDEEMED> (395,966)
<SHARES-REINVESTED> 4,578
<NET-CHANGE-IN-ASSETS> (15,638,290)
<ACCUMULATED-NII-PRIOR> 25,945,488
<ACCUMULATED-GAINS-PRIOR> 29,808,213
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,278,028
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,271,315
<AVERAGE-NET-ASSETS> 473,971,061
<PER-SHARE-NAV-BEGIN> 12.30
<PER-SHARE-NII> 0.50
<PER-SHARE-GAIN-APPREC> (1.35)
<PER-SHARE-DIVIDEND> (0.14)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.31
<EXPENSE-RATIO> 2.32
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS VALUE FUND AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> MFS VALUE FUND CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 152,248,756
<INVESTMENTS-AT-VALUE> 157,631,224
<RECEIVABLES> 6,097,950
<ASSETS-OTHER> 2,185
<OTHER-ITEMS-ASSETS> 5,144
<TOTAL-ASSETS> 163,736,503
<PAYABLE-FOR-SECURITIES> 4,483,727
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 273,628
<TOTAL-LIABILITIES> 4,757,355
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 142,471,483
<SHARES-COMMON-STOCK> 15,026,987
<SHARES-COMMON-PRIOR> 12,222,512
<ACCUMULATED-NII-CURRENT> 208,440
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10,858,098
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,441,127
<NET-ASSETS> 158,979,148
<DIVIDEND-INCOME> 1,507,670
<INTEREST-INCOME> 543,228
<OTHER-INCOME> (51,308)
<EXPENSES-NET> 2,160,522
<NET-INVESTMENT-INCOME> (160,932)
<REALIZED-GAINS-CURRENT> 12,000,871
<APPREC-INCREASE-CURRENT> (10,647,522)
<NET-CHANGE-FROM-OPS> 1,192,417
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (344,329)
<DISTRIBUTIONS-OF-GAINS> (19,570,480)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,051,409
<NUMBER-OF-SHARES-REDEEMED> (4,191,439)
<SHARES-REINVESTED> 1,944,505
<NET-CHANGE-IN-ASSETS> 25,675,643
<ACCUMULATED-NII-PRIOR> 50,522
<ACCUMULATED-GAINS-PRIOR> 19,426,939
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,141,475
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,303,433
<AVERAGE-NET-ASSETS> 151,545,727
<PER-SHARE-NAV-BEGIN> 10.82
<PER-SHARE-NII> (0.01)
<PER-SHARE-GAIN-APPREC> 0.26
<PER-SHARE-DIVIDEND> (0.03)
<PER-SHARE-DISTRIBUTIONS> (1.60)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.44
<EXPENSE-RATIO> 1.37
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS VALUE FUND AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> MFS VALUE FUND CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 152,248,756
<INVESTMENTS-AT-VALUE> 157,631,224
<RECEIVABLES> 6,097,950
<ASSETS-OTHER> 2,185
<OTHER-ITEMS-ASSETS> 5,144
<TOTAL-ASSETS> 163,736,503
<PAYABLE-FOR-SECURITIES> 4,483,727
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 273,628
<TOTAL-LIABILITIES> 4,757,355
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 142,471,483
<SHARES-COMMON-STOCK> 1,841,276
<SHARES-COMMON-PRIOR> 101,633
<ACCUMULATED-NII-CURRENT> 208,440
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10,858,098
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,441,127
<NET-ASSETS> 158,979,148
<DIVIDEND-INCOME> 1,507,670
<INTEREST-INCOME> 543,228
<OTHER-INCOME> (51,308)
<EXPENSES-NET> 2,160,522
<NET-INVESTMENT-INCOME> (160,932)
<REALIZED-GAINS-CURRENT> 12,000,871
<APPREC-INCREASE-CURRENT> (10,647,522)
<NET-CHANGE-FROM-OPS> 1,192,417
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,242)
<DISTRIBUTIONS-OF-GAINS> (318,610)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,212,735
<NUMBER-OF-SHARES-REDEEMED> (504,229)
<SHARES-REINVESTED> 31,137
<NET-CHANGE-IN-ASSETS> 25,675,643
<ACCUMULATED-NII-PRIOR> 50,522
<ACCUMULATED-GAINS-PRIOR> 19,426,939
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,141,475
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,303,433
<AVERAGE-NET-ASSETS> 151,545,727
<PER-SHARE-NAV-BEGIN> 10.79
<PER-SHARE-NII> (0.09)
<PER-SHARE-GAIN-APPREC> 0.27
<PER-SHARE-DIVIDEND> (0.03)
<PER-SHARE-DISTRIBUTIONS> (1.60)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.34
<EXPENSE-RATIO> 2.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
